Chapter 15

  1. after-tax discounting approach
    In an after-tax discounting approach, the estimated after-tax cash flows (e.g., after-tax bond payments) are discounted using a rate that has been reduced to reflect the net rate received by an investor with a specified marginal tax rate.
  2. appraisals
    Appraisals are professional opinions with regard to the value of an asset, such as a real estate property.
  3. backward induction
    Backward induction is the process of solving a decision tree by working from the final nodes toward the first node, based on valuation analysis at each node.
  4. closed-end real estate mutual fund
    A closed-end real estate mutual fund is an investment pool that has real estate as its underlying asset and a relatively fixed number of outstanding shares.
  5. commingled real estate fund
    Commingled real estate funds (CREFs) are a type of private equity real estate fund that is a pool of investment capital raised from private placements that are commingled to purchase commercial properties.
  6. comparable sale prices approach
    The comparable sale prices approach values real estate based on transaction values of similar real estate, with adjustments made for differences in characteristics.
  7. data smoothing
    Data smoothing occurs in a return series when the prices used in computing the return series have been dampened relative to the volatility of the true but unobservable underlying prices.
  8. decision node
    A decision node is a point in a decision tree at which the holder of the option must make a decision.
  9. decision tree
    A decision tree shows the various pathways that a decision maker can select as well as the points at which uncertainty is resolved.
  10. depriciation
    Depreciation is a noncash expense that is deducted from revenues in computing accounting income to indicate the decline of an asset's value.
  11. depreciation tax shield
    A depreciation tax shield is a taxable entity's ability to reduce taxes by deducting depreciation in the computation of taxable income.
  12. discounted cash flow (DCF) method
    The income approach is also known as the discounted cash flow (DCF) method when cash flows are discounted rather than accounting estimates of income.
  13. effective gross income
    The effective gross income is the potential gross income reduced for the vacancy loss rate.
  14. effective tax rate
    The effective tax rate is the actual reduction in value that occurs in practice when other aspects of taxation are included in the analysis, such as exemptions, penalties, and timing of cash flows.
  15. equity residual approach
    An alternative approach, often termed the equity residual approach, focuses on the perspective of the equity investor by subtracting the interest expense and other cash outflows due to mortgage holders (in the numerator) and by discounting the remaining cash-flows using an interest rate reflective to the required rate of return on the equity of a leveraged real estate investment (in the denominator).
  16. exchange-traded funds (ETFs)
    Exchange-traded funds (ETFs) represent a tradable investment vehicle that tracks a particular index or portfolio by holding its constituent assets or a subsample of them.
  17. fixed expenses
    Fixed expenses, examples of which are property taxes and property insurance, do not change directly with the level of occupancy of the property.
  18. FTSE NAREIT US Real Estate Index Series
    The FTSE NAREIT US Real Estate Index Series is a family of REIT-based performance indicies that covers the different sectors of the U.S. commercial real estate space.
  19. gearing
    Gearing is the use of leverage.
  20. hedonic price index
    A hedonic price index estimates value changes based on an analysis of observed transaction prices that have been adjusted to reflect the differing characteristics of the assets underlying each transaction.
  21. income approach
    The income approach values real estate by projecting expected income or cash flows, discounting for time and risk, and summing them to form the total value.
  22. information node
    An information node denotes a point in a decision tree at which new information arrives.
  23. NCREIF Property Index (NPI)
    The NCREIF Property Index (NPI) is the primary example of an appraisal-based real estate index in the United States and is published by the National Council of Real Estate Investment Fiduciaries (NCREIF), a not-for-profit industry association that collects data regarding property values from its members.
  24. net lease
    In a net lease, the tenant is responsible for almost all of the operating expenses.
  25. net operating income (NOI)
    Net operating income (NOI) is a measure of periodic earnings that is calculated as the property's rental income minus all expenses associated with maintaining and operating the property.
  26. net sale proceeds
    The net sale proceeds (NSP) is the expected selling price minus any expected selling expenses arising from the sale of the property at time T.
  27. open-end real estate mutual funds
    Open-end real estate mutual funds are public investments that offer a non-exchange traded means of obtaining access to the private real estate market.
  28. operating expenses
    Operating expenses are non-capital outlays that support rental of the property and can be classified as fixed or variable.
  29. potential gross income
    The potential gross income is the gross income that could potentially be received if all offices in the building were occupied.
  30. pre-tax discounting approach
    The pre-tax discounting approach is commonly used in finance, where pre-tax cash flows are used in the numerator of the present value analysis (as the cash flows to be received), and the pre-tax discount rate is used in the denominator.
  31. private equity real estate funds
    Private equity real estate funds are privately organized funds that are similar to other alternative investment funds, such as private equity funds and hedge funds, yet have real estate as their underlying asset.
  32. profit approach
    The profit approach to real estate valuation is typically used for properties with a value driven by the actual business use of the premises; it is effectively a valuation of the business rather than a valuation of the property itself.
  33. real estate development projects
    Real estate development projects can include one or more stages of creating or improving a real estate project, including the acquisition of raw land, the construction of improvements, and the renovation of existing facilities.
  34. real estate joint ventures
    Real estate joint ventures are private equity real estate funds that consist of the combination of two or more parties, typically represented by a small number of individual or institutional investors, embarking on a business enterprise such as the development of real estate properties.
  35. real estate valuation
    Real estate valuation is the process of estimating the market value of a property and should be reflecting of the price at which informed investors would be willing to both buy and sell that property.
  36. real option
    A real option is an option on a real asset rather than a financial security.
  37. risk premium approach
    The risk premium approach to estimation of a discount rate for an investment uses the sum of a riskless interest rate and one or more expected rewards - expressed as rates - for bearing the risks of the investment.
  38. stale pricing
    The use of prices that lag changes in true market prices is known as stale pricing.
  39. syndications
    Syndications are private equity real estate funds formed by a group of investors who retain a real estate expert with the intention of undertaking a particular real estate project.
  40. vacancy loss rate
    The vacancy loss rate is the observed or anticipated rate at which potential gross income is reduced for space that is not generating rental income.
  41. variable expenses
    Variable expenses, examples of which are maintenance, repairs, utilities, garbage removal, and supplies, change as the level of occupancy of the property varies.
Card Set
Chapter 15
Real Estate Equity Investments