Glossary

Autoregression
The tendency of changes in one period to partially echo the changes in previous periods. In this text, it generally refers to real estate prices and capital returns.
Basis point
One‐hundredth of a percent. This is a common unit in the investment industry to refer to returns, and especially to differences between two returns.
Capex
Capital expenditures (also called “capital improvement expenditures”); the cost of longer‐lived expenditures to improve a real estate property.
Cap rate
Capitalization rate; in US real estate terminology, an income or earnings yield, usually based on accounting net income or earnings (rather than a cash yield). images.
Cash yield rate
Current net cash flow divided by the property asset value. Net cash flow = NOI − Capex.
Confidence interval
A range of values such that there is a specified probability that the actual value of interest lies between (within) the interval, or bounds.
Covariance
A statistical concept referring to how two things vary over time together, or not.
Cumulative distribution function (CDF)
The cumulative distribution is the sum of the frequency distribution up to a specified point. It “integrates” the frequency (or “density”) of the relative likelihood of each outcome across the range of all possible outcomes. It generally indicates the probability of an outcome being equal or less than a given value.
Current price/income multiple
Current price of the asset divided by its current annual income (inverse of yield).
Cyclicality
The tendency of the market to have “boom” and “bust” periods.
Data table
A Microsoft Excel® function that allows the user to quickly try out the effect on output values caused by different input values for formulas, also used to implement Monte Carlo simulation.
Discount rate, r
The rate of reduction per time period of the value of future money amounts in terms of present value; it is how the DCF valuation accounts for time and risk—by converting future cash flow amounts to present values.
Discounted cash flow
A fundamental way to value real estate properties based on the opportunity cost of cash flow, time, and risk.
Distribution of possibilities
The description of the expected frequency of occurrence of outcomes over the range of possibilities.
Effective gross income
PGI minus vacancy allowance.
Elasticity
See price elasticity.
Ex‐ante
A standard expression meaning “forward‐looking,” from the Latin meaning “from before.”
Ex‐post
A standard expression meaning “backward‐looking,” from the Latin meaning “from afterward.”
Expected return, expected value
“Expected” in such contexts signifies the probabilistic mean, which is a type of “average” across the possible outcomes. When dealing with probability distributions, we calculate the expected value of a variable as the weighted average of the variable over all of its possible outcome values, weighting by the probability of the outcome value.
Fee simple
Ownership in “fee simple” refers to absolute ownership in a property, as understood in North America, the United Kingdom, and some other countries, generally without temporal restrictions. It contrasts with other forms of ownership—for example, those limited by time (99 years) or extent (excluding minerals, for instance).
First‐order stochastic dominance
The situation in which one alternative is never beaten by another alternative over all possible uncertain outcomes driven by uncertain (“stochastic”) factors.
Flaw of averages
A word play on the “law of averages,” which is the (false) notion that future events will balance out toward an average. The flaw of averages says that using average input values to estimate future expected outcome values is a mistake—it gives erroneous or misleadingly incomplete results.
Floor/Area Ratio (FAR)
Also called “plot ratio” and “site ratio” in the United Kingdom and elsewhere, as well as several other variants (such as floor space index, FSI); it equals the floor surface area of built space divided by the ground surface area of the land plot on which the building sits.
Forward claim
A commitment to buy an asset that will be received and paid for sometime in the future, where the price to be paid is already determined in the present.
Geometric mean
A type of mean (average) of a set of quantities, found by multiplying the quantities times each other and then raising that product to the power of the inverse of the number of quantities. In investments, the geometric mean return is the periodic rate of return, which if applied to a given starting value and compounded throughout the holding period will result in a given ending value. In contrast to the arithmetic mean return (the unweighted average of all the returns earned each period), the geometric mean return is unaffected by the volatility of the returns, and depends purely on the beginning and ending values of the investment and the number of periods in the holding of the investment.
Going‐in yield rate
The ratio of current income (or cash flow) to asset value (or price). Usually applied to the next (first upcoming) year’s income.
Going‐out yield rate
The yield rate at the end of the projected investment, applicable to the resale price at which the investment will be sold. Operationally, it is the ratio of the net cash flow of the next year after the sale, to the reversion value of the investment.
Growth rate, g
The projected rate at which the cash flow components of a property will change each year (often also relates to the rate of growth of the asset value).
Hurdle rate
A discount rate set by management for its agents to use as the discount rate in DCF and such analyses. Though, in principle, the hurdle rate should equal (or be based on) the economic opportunity cost of capital, the hurdle rate may reflect management procedures for capital budgeting.
IF statements
Programmed commands in a computer spreadsheet that are conditional on pre‐specified conditions; they automate the process of mimicking investor decisions.
Inertia
The tendency of the past to define the future. See autoregression.
