|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
In a lease, the reduction
or elimination of rent for a period of time.
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.
The sum of annual depreciation deductions taken to date. Also,
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.
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
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
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.
The increase over time in the value of an asset due to economic
factors rather than to improvements or additions.
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.
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
The starting point for computing gain or loss on an investment;
typically, the original purchase price. See also, Adjusted Basis.
An asset's original basis less accumulated depreciation.
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
Gain from the sale or disposition of a capital asset, such as
real estate. May be long term or short term
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
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.
The rate of return on an investment measured as the ratio
between the cash flow before taxes and the initial cash
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
See Non-Residential Property.
A fee paid, typically to a real estate agent or broker, for
negotiating a loan, lease or sale.
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
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.
|Debt Coverage Ratio
The ratio between an income property's annual net operating
income and its annual debt service.
The total loan payment, including both interest and principal.
Decline in value of a house due to wear and tear, adverse
changes in the neighborhood, or any other reason.
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,
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.
|Effective Gross Income (EGI)
See Gross Operating Income.
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).
The difference between a property's value and the balance of
the mortgages and other debts against it.
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.
|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.
The first, or senior claim against an asset, as security for
repayment of a debt.
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.
|General Partner (GP)
The person or entity in a limited partnership that bears
unlimited liability and all of the management responsibility of
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.
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.
See Capital Addition.
Real property leased to tenants and held for the purpose of
generating ongoing rental income.
The loss of a currency's purchasing power over time.
The annual rate at which a currency loses purchasing power.
The amount of cash invested at the time a property is
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.
A contract granting possession of land or a specified part of a
building for a specified time in exchange for rent.
An owner who leases property to a tenant; landlord.
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.
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
Limited Partner's Ratio
The ratio between the amount invested by a particular
limited partner to the total amount invested by all of the
Long-Term Capital Gain
The gain on an asset held more than 12 months.
|Marginal Tax Bracket
The rate at which the investor's next dollar of income will be
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).
A lien against a property that secures a mortgage loan or
The lender in a mortgage agreement.
The borrower in a mortgage agreement.
|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.
Real property that does not satisfy the definition of
Residential Property; property not primarily intended for use as
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.
A property owner who occupies part or all of his or her
An operating expense that is passed on, in whole or in part, to
A business or rental activity that the taxpayer does not
materially participate in managing or running. See also, Passive
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
Property that is movable, not permanently attached to the real
estate. Appliances are personal property.
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.
The amount of a loan, exclusive of any interest.
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
See Pass Through.
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.
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.
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.
The value of an investment at the time of its resale.
See Reinvestment 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.
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.
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.
|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.
An investment vehicle that can shield a part of an investor's
ordinary income from taxation.
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
The number of periodic payments over which a loan is amortized.
A government obligation representing a virtually risk-free
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.
|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.