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Glossary of Terms

A  B  C  D  E  F  G  H  I  J  K  L  M  N  O  P  Q  R  S  T  U  V  W-Z

 
  A
Abatement
In a lease, the reduction or elimination of rent for a period of time.

Accelerated Depreciation
Depreciation methods that allow a taxpayer to take faster write-offs than with straight-line during the early part of an asset's useful life.

Accumulated Depreciation
The sum of annual depreciation deductions taken to date. Also, accrued depreciation.

Adjustable Rate Mortgage (ARM)
A mortgage loan in which the interest rate is not constant over the life of the loan, but is adjusted periodically according to a predetermined formula or index.

Adjusted Basis
The original cost of an asset, such as real estate, plus capital improvements, less accumulated depreciation and costs of sale. The taxable gain at the time of sale is, in general, the selling price less the adjusted basis.

Adjusted Gross Income (AGI)
Gross income less certain adjustments, including IRA, alimony, and Keogh deductions. Used in determining the investor's passive loss allowance.

Alternative Minimum Tax (AMT)
A tax that may be triggered if certain tax benefits, such as passive losses and accelerated depreciation, reduce an individual's income tax liability. You must use Federal tax form 6251 to determine if you are subject to the Alternative Minimum Tax.

Amortization
a) The process through which a loan is retired over time through periodic repayment of the principal.

b) The process of taking a partial annual tax deduction for an item that cannot be expensed in a single year. For example, points paid to secure a loan must typically be deducted (amortized) over the life of that loan payment plan which enables the borrower to reduce his debt gradually through monthly payments of principal.

Annual Debt Service (ADS)
The total of all payments on a mortgage loan, including both interest and principal, for a year.

Annual Property Operating Data (APOD)
A form that lists a property's gross income, individual operating expenses, and net operating income. Similar to a profit-and-loss statement for a business.

Appreciation
The increase over time in the value of an asset due to economic factors rather than to improvements or additions.

Assumed Mortgage
A mortgage in which the purchaser of a property assumes Liability of an existing mortgage loan. Typically the purchaser takes over the existing balance, terms and payment schedule. Many mortgage loans contain a "due on sale" clause which prohibits assumption by requiring the original borrower to pay off the loan if he or she transfers title of the mortgaged property to a third party.
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  B
Balloon Payment
A provision in a loan which requires the principal balance to be paid off in a lump sum before the loan would be retired through normal amortization.

Basis
The starting point for computing gain or loss on an investment; typically, the original purchase price. See also, Adjusted Basis.

Book Value
An asset's original basis less accumulated depreciation.
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  C
Capital Addition
An addition to a piece of real estate having a useful life of more than one year, or an improvement that is likely to prolong the life of the property. A capital addition is different from a repair, which maintains rather than increases the life of a property.

Capital Gain
Gain from the sale or disposition of a capital asset, such as real estate. May be long term or short term

Capital Improvement
See Capital Addition.

Capitalization Rate (Cap Rate)
The ratio between a property's net operating income and the sum of its purchase price (or value) and capital additions.

Cash Flow After Taxes (CFAT)
The cash flow before taxes, reduced by the tax liability that the property generates for the owner, or increased by the tax savings.

Cash Flow Before Taxes (CFBT)
During a given period, all of a property's cash inflows less all of its cash outflows. Inflows are counted whether or not they must be included as taxable income and outflows are counted regardless of deductibility. Cash flow is not affected by a depreciation deduction, which is not a cash item. "Cash flow before taxes" ignores the property's effects on the owner's income tax liability.

Cash-on-Cash Return
The rate of return on an investment measured as the ratio between the cash flow before taxes and the initial cash investment

Closing Costs
Costs paid, typically to an attorney, for documentation and representation in connection with the purchase or sale of a piece of real estate. Title insurance is usually considered a closing cost, but real estate commissions, loan fees, prepaid interest and fire or liability insurance are not considered closing costs.

Commercial property
See Non-Residential Property.

Commission
A fee paid, typically to a real estate agent or broker, for negotiating a loan, lease or sale.

Comparables
For purposes of valuation, properties that are similar to the subject property and that have been recently sold or leased

Consumer price index (CPI)
An index published by the U. S. Bureau of Labor Statistics and widely used as a measure of inflation. The index estimates the cost of buying a fixed group of goods and services and compares that cost to the base year (1982) which was assigned an index value of 100. The CPI is commonly used in escalation clauses of commercial real estate leases so that the rent generated by those leases will keep pace with inflation. Also, cost-of-living index.

Costs of Sale
Fees typically paid to a broker and/or attorney to effect the sale of a piece of real estate. These costs are not tax deductions as such. Rather, they are an adjustment to the basis of the property and thus affect the taxable gain on sale.
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  D
Debt Coverage Ratio
The ratio between an income property's annual net operating income and its annual debt service.

Debt Service
The total loan payment, including both interest and principal.

Depreciation
Decline in value of a house due to wear and tear, adverse changes in the neighborhood, or any other reason.