Internal rate of return (IRR)
A mathematical metric to measure investment returns when the investment involves cash flows occurring in more than one future period. Algorithmically, the IRR is the rate that discounts a specified stream of cash flows to a net present value of zero.
Investment value
See value in use.
Leverage
The effect of debt or debt‐like obligations on the investment risk and return of the equity.
Mean‐reversion
The tendency of observations that differ from a long‐term mean value to be followed by observations closer to that mean.
Momentum
A synonym for inertia. See autoregression.
Monte Carlo simulation
A repetitive process, based on input probability distributions and a model of the functioning of the project in each period, generating independent, random future scenarios that collectively mimic what could happen in reality, in principle covering the entire range of possible outcomes.
Net cash flow
NOI − Capex.
Net operating income
EGI − Operating Expenses.
Net present value (NPV)
The present value of project or investment asset net of the cost of acquiring the asset.
Normal distribution
A particular form of the bell‐shaped probability distribution, characterized by its mean value and standard deviation.
Operating expenses
Regularly recurring costs for operating a property, such as utilities, insurance, taxes, and maintenance.
Opportunity cost
The value of what is lost or foregone or used up because of a given action, based on what otherwise could have been done, in principle based on market values.
Opportunity cost of capital (OCC)
The return the investor could expect from investing in a typical asset with similar risk to the subject asset. It represents what the market requires as an expected return on an investment.
Potential gross income (PGI)
The amount of revenue a property would generate if fully occupied.
Present value (PV)
The value as of the present time of a future money amount, adjusting for time and risk.
Price elasticity
Refers to how the quantity of goods or services change because of changes in their prices. Supply elasticity refers to the quantity produced. Demand elasticity refers to the quantity bought. Generally measured as a dimensionless ratio of changes: percent change in quantity divided by percent change in price.
Pricing factor
A ratio that multiplies the original, single‐stream pro forma cash flow expectation to arrive at a future cash flow outcome for a given scenario.
Private value
See value in use.
Probability density function (PDF)
The frequency (or “density”) of the relative likelihood of each outcome across the range of all possible outcomes. This frequency is relative to all the possibilities.
Probability distribution
A common way to refer to a PDF or CDF.
Pro forma
A table (or matrix) showing the projected cash flows (income and expenses) for an investment (rows) over time (columns).
Put‐call parity
A way to view the same flexibility in development from either of two equivalent perspectives—that is, the right without obligation to do something implies the right without obligation to not do it.
Random number
A number drawn from a probability distribution that is independent (not affected) by a previous number drawn.
Random walk
A process of the random evolution of values over time in which the value is the accumulation of a succession of random steps (increments in value), each of which is independent of any others and of the current value of the process. Often used for modeling stock market prices.
Ratio valuation formula
A formula to determine the value of an asset by use of a ratio of asset value as a fraction or multiple of some measure of income, without doing a multi‐period DCF valuation.
Return
Returns are the basic way to measure performance in the investment business—essentially, how much money you are getting in “return” for the money you invested up front. Return “of” your investment gets your investment back without profit. Return “on” your investment gets you profit or income from your investment. Returns are measured in fractions or percentages of the investment—money amounts divided by money amounts.
Reversion
The resale value of an investment asset—in real estate, usually a major source of return “of” the original investment.
Risk‐free rate
The return that investors can get by investing without any risk, a notional concept but often approximated in practice by the yield on short‐term obligations of solid governments with impeccable credit ratings. Also referred to as the “Time Value of Money”.
Risk premium
The extra expected return that the asset market “offers” to investors to compensate investors for taking on the risk associated with the given investment, reflecting an equilibrium between supply of and demand for investment assets, and the way that the market views risk.
Salvage or terminal value
The expected resale price for the property (also see reversion).
Standard deviation
Denotes the “spread” of a probability distribution. It is a way to indicate how far possible outcomes may differ from the expected value or average of a distribution.
Stochastic
A technical term indicating that outcomes are determined over time by the realization of random, unpredictable factors.
Super‐normal profit
A profit above the opportunity cost of capital; a positive net present value evaluated at a price equal to market value.
Target curve
A simple line graph depicting either the cumulative or frequency distribution of the simulated results, typically referring to values of some metric of interest. For an investment, the target metric might be the present value or investment return.
Vacancy allowance
The fraction of potential revenue that could be generated by a property that will not occur due to vacancy.
Value at risk (VaR)
A measure of the downside exposure faced by an investment, the value at and below which outcomes will occur with a specified probability. An X% VaR of $Y means that there is X percent chance that an outcome of $Y or less will occur.
Value in use
The value of an asset for particular owners or users apart from its exchange value—that is, ignoring how much the asset might sell for if it could be traded.
Volatility
The variation over time in the returns from (or price changes in) an investment asset.
Yield rate, y
The ratio of current net cash flow to price.
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