A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
____________________________________________________________
Adjustable-Rate
Mortgage (ARM): A mortgage in which the interest rate is periodically determined by
reference to the interest rate of a base index, such as the 1-year U.S. Treasury Security,
or some other index such as LIBOR, published by a neutral third
party. The mortgage rate is constructed by adding an interest rate margin, or spread, to
the base index rate. Purpose is to transfer to the borrower the major risk of an increase
in market interest rates. In return, the borrower usually achieves a rate lower than a
fixed-rate loan.
Adjusted Funds From Operations (AFFO):
Funds From Operation (of a REIT) to which is added back certain necessary replacement
costs which would ordinarily be covered by depreciation and amortization deductions. Funds
From Operations do not include deductions for depreciation and amortization. See FFO.
AITD: An acronym for All-Inclusive
Deed of Trust. A deed of trust securing a promissory note whose
principal includes the principal of one or more senior promissory notes,
and whose payment includes the payments due on these senior notes. Also called a
wrap-around mortgage.
Amortizing Loan : A loan whose periodic
repayments contain an amount designated for the reduction of the principal;
therefore, a loan whose balance will eventually be reduced to zero. The amortization
schedule is the time necessary for the balance to reach zero.
Annuity-due : An annuity (a financial instrument involving regularly occurring payments) made or received at the beginning of the payment period. Contrast to Ordinary Annuity.
APR : An acronym standing for Annual Percentage Rate. The APR of a loan is the yield, or Internal Rate of Return, which the lender realizes on the loan over the term of the loan. Conversely, it is also the actual interest rate paid by the borrower when loan fees (points) and other loan charges are taken into account. Under Federal Regulation Z, the APR is required to be given to residential borrowers within three days of the loan application. Permits the consumer to compare loans with dissimilar interest rates and fees. Commercial loans (loans on non-residential property and loans on 5 or more residential units) are not required to specify the APR.
APY: Annual Percentage Yield. A synonym for Effective Rate of Interest. See Effective Rate
Auto Lease, "Money Factor" : A constant used by auto leasing agents to calculate the amount of the monthly lease payment on an automobile lease. The money factor is equal to the interest rate charged divided by 2400. To compare a money factor to an interest rate, multiply the factor x 2400. (Money factors are not exactly equivalent to interest rates)
Beta: A measure of the
correlation in the movement of a stock's price to that of an external index, most commonly
the average price of the S&P 500 .
It is based either on a 60-month or 36-month historical regression of the return on the
stock onto the market return:
Ri = a + b(Rm) + e where Ri is the monthly total returns on the
stock, a is the stock's Alpha, b is the stock's Beta, Rm
is the monthly total returns on the market (S&P; 500), and e is the
error term.
A minimum of 12 monthly returns are required for this calculation. A beta of 1 means that
the market and the stock move up or down together, at the same rate. That is, a 5% up or
down move in the market should theoretically result in a 5% up or down move in the stock.
A beta coefficient of 2 suggests that the stock is twice as volatile as the market. That
is, if the market moves up 5%, then the stock should move up 10%. A beta coefficient of
0.5 indicates that the stock will move one-half as much as the market, either up or down.
A negative beta indicates the stock tends to move in an opposite direction from the
general market. That is, the stock price declines when the overall market is rising, or
rises when the overall market is declining. The 60-Month Beta is a total return
index while the 36-Month is a price-only index. Negative beta stocks are rare.
Bond Duration : A calculated factor used to approximate a bond's current price sensitivity to potential changes in market-rate yields. The Duration factor is the summation of the time-weighted ratios of the present value of the remaining payments and principal outstanding on a bond to the current market value of the bond.. Bond Duration is always a negative number. The percent change in the bond is approximately equal to the percent change in market yield multiplied by the Duration factor. A more accurate estimate of the change is obtained by the use of the Modified Duration. The Modified Duration is equal to the Duration divided by (1 + (yield rate/2)). Changes in bond value as measured by Duration are more accurate when the market interest rate changes are relatively small.
Book Value: the reported net worth of a company.
Generally, the original capital to start the firm, plus any capital raised by additional
issues, less repurchased shares, plus retained earnings. Book value is often modified by
accounting adjustments which do flow through the income statement. Equivalent to
"stockholders equity." Expressed as book value/share.