Depreciation Allowance
The amount of the tax deduction that a property owner may take each year until he or she has written off the entire depreciable asset. In real estate, the physical structures are considered depreciable assets, but the land is not. Therefore, there is no depreciation allowance for the value of the land. See also, Useful Life

Discount Rate
The compound interest rate used to reduce expected future cash flows to their estimated present value.

Discounted Cash Flow Analysis (DCF)
An income-property appraisal technique that estimates value by discounting all expected future cash flows to the present and summing the discounted amounts.
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  E
Effective Gross Income (EGI)
See Gross Operating Income.

Escalation
A clause in a real estate lease that provides for an adjustment to the rent, usually based on some external event such as a rise in the Consumer Price Index (CPI).

Equity
The difference between a property's value and the balance of the mortgages and other debts against it.

Expense Stop
A provision in a lease where the tenant agrees to pay the excess of certain operating expenses over a base amount. The landlord pays the expense up to the amount of the expense stop and the tenant pays or reimburses the landlord for the rest.
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  F
Fair Market Value
The price at which a property would change hands from a willing seller to a willing buyer, where neither party is under a compulsion to sell or buy and where both have reasonable knowledge of all pertinent facts. Also, Market Value.

First Mortgage
The first, or senior claim against an asset, as security for repayment of a debt.

Funded Reserves
A sum of money put aside so that it will be available to handle an extraordinary expense or improvement. For example, an investor may anticipate the need for a new roof five years after acquisition of a property, and place money into a reserve account in advance so that funds are available when needed.
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  G
General Partner (GP)
The person or entity in a limited partnership that bears unlimited liability and all of the management responsibility of that partnership.

Gross Operating Income (GOI)
A property's annual Gross Scheduled Income, less allowances for vacancy and credit loss. Also, Effective Gross Income.

Gross Rent Multiplier (GRM)
A method of estimating or expressing a property's value as a multiple of its gross rental income.

Gross Scheduled Income
The annual income of a property if all rentable space were in fact rented and all rent collected; the total potential income.
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  H
Half-Month Convention
A provision of the tax code as of this writing that allows only one-half month of depreciation in the month a property is acquired, and one-half month in the month it is sold.
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  I
Improvement
See Capital Addition.

Income Property
Real property leased to tenants and held for the purpose of generating ongoing rental income.

Inflation
The loss of a currency's purchasing power over time.

Inflation Rate
The annual rate at which a currency loses purchasing power.

Initial Investment
The amount of cash invested at the time a property is purchased.

Interest-Only Mortgage
A mortgage loan in which the borrower makes periodic payments of interest only and pays the full principal balance at the end of the loan term.

Internal Rate of Return (IRR)
The rate of return that discounts all anticipated future net cash flows (including the reversion) back to a present value that equals the initial investment.
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  J
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  K
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  L
Lease
A contract granting possession of land or a specified part of a building for a specified time in exchange for rent.

Lessor
An owner who leases property to a tenant; landlord.

Lessee
A tenant who leases property from a landlord.

Limited Partner (LP)
An investor in a limited partnership who typically has none of the management responsibility and whose liability is limited to the amount of his or her investment.

Limited Partnership
A partnership having a General Partner who manages the partnership's investments and bears unlimited liability, and Limited Partners who have no management control and whose liability typically is limited to the amount of their investment.

Limited Partner's Ratio
The ratio between the amount invested by a particular limited partner to the total amount invested by all of the limited partners.

Long-Term Capital Gain
The gain on an asset held more than 12 months.
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  M
Marginal Tax Bracket
The rate at which the investor's next dollar of income will be taxed.

Market Value
See Fair Market Value.

Modified Financial Management Rate of Return (MFMRR)
See Modified Internal Rate of Return.

Modified Internal Rate of Return (MIRR)
An alternative to conventional Internal Rate of Return (IRR). IRR will usually will fail to yield a result in a situation where there are negative cash flows. The MIRR calculation takes any negative cash flows, zeroes them out and discounts them at a safe rate back to day one of the investment period. The discounted amount is treated as additional capital needed on day one. MIRR also takes positive cash flows and compounds them forward to the sale year, using the reinvestment rate (also known as the risk rate).

Mortgage
A lien against a property that secures a mortgage loan or note.

Mortgagee
The lender in a mortgage agreement.

Mortgagor
The borrower in a mortgage agreement.
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  N
Net Operating Income (NOI)
A property's Gross Operating Income less the sum of all operating expenses. NOI represents a property's profitability before consideration of taxes, financing or recovery of capital.

Net Present Value (NPV)
The discounted value of all of a property's future cash flows (including the reversion) less the initial cash investment.

Non-Residential Property
Real property that does not satisfy the definition of Residential Property; property not primarily intended for use as dwellings.
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  O
Operating Expense
Expense necessary for the maintenance of a piece of real property and to insure its continued ability to produce income. Loan payments, depreciation and capital expenditures are not considered operating expenses.

