Laserfiche WebLink
PAGE | 6 <br />APPENDIX A: GLOSSARY OF TERMS <br />Capitalization Rate or Cap Rate – The rate of return used to derive the capital value of an income stream. The value of <br />a real estate asset is commonly set on the basis of dividing net operating income (NOI) by a capitalization rate. <br />Debt Coverage Ratio – Defined as net operating income divided by annual debt service. This measure is often used as <br />underwriting criteria for income property mortgage loans, and limits the amount of debt that can be borrowed. <br />Standard minimum debt coverage ratios would be in the 1.20 to 1.30 range. A debt coverage ratio of 1.20 indicates that <br />in your first year of stabilized occupancy, your net operating income (NOI, gross income less expenses) is equal to 120% <br />of your debt service requirements (principal and interest). <br />Equity – The interest or value that the owner has in real estate over and above the liens held against it. <br />Net Operating Income (NOI) – Income from property after operating expenses have been deducted, but before deducting <br />income taxes and financing expenses. <br />Return on Cost (ROC) – Net operating income in the initial year, divided by total project cost. This measure is also <br />commonly referred to as the going-in cap rate. <br />Return on Equity or Equity Yield Rate or Cash on Cash – The rate of return on the equity portion of an investment, taking <br />into account periodic cash flow. In this analysis, the return on equity represents the initial rate of return, and is defined