Boot: Unlike property given or received in an otherwise
tax-deferred S.1031 exchange. For example, cash (Personal Property) received in an
exchange of Real Property. Boot is taxable to the receiver of the boot up to the amount of
the capital gain, but never to the giver of the Boot.
Buydown Mortgage : A mortgage in which the seller reduces the nominal interest rate to the buyer by contributing specified (periodic) payments which cause the mortgage to resemble one with a lower interest rate. A 3-2-1 buydown would be one on which the buyer's loan behaves like a mortgage 3%, 2% and then 1% lower in interest rate during the first, second and third periods than the actual rate on the new mortgage. Payments would be funded in advance by the seller. The length of the period is usually, but not always, annual. Buydown mortgages are also available from the lender, in which case the borrower pays a cash lump sum up-front to obtain a lower interest rate.
Call Date : With reference
to mortgages, a date on which a lender may require the remaining balance to become
immediately due and payable. A "30 due in 7" mortgage, for example, would have
payments structured as a 30-year loan, but would require a payoff by the borrower at the
end of the 7th year. With reference to bonds, a date on which the issuer of the
bonds may "call-in" the bond for redemption. Bond call dates afford the issuer
potential relief from a bond-obligation with a high interest rate during periods when
market rates are substantially lower.
Capital Gain: A gain resulting from the sale of a capital
asset. A long-term capital gain is the difference between the net sales
price and the adjusted basis of an asset which has been held for the legally proscribed
period of time. This time period changes from time to time. As of July 2004, the minimum
holding time to qualify for Long Term Capital Gains treatment is one year and one day.
Capitalization rate : The
rate at which a capital sum produces periodic payment. It is also the ratio which a
constant payment-ordinary annuity bears to the total Present Value of the annuity. In real
estate, the ratio of the annual Net Operating Income to the Fair
Market Value of an income-producing property. (NOI/FMV = capitalization
rate)
More correctly, the overall capitalization rate
when the NOI is compared to the total market value. The discount rate used to convert a
perpetual annuity to a capital amount. The overall rate is the return rate
on both equity invested plus debt. See Equity Return Rate
Cashflow : Most simply, the flow of cash from one set of pockets into another. More precisely, Net Operating Income plus non-cash items which have already been deducted in determining the NOI, such as income taxes, depreciation and amortization allowances. Same as EBITDA
Compound Interest : Interest
earned on a principal sum to which prior earned interest has been added. Formula for
compound interest forms the mathematical basis for the Time Value Of Money. (Cited by A.
Einstein as the world's greatest invention.)
Consumer Price Index (CPI) : The cost of a basketful of goods
purchased from time to time by the consumer. This index is maintained and published by the
federal government's Bureau of Labor Statistics, (www.bls.gov) and serves as a popular measure of inflation. (See
USEFUL LINKS )
Convexity of Bond Curve: Refers
to the convex shape of the curve which results from plotting the price of a bond of a
constant maturity and coupon rate against increasing market yields. Convexity is
equal to the second derivation of Macaulay's formula for Bond Duration and measures the
rate of change in the slope of the bond curve.
Core Rate of Inflation: The
Consumer Price Index measured after subtracting the cost of energy and food.
Coupon Rate: The rate at which a bond
pays annual dividends, expressed as a percent of $1,000. The dividend payment is typically
divided in two and paid every six months.
Covered Call: An option to sell shares of
stock which is already owned by the optionor at a specific price on or before a specific
date.
Debt Coverage Ratio (DCR) : The ratio of
the annual Net Operating Income of an income-producing property to the annual cost of
servicing the loan. Also known as Debt Service Ratio (DSR).
Direct Capitalization: A process whereby the value of a property is determined by dividing the Net Operating Income by a market derived discount rate. This single rate is called the 'capitalization rate.' Contrast to Yield Capitalization.
Discount Rate : The opposite of an interest rate. A rate used to convert the future value of a single sum, or a series of payments, or a combination of the two, to an equivalent present value. A rate used to move the value of money backward in time. Interest rates move the value of money forward in time.
Discounted Cash Flow: A technique by which the
values of future cashflows are converted into a financially equivalent, single Present Value, using a discount rate.
DownREIT: A REIT which acts as a
general partner in partnership with owners from whom it acquires real properties.
The owners acquire interests in the partnership in exchange for the contribution of the
property to the partnership. This is ordinarily a tax-free event. DownREITS differ from
UpREITs in that the REIT owns other real properties previously acquired, while in the
UPREIT the REIT owns no other properties. See UpREIT.
