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Real Estate Finance Terms

accrued depreciation: The actual depreciation of a property at a given date; the difference between the cost of replacement as of the date of appraisal and the present appraised market value.

actual cash value: The price property will bring in a fair market, after fair and reasonable efforts have been made to find the purchaser who will give the highest price. Also called fair cash value.

amortization: The process of recovering, over a stated period of time, a capital investment; the provision for the gradual liquidation of an obligation, usually by equal payments at regular intervals over a specific period of time.

arbitrage: Buying in one market while selling simultaneously in another to make a profit (minus transaction costs).

capitalization: The process of converting into a present value (obtaining present worth of) a series of anticipated future annual installments of income.

capitalization rate: The rate used to convert income into value.

compound interest: The interest on interest; interest earned during a given period is added to the principal and included in the next period's interest calculation.

consumer price index: Various statistical indexes gathered and published by the U.S. federal government as economic indicators.

cost approach: A method in which the value of a property is derived by estimating the replacement cost of the improvements, deducting the estimated depreciation, and adding the value of the land, as estimated by use of the market data approach.

creative financing: Any financing arrangement other than a traditional mortgage from a third-party lending institution.

debt service: The payments consisting of amortization and interest on a loan.

depreciation: A loss from the upper limit of value caused by deterioration and/or obsolescence.

discount rate: An interest rate commensurate with perceived risk; used to convert future payments or receipts to present value.

DOWNREIT: Similar to an UPREIT, with the difference lying in asset holdings. Most of a DOWNREIT's holdings are in property, whereas with UPREITs assets lie in Operating Partnership Units.

equity: The net value of a property, obtained by subtracting from its total value all liens and other charges against it. The term is frequently applied to the value of the owner's (as opposed to the lender's) interest in property in excess of all claims and liens.

funds from operations: Net income, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect funds from operations on the same basis.

income approach: An appraisal technique in which the anticipated net income is processed to indicate the capital amount of the investment that produces it.

leverage: The use of borrowed funds to complete an investment transaction. The higher the proportion of borrowed funds used to make the investment, the higher the leverage and the lower the proportion of equity funds.

market sales approach: An appraisal technique in which the market value estimate is predicated upon prices paid in actual market transactions and current listings.

market value: The price to expect if a reasonable time is allowed to find a purchaser and if both seller and prospective buyer are fully informed. Market value connotes what a property is actually worth and for what market price it might sell.

mortgage constant: The total annual payment of principal and interest (annual debt service) on a level-payment amortized mortgage, expressed as a percentage of the initial principal amount of the loan.

multiple percentage rates: A lease agreement in which the percentage rent rate changes at various increments of sales.

net operating income: The income after deducting from gross income the operating expenses, including property taxes; insurance; utilities; management fees; heating and cooling expenses; repairs and maintenance; and replacement of equipment.

operating expenses: Generally speaking, all expenses, occurring periodically, that are necessary to produce net income before depreciation. Under some conditions these expenses are placed in two categories: operating expenses and fixed charges.

recapture rate: The annual rate at which capital investment is returned to an investor over a specified period of time; the annual amount, apart from interest or return on interest (compound interest), that can be recaptured from an investment. Also called capital recovery rate.

real estate investment trust (REIT): A company dedicated to owning and, in most cases, operating income-producing real estate, such as apartments, shopping centers, offices and warehouses. Some REITs are also engaged in financing real estate. To be a REIT, a company is legally required to pay virtually all of its taxable income (95%) to its shareholders every year.

time value of money: The concept underlying compound interest: that a dollar received today is worth more than a dollar in the future, due to opportunity, cost, inflation and certainty of payment.

UPREIT: In the typical umbrella partnership real estate investment trust (UPREIT), the partners of an existing partnership and a newly formed REIT become partners in a new partnership termed the operating partnership. For their respective interests in the operating partnership (units), the partners contribute the properties from the existing partnership and the REIT contributes the cash proceeds from its public offering. The REIT typically is the general partner and majority owner of the operating partnership units.

Sources: ICSC, NAREIT, "Barron's Dictionary of Real Estate Terms."