Owner-Occupant
A property owner who occupies part or all of his or her property.
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  P
Pass Through
An operating expense that is passed on, in whole or in part, to a tenant.

Passive Activity
A business or rental activity that the taxpayer does not materially participate in managing or running. See also, Passive Loss Allowance.

Passive Loss Allowance
The dollar amount of losses from passive-activity investments that an individual taxpayer may deduct against ordinary income. In general, losses from passive activities can only be used to offset income from other passive activities. As of this writing an exception exists for owners of rental real estate, who may deduct up to $25,000 of net losses from rental real estate investments in which they actively participate. This allowance is reduced for taxpayers with Adjusted Gross Income over $100,000.

Personal Property
Property that is movable, not permanently attached to the real estate. Appliances are personal property.

Points
A fee paid to a lender for the lender's service in making the loan. Typically a point is equal to one percent of the amount of the loan. Points are not deductible as an expense, but must be written off over the life of the loan.

Present Value (PV)
The discounted value of a series of future cash flows.

Principal
The amount of a loan, exclusive of any interest.

Pro Forma

A statement or report of projections about the possible future performance of an income property. A pro forma uses assumptions as to future revenues, expenses, interest rates, tax considerations, etc.
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  Q
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  R
Recoverable Expense
See Pass Through.

Refinance
The process of retiring all existing loans against a property and replacing them with a new loan. In a cash-out refinance, the new loan is greater than the sum of the loans being retired and the borrower receives the difference in cash.

Rehabilitation Tax Credit
A credit that may be taken against one's total tax liability for improvements made to certain properties. Credits of up to 20% of the improvements made to historic properties and up to 10% of the improvements made to non-historic properties are available as of this writing. A variety of conditions and limitations apply, including the dollar value of the improvements in relation to the property's basis, the amount of time allowed for the project, certification requirements, passive loss limitations, alternative minimum tax considerations and others.

Reinvestment Rate
In Modified Internal Rate of Return, the rate at which the investor believes he or she could reinvest the positive cash flows from your investment. Also, Risk Rate.

Rentable Square Feet
The portion of a rental property that may be leased to tenants.

Resale
See Reversion.

Residential Property
Real estate designed and intended as dwellings, including single- and multi-family homes but not hotels or motels. A property that combines both residential and non-residential uses must derive at least 80% of its gross rental income from dwelling units to be considered residential for purposes of depreciation. If a mixed-use property is owner-occupied, then the fair-market value of the owner's unit must be taken into account when determining the residential or non-residential status of the property.

Revenue Reconciliation Act
Tax law passed in 1993, which changed the useful life for non-residential property, introduced the concept of "real estate professional" and limited the tax on capital gains to 28%; the capital gains provision was superseded by the Taxpayer Relief Act of 1997 and again by the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Reversion
The value of an investment at the time of its resale.

Risk Rate
See Reinvestment Rate.
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  S
Safe Rate
In Modified Internal Rate of Return, the interest rate at which you believe you can put money aside, in a secure and reasonably liquid form, so that it will grow to meet the amount needed to cover future negative cash flows.

Sensitivity Analysis
An analysis where one or more independent variables is altered to determine the effect on a particular dependant variable. For example, one might test how different rental rates affect the cash flow before taxes or how different purchase prices affect the Internal Rate of Return. Also, What-If Analysis.

Short-term Capital Gain

The gain on an asset held 12 months or less.

Straight-Line Depreciation
A depreciation method that allows the owner to write off an asset's basis in equal amounts over its useful life. For example, if an asset were to have a 10-year useful life, the straight-line depreciation allowance each year would be 10 percent of the basis. Note that in the tax code as of this writing there exists a so-called half-month convention for real estate, where the taxpayer is allowed only one-half month depreciation in the month of acquisition and one-half month in the month of resale.
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  T
Tax Reform Act
A tax bill that substantially altered the treatment of capital gains, ending the 50 percent capital gain exclusion. The law also introduced the concept of passive activity investments and limited the losses from such activities that could be taken against ordinary income.

Tax Shelter
An investment vehicle that can shield a part of an investor's ordinary income from taxation.

Tax-Deferred Exchange
A provision of the tax code (sec. 1031) that permits property owners to exchange like properties. If certain criteria are met, the parties can defer recognition of gain or loss and therefore also defer the tax that might have occurred in an outright sale.

Tenant Improvements (TI)
Improvements made to a rental unit by a landlord for the benefit of a tenant. Such improvements are capital expenditures, not repairs.

Term
The number of periodic payments over which a loan is amortized.

Treasury Bill
A government obligation representing a virtually risk-free investment.
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  U
Useful Life
The length of time, as specified in the tax code, over which an asset may be depreciated. The Useful Life for tax purposes is not necessarily the same as the actual physical life expectancy of a particular asset.
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  V
Vacancy and Credit Allowance
A deduction from the Gross Scheduled Income for losses due to unoccupied space and uncollected rent. The result is the Gross Operating Income, also called Effective Gross Income.
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  W-Z
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