Real Estate and Finance Terms

• Important real estate and finance terms with definitions are given below

Pro-forma Statement

• An accounting statement forecasts income and expenses, generally for five or more years
• Investors typically use pro-forma statements to estimate their rate of return for a particular property

Capitalization Rate

• The percentage representing the relationship between net operating income and present value
• It is the sum of the discount rate, the effective tax rate, and the recapture rate
• Value is calculated as Income / Rate

Rentable Square Footage

• The usable area can be leased or rented to a tenant

Common Areas

• Spaces in a commercial building shared by tenants or residents
• Examples include lobbies, corridors, stairs, and elevators

Net Lease

• A lease requires the tenant to pay some or all property expenses, in addition to rent
• Expenses normally paid by the property owner, such as real estate taxes, insurance, maintenance, repairs, and utilities, are included

Gross Lease

• A lease where the lessor meets all property charges regularly incurred through ownership

Percentage Lease

• A lease where the rental is based on a percentage of sales volume made on the leased premises
• It usually provides for minimal rental

Estoppel

• An instrument executed by the mortgagor
• The present status and balance due on the mortgage are set forth as of the execution date

Anchor Stores

• A key tenant in retail, typically a larger store in a shopping mall
• Examples include department stores or major retail chains like Macy's and Nordstrom

Debt Service

• The annual amount a debtor pays on an obligation to repay borrowed money

Before Tax Cash Flow

• The net profit or loss calculated by subtracting expenses from income before taxes are paid

After Tax Cash Flow

• The net profit or loss realized after taxes are deducted

Cash on Cash Return

• A percentage return on money invested in a property by an investor
• Calculated as Cash Flow/Down Payment

Lease Escalation Clause

• A contract provision allowing one party to pass an increase in costs to another party
• Escalation clauses usually relate to influences beyond both parties' control, such as inflation

Leverage

• The use of borrowed capital (mortgage) increases the potential return of an investment

Net Operating Income

• The gross income minus expenses (and sometimes debt service)
• It is also referred to as cash flow

Gross Income

• The total amount collected from rents and other income-producing opportunities, such as washing machines and storage

Tax Shelter

• Reducing taxable income to lower payments to tax-collecting entities, including state and federal governments

Time Value of Money (TVM)

• Money available at the present time is worth more than the same amount in the future due to its potential earning capacity

Rate of Return

• A profit on an investment over a period, expressed as a proportion of the original investment

Usable Square Footage

• The space can be used or occupied by a tenant
• Typically does not include elevators, stairs, or mechanical spaces

Straight-line Depreciation

• The depreciation of an asset assumes the asset will lose an equal amount of value each year

Tax Depreciation

• An income deduction allows a taxpayer to recover the cost or other basis of certain property
• It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property

Capital Gain

• A profit resulting from the sale of a property where the amount realized from the sale exceeds the purchase price

Capital Loss

• The difference between a lower selling price and a higher purchase price, resulting in a financial loss to the seller

Basis

• Revenues and expenses are recognized when physical cash is received or paid out

Recaptured Depreciation

• When real property is sold at a gain and accelerated depreciation has been claimed, the owner may be required to pay a tax at ordinary (non-accelerated) rates to the extent of the excess accelerate depreciation

Adjusted Basis

• A bookkeeping term
• It is the original cost of a property minus depreciation and sales of portions thereof plus allowable additions such as capital improvements and certain carrying costs and assessments

Boot

• Cash received in a tax-deferred exchange

Tax-Deferred Exchange

• Under Section 1031 of the US Internal Revenue Code, the exchange of certain types of property may defer the recognition of capital gains or losses due upon sale

Appreciation

• A monetary gain results from the increase in the market value of an investment, excluding additions of capital

Cash Flow

• The net result when expenses are subtracted from income from an investment property
• The result determines the rate of return on an investor's money

Passive Activity Income

• Earning from a rental property in which one is not actively involved

Active Income

• Income for which services have been performed

Important real estate and finance terms are defined. Terms include pro-forma statements, capitalization rate, rentable square footage, common areas, and net lease. These concepts are crucial for understanding property investment and financial analysis in real estate.