Duration: See Bond Duration
EBITDA: an acronym
standing for Earnings Before Interest, Taxes, Depreciation
and Amortization. Revenue, less cost of goods, selling and
administrative costs, but before interest costs, income taxes, and non-cash deductions
such as depreciation and amortization. Equivalent to the term "cashflow."
Effective Rate: The rate at which $1.00
will grow in one year as the result of compounding of the interest rate. To calculate the
effective rate, calculate the Future Value of $1.00 bearing interest at rate i/n over n
periods per year. Subtract one from the result and multiply x 100 to convert to a
percentage.
Equity Return Rate:
The rate of return from an investment based on the equity portion of the investment only.
This is in contrast to the overall capitalization rate which
includes both equity and debt (borrowed funds).
Fixed Costs: Costs of operation or production
which are not influenced by units produced See Incremental
Cost, Variable Cost.
Finite Annuity: A series of
payments occurring on a regular schedule for a definite period of time.
FICO score: A credit worthiness scoring program
developed by Fair Isaac Company and widely used by credidt agencies to gauge the
potential for a borrower to default.
Free Cash Flow : Cash available to debt and
equity holders after any investment sums required to replace operating capacity. This
investment money does not include cash for new investments.
Alternately, FFO = cash available to finance expansion, reduce debt, pay dividends or
repurchase equity. If historical depreciation allowances were equal to the cost of
replacing capacity, then Net Income and Free Cash Flow would be identical.
Front-end, Back-end Ratios : Financial
ratios used by mortgage underwriters to qualify a borrower for a residential loan. The
Front-end ratio is the ratio of total monthly housing expenses (including taxes, ins.
etc…) divided by total monthly gross income. The Back-end ratio is the total of all
current periodic debt payments (including housing) divided by total monthly gross income.
Funds From Operations (FFO):
Operating Income before deductions for depreciation and amortization. Does not include
income from the one-time sale of assets. Used to express the income of a REIT.
See AFFO
Future Value: The value of a Present
Value sum, or a series of payments, or a combination of both, carried forward in time and
increased by a periodic interest rate.
Goodwill: The price paid for a
business over and above the value of the hard assets.
Graduated Payment Loan (GPM): A loan
whose payments increase during the early years (usually years 1-6) and then remain level
for the remainder of the term of the loan.
Gross Rent Multiplier: The ratio of
the price of a real estate property to its gross scheduled rent.
Gross Scheduled Income:
Rent which would be collected from a real property if every space were leased,
and if there were no vacancies or credit losses. The maximum Potential Income.
Gross Operating Income:
The amount of rent collected from the operation of a property after deductions for vacancy
and credit losses, but before deductions for operating expenses. Sometimes called Gross
Effective Rent.
Hurdle Rate: The minimum rate of return which must be met on a project. Contrast to Opportunity Cost . The hurdle rate is sometimes set equal to the cost of borrowed funds.
Incremental Cost: The
cost of one additional unit of production from present levels.
Inflation Adjusted Rate (IAR): The periodic
rate of return on an investment after adjustment for inflation. Formula: I.A.R = (1+
nominal interest rate) / (1 + inflation rate) -1. (Multiply x 100 to convert to a
percentage rate) A rate used to express future sums in constant (non-inflated) dollars.
Permits the measurement of the buying power of future dollars as measured in today's
dollars.
Interest: Money paid or received for the use
money.When the interest earned is added to the principal the interest earned on the total
is known as compound interest. If the interest is not added to
principal, the interest earned on principal is known as simple interest.
Internal Rate of Return (IRR) : A single
discount rate which, when applied to all future cashflows, causes the sum of their present
values to equal the amount of the original investment. Or, that single discount rate
which, when applied to a cashflow series, will result in a Net Present
Value = zero. See Modified IRR.
Letter of Intent (LOI): A letter to a property owner which outlines the major terms under which a prospective buyer would be willing to purchase the property. Typically not binding on either the seller or the buyer if so specified.
Leverage : The use of borrowed money in an investment. The ability to control an investment using borrowed funds. Positive leverage occurs when the rate of return on the investment exceeds the rate of interest paid on borrowed funds. Negative leverage is the opposite situation. Neutral leverage occurs when the rates are equal.
