Part 3 Vocab

Question 1

the conversion of income into value

Answer 1

capitalization

Question 2

A ratio of one year’s net operating income provided by an asset to the value of the asset; used to convert income into value in the application of the income capitalization approach.

Answer 2

capitalization rate (R)

Cap Rate = NOI / Sale Price

Question 3

a method used to convert an estimate of a single year’s income expectancy into an indication of value in one direct step, either by dividing the net income estimate by an appropriate cap rate or by multiplying the income estimate by an appropriate factor. It employes cap rates and multipliers extracted or developed from market data.

Answer 3

direct capitalization

Value = Gross rent per month x gross rent multiplier

Note: Only one year’s income is used. Yield and value changes are implied, but not explicitly identified.

Question 4

the anticipated income from all operations of the real estate after an allowance is made for vacancy and collection losses and an addition is made for any other income.

Answer 4

effective gross income (EGI)

Question 5

the actual or anticipated income that remains after all operating expenses are deducted from effective gross income, but before mortgage debt service and book depreciation are deducted.

Answer 5

Net operating income (NOI, Io)

Question 6

The relationship between a single year’s net operating income expectancy and the total property price or value.

Answer 6

overall capitalization rate (Ro)

Ex: A property has a net operating income (NOI) of $50,000 and sold for $500,000. What is the overall capitalization rate?
Answer: 10% ($50,000/$500,000)

Question 7

the total possible income attributable to property at full occupancy before vacancy and operating expenses are deducted.

Answer 7

Potential Gross Income (PGI)

Question 8

the portion of net operating income that remains after total mortgage debt service is paid but before income tax on operations is deducted.

Answer 8

Pre-tax cash flow (PTCF)

aka: before-tax cash flow or equity dividend

Question 9

a lump-sum benefit that an investor receives or expects to receive upon the termination or sale of an investment.

Answer 9

Reversion

Question 10

a method used to convert future benefits into present value by 1) discounting each future benefit at an appropriate yield rate or 2) developing an overall rate that explicitly reflects the investment’s income pattern, holding period, value change, and yield rate.

Answer 10

Yield Capitalization