AI2154 | Final Exam 24 (Vocabulary)

Question 1

Market Value

Answer 1

an amount for which something may be sold on a given market

Question 2

Investment Value

Answer 2

an amount for which a particular investor or group of them think an investment is worth

Question 3

Fair Value

Answer 3

a broad measure of an asset’s worth and is an estimate of the company’s assets and liabilities found on the company’s financial statement

Question 4

Anchoring

Answer 4

the subconscious use of irrelevant information (purchase price of a security) as a fixed reference point for making subsequent decisions on the security

Question 5

Asymmetric Information

Answer 5

when one party in a transaction is in possession of more information than the other

Question 6

Exit Yield

Answer 6

the yield used to capitalize the projected rent at the end of a holding period to calculate the exit value

Question 7

Weighted Average Cost of Capital (WACC)

Answer 7

a firm’s average cost of capital from all sources including common stock, preferred stock, bonds, and other forms of debt

Question 8

Expropriation

Answer 8

the act of the government claiming privately owned property against the wishes of the owners to be utilized to benefit the general public

generally the government pays over the market value

Question 9

Operational Leverage

Answer 9

a measurement of a company’s fixed costs as a percentage of its total costs used to evaluate the breakeven point of a business to better understand profitability and risk

Question 10

Scenario Analysis

Answer 10

the process of estimating the expected value of a portfolio after a given change in the values of key factors take place

generally where worst-case and best-case scenarios may be tested

Example: Analyzing different economic conditions for a project

Question 11

Sensitivity Analysis

Answer 11

a process of examining how changes in the assumptions of an economic model impact its predictions

Example: adjusting interest rates to see impact on net present value of property

Question 12

Mortgage Lending Value

Answer 12

the value of the property set by means of an appraisal carried out by an accredited company

the value used when applying for a mortgage from a bank

Question 13

Residual Land Value

Answer 13

a method for calculating the value of development land that includes profit but not including cost of land

Question 14

Internal Valuer

Answer 14

a valuer who performs a valuation for their employer

Question 15

External Valuer

Answer 15

a valuer who performs a valuation for a third party

Question 16

What-if Analysis

Answer 16

another name for Scenario Analysis

a technique that is used to determine how projected performance is affected by changes in the assumptions that projections are based upon

best case, worst case, ideal case

Question 17

Transaction Based Valuation

Answer 17

a way to value properties base on historical transaction records

Question 18

Smoothing

Answer 18

the practice of averaging out fluctuations or irregularities in financial data over time to provide a more stable and reliable estimate of value

Question 19

Capitalization Rate

Answer 19

A capitalization rate is used in real estate valuation to convert income into value by dividing the property’s net operating income (NOI) by the capitalization rate to determine its market value.

Question 20

Discount Rate

Answer 20

A discount rate is used in discounted cash flow (DCF) analysis to discount future cash flows back to their present value, considering the time value of money and the risk associated with those cash flows.

Question 21

Discount Rate

Answer 21

a metric that represents an investor’s required rate of return on a commercial real estate investment

Discount Rate = Risk Free Rate + Inflation + Property Risk

Average discount rate is between 7.5 to 9.5 percent

Question 22

Illiquidity

Answer 22

something not easily exchanged for cash

Question 23

Market Rent Distribution

Answer 23

normal bell curve:
market rents when the data exhibits a bell-shaped curve and rent variations are relatively symmetric around the mean

Question 24

Vacancy Rate Distribution

Answer 24

lognormal bell curve

Question 25

Mortgage Interest Rate Distribution

Answer 25

lognormal bell curve

Question 26

Optionality in Property Development

Answer 26

Optionality in property development refers to the flexibility and potential for future value enhancement or adaptation of a property, allowing developers to capitalize on changing market conditions or emerging opportunities, thus maximizing returns on investment. It involves incorporating features or design elements that offer potential for alternative uses, expansions, or reconfigurations over time.

Question 27

Real Options

Answer 27

flexibility to adapt or change property use

Question 28

Financial Options

Answer 28

Rights to buy/sell property at set price

Question 29

Embedded Options

Answer 29

implicit in property contracts, like lease renewal

Question 30

What is the Red Book?

Answer 30

The Red Book refers to the RICS Valuation - Global Standards, commonly known as the “Red Book” due to its distinctive cover. It sets out mandatory rules, best practice guidance, and technical standards for valuations.