LIBOR: An acronym for London
Interbank OfferedRate. The LIBOR rate quoted in the Wall
Street Journal is an average of rate quotes from five major banks: Bank of America,
Barclays, Bank of Tokyo, Deutsche Bank and Swiss Bank. These rates are applicable to
dollars deposited in countries whose major currency in not the dollar.
Loan Points : Fees paid over and above the nominal
interest rate for the use of borrowed funds. One point is equal to one percentage point of
the loan amount. Loan points are equivalent to pre-paid interest on a loan. In the case of
residential real estate, points paid on a loan used to acquire a residence are
fully deductible (on loans not in excess of $1Million) as interest paid in the year of
acquisition. Points paid on loans used to refinance a principal residence, and on all
non-residential property, must be amortized (deducted ratably) over the life of the loan.
Mezzanine Loan: A loan secured by a second trust
deed or second mortgage. More specifically, a loan intended to bridge the gap between a
first position loan which is relatively small and the fair market value of the asset.
Mezzanine loans are often secured by the borrower's ownership position in the property
rather than by a mortgage or trust deed whcih pledges the property itself as security for
the loan.
Modified Internal Rate of Return:
The Internal Rate of Return adjusted for negative cashflows using a "safe rate"
to provide for future negative cashflows. Becomes more and more significant as IRR
increases. Also known as the Financial Management Rate of Return (FMRR)
Net Asset Value (NAV): The underlying total value
of assets owned by a REIT divided by the total number of outstanding shares of the REIT. A measure (ratio) of the value of the assets owned to the price of
the stock.
Net Mortgage Relief: The amount by which the mortgage on a
relinquished property exceeds the amount of mortgage on the replacement property in a S.
1031 exchange. Probably the most overlooked source of Boot in S. 1031 exchanges.
Net Operating Income: Operating
revenue less operating expenses, not to include the cost of servicing loans nor non-cash
items such as depreciation and amortization expense.
Net Present Value: The present value of a series of cashflows after having subtracted the amount of the initial investment. Widely used as a measurement stick for the acceptability of a project or venture when the required "hurdle" or discount rate is defined beforehand.
Opportunity Cost of Funds : The rate of return which could be realized on the next best available investment of similar risk.
Option: An option conveys the right, but not the obligation, to sell or buy an asset at a determinable price. The Chicago Board of Options (www.CBOE.com) is second only to the New York Stock Exchange in daily volume,
Ordinary Annuity : A series of regular payments made or received at the end of the specified period.
Paper: A colloquial term for a promissory note.
Perpetual Annuity : A regularly occurring payment which continues forever. Payment may be either Ordinary or Annuity Due
Present Value : The present-day
worth of a single sum, or a series of payments, or a combination of the two, when
discounted at a specified rate. Synonymous with Present Worth. The present-day equivalent
financial value of a future cashflow. The discounted value of future cashflows.
Residual Value, Reversionary Value:
The Future Value of an investment at the end of the holding period.
Return on Equity : The rate of return on the owner's cash as opposed to the rate of return on all cash invested. The owner's Internal Rate of Return.
Return on Investment: Rate of
Return on all cash invested in the project. This includes both owner-equity and
third-party loans.
REIT: An acronym for Real Estate
Investment Trust, a corporation, trust or association which invests either
in real properties, real property mortgages, or a combination of the two. REITs combine
the limited liability advantage of the corporate form of ownership with the single-level
taxation advantage of a partnership. In addition to other requirements for special tax
treatment,, REITs must distribute (as of Jan. 1, 2000) 90% or more of annual
earnings in the form of dividends. See UpREIT, DownREIT.
Reverse Mortgage: A mortgage on real property in which the
lender pays the property owner a specified, periodic payment secured by the owner's equity
in the property.
S. 1031 Exchange: A tax-deferred
exchange of either real or personal property for like-kind property. "S.
1031" refers to the section of the tax code covering tax-deferred exchanges. Current
law also permits the exchange of real property which is "taken" (by eminent
domain, condemnation). This kind of exchange is covered by S. 1033 of the I.R.C., and is
different from S. 1031 in many important details.
Safe Rate: The rate at which
funds can be invested on a short-term basis with virtual certainty regarding the future
return of capital and modest interest. The most common source for the safe
rate is the U.S. Treasury securities of various maturities. The standard U.S. Treasuries
deliver yields which include an allowance for inflation. The Treasury Inflation-Protected
Securities (TIPS) deliver the basic Safe Rate without the inflation factor.
