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It’s All Greek to Me: Common Real Estate Terms Defined

Ben Vestal Comments
Continued from page 1

9. Net Operating Income

The net operating income (NOI) is the income from a property or business after operating expenses have been deducted, but before deducting taxes, depreciation and debt service (interest and principal). I believe 90 percent or more of a storage facility’s value is directly related to NOI.

NOI is used to calculate the value of the property by applying a market cap rate or rate of return an investor is looking to achieve to a value or purchase price.

8. Loan to Value

Loan-to-value (LTV) is the relationship of the loan balance to the appraised value of the property. For example, if the appraised value of a property is $1 million and the loan balance is $750,000, the property then has an LTV of 75 percent.

This is not always the true market value or what you feel the value may be, but simply the loan amount divided by the appraised amount. LTV is typically used in the underweighting analysis when you refinance or place a loan on a property. Lenders historically have had limits in the range of 70 percent to 80 percent of the loan to appraised value.

7. 1031 Exchange

Named after its place in the U.S. tax code, a 1031 Exchange (sometimes known as “like kind exchange”) allows for the capital-gains taxes on a transaction to be deferred if the proceeds from the sale are reinvested in a similar or “like kind” asset. These exchanges are typically used in real estate, but people can also apply them to some other big-ticket assets.

The key thing to remember is you are only deferring the taxes, not avoiding them. There are lots of details to consider, so be sure to call your accountant first when considering this type of transaction.

6. Special-Purpose Property

A special-purpose property is a building or property that has limited uses, such as self-storage, churches, theaters and schools. Self-storage is sometimes considered a special-purpose property, meaning the building or property would need major remodeling, rezoning or demolition to be used for an alternate use and, thus, may impede financing with some institutions.

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