Real Estate Ch. 8

Pro forma

A cash flow forecast prepared to facilitate discounted cash flow analysis

Reconstructed operating statement

A statement of property income and expenses formatted for the purposes of appraisal and investment analysis. Differs from typical management operating statement in the treatment of certain expenses, including management fees, mortgage payments, and vacancy and collection losses

Selling expenses (SE)

Costs associated with the disposition of a property

Capital expenditures (CAPX)

Expenditures for replacements and alterations to a building (or improvement) that materially prolong its life and increase its value

Direct market extraction

Method of estimating the appropriate capitalization rate from comparable property sales

Terminal capitalization rate (Rt)

Rate used to convert annual net cash at the end of an expected holding period into an estimate of future sale price

Leased fee estate

The bundle of rights possessed by the landlord in a leased property, made up primarily of the right to receive rental payments during the lease term and ultimately to repossess the property at the end of the lease term

Reversion

The cash proceeds from sale

Fee simple estate

The complete ownership of a property; may be either absolute or conditional

Net sale proceeds (NSP)

The expected selling price less selling expenses

Operating expenses (OE)

The expenses that are necessary to operate and maintain an income producing property

Going-in cap rate (Ro)

The overall capitalization rate; the ratio of the first-year net operating income to the overall value of the property at the time of sale

Income capitalization

The process of converting periodic income into a value estimate

Direct capitalization

The process of estimating the value of a property by dividing a property's annual net operating income by an overall capitalization rate

Natural vacancy rate

The proportion of potential gross income not collected when the use (rental) market is in equilibrium

Internal rate of return (IRR)

The rate of interest (discount) that equates the present value of the cash inflows to the present value of the cash outflows; that is, the rate of discount that makes the net present value equal to zero

Going-out cap rate (Rt)

The ratio of the estimated net operating income in the year following sale to the overall value of the property at the time of sale

Effective gross income multiplier (EGIM)

The ratio of the sale prices to the annual effective gross income of the income-producing property

Contract rent

The rent specified in the lease contract

Market rent

The rent that could be obtained by renting a property on the open market

Terminal value (Vt)

The sale price at the end of the expected holding period

Potential gross income (PGI)

The total annual income the property would produce if it were fully rented and had no collection losses

Effective gross income (EGI)

The total annual income the rental property produces after subtracting vacancy losses and adding miscellaneous income

Overall capitalization rate (Ro)

The type of capitalization rate used in direct capitalization, calculated by dividing comparable properties' net operating incomes by their selling prices

Net operating income (NOI)

The type of income to a property used in direct capitalization, calculated by deducting from potential gross income vacancy and collection losses and adding other income to obtain effective gross income. From this amount all operating expenses are subtracted, including management expense and a reserve for replacements, or capital expenditures, and other nonrecurring expenses