Senior Promissory Note and Trust Deed: a
note whose securing instrument (trust deed or mortgage) is
recorded earlier in time than a later trust deed or mortgage securing another
promissory note. A senior trust deed has priority over a junior trust deed or
mortgage in the order in which they are to be satisfied in the event of a default.
Simple Interest: Interest earned on a capital sum to which no
prior earned interest has been added. Contrast to Compound
Interest
Stock Equilibrium Formula: The formula for
an ordinary, infinite annuity. Used in the valuation of stocks which have earnings. Annual
earnings are capitalized (divided) by the targeted yield rate. When the stock offers
earnings growth potential, the value of the growth rate is subtracted from the yield rate.
Probably a misuse of the capitalization method which applies to periodic payments
(dividends).
Standard Deviation: The
degree of dispersion of data as measured from the mean (average), or from the
Expected Result determined by applying probabilities to the range of possible outcomes. In
a series of measurements, x ....... xn, where k is an integer equal to or
greater than 1, at least (1- 1/k2 ) percent of the
measurements will fall within k Standard Deviations of the Expected Result. This is true
for any distribution pattern, but in a normal "bell curve" shaped
distribution pattern, 68% of measurements will fall within 1 Standard Deviation,
95.5% will fall within 2 Standard Deviations and 99.7% will fall within 3 Standard
Deviations of the average or Expected Result. Standard Deviation is equal to the square
root of the Variance.
Subprime Mortgage: A loan made to an entity with poor credit risk.
TIPS: U.S. Treasury Inflation-Protected Securities: A series of notes and bonds whose maturity values are periodically adjusted for inflation. The coupon rate of these securities reamins constant but is applied to the periodically adjusted maturity value thereby preserving the constant purchasing power of the invested dollar.
Tick: In bond parlance, 1/32 of 1 point. One
point = 1% of $1,000, or $10.00. Therefore, 1 tick = $0.3125.
Time Value of Money: A concept meant to convey the idea that
the value of money varies according to the time for its receipt or payment.
Trust Deed: A recordable
lien (money encumbrance) against real property used to secure a promise or a debt.
UpREIT: An acronym for Umbrella
Partnership Real Estate Investment Trust. UpREITs are
limited partnerships in which the REIT acts as the General Partner. The following
definition is from the National Association of Real Estate Investment Trusts (NAREIT):
"After a period of time (often one year), the partners may enjoy the same liquidity of the REIT shareholders by tendering their Units for either cash or REIT shares (at the option of the REIT or Operating Partnership). This conversion may result in the partners incurring the tax deferred at the UPREIT's formation. The Unit holders may tender their Units over a period of time, thereby spreading out such tax. In addition, when a partner holds the Units until death, the estate tax rules operate in a such a way as to provide that the beneficiaries may tender the Units for cash or REIT shares without paying income taxes."
Yield Capitalization: A discounting technique whereby the Present Value of cashflows which change from period to period can be determined. The discount rate (or rates) applied is the yield required by the investor for each time period in the cashflow. This is in contrast to Direct Capitalization in which the discount rate (capitalization rate) is a single rate derived from current market data.
Yield Curve: The curve which results from plotting the yield rate of a series of bonds of similar risk against their time-to-maturity. Most common yield curve is that of U.S. Treasury Bills, Notes and Bonds. It is published in most daily financial newspapers and usually appears on the Bond page.
Yield-to-Maturity (YTM) : The Internal Rate of Return on a bond investment held to the maturity or to the redemption (call) date of the bond.
Yield : A synonym for the Internal Rate of Return
Yield Maintenance Clause: A pre-payment clause
inserted into a mortgage document which is designed to preserve the lender's originally
anticipated yield on the loan. The penalty percentage is usually the percent difference
between the loan's interest rate and the current yield on Treasury securities whose
maturity is approximately equal to the remaining term of the loan. This penalty rate is
multiplied by the current balance of the loan to determine the amount of the penalty. The
result is discounted over the remaining months of the loan using the applicable Treasury
rate as the discount rate.
Zero Coupon Bond: A bond which is
separated from its dividend payments. Also called a "strip." The holder of
this bond receives only the redemption value of the bond and is not entitled to any of the
dividend payments (coupons) carried by the original bond. Zeros are very volatile carrying
a Duration Factor approximately equal to their maturity in
years.