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Real Estate - Exam 2

Ch 8

TermDefinition
Capital expenditures (CAPS) Expenditures for replacements and alterations to a building (or improvement) that materially prolong its life and increase its value
Contract rent The rent specified in the lease contract
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
Direct market extraction Method of estimating the appropriate capitalization rate from comparable property sales
Effective gross income (EGI) The total annual income the rental property produces after subtracting vacancy losses and adding miscellaneous income
Effective gross income multiplier (EGIM) The ratio of the sale prices to the annual effective gross income of the income-producing property
Fee simple estate The complete ownership of a property; may be either absolute or conditional
Going-in cap rate (Ro) The overall capitalization rate; the ratio of the first-year net operating income to the overall value (or purchase price) of the property
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
Income capitalization The process of converting periodic income into a value estimate
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
Leased fee estate The bundle of rights posessed 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
Market rent The rent that could be obtained by renting a property on the open market
Natural vacancy rate The proportion of potential gross income not collected when the use (rental) market is in equilibrium
Net operating income (NOI) The type of income to a property used in direct capitalization, calculated by deducting from PGI vacancy and collection losses and adding other income to obtain effective gross income. From this amount all operating expenses are subtracted
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
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
Potential gross income (PGI) The total annual income the property would produce if it were fully rented and had no collection losses
Pro forma A cash flow forecast prepared to facilitate discounted cash flow analysis
Reconstructed operating statement A statement of property income and expenses formated for the purposes of appraisal and investment analysis. Differs from typical management operating staement in the treatment of certain expenses: management, mortgage, vacancey, and collection loss
Reversion The cash proceeds from sale
Selling expenses (SE) Cost associated with the disposition of a property
Terminal capitalization rater (Rt) Rate used to convert annual net cash at the end of an expected holding period into an estimate of future sale price
Terminal value (Vt) The sale price at the end of the expected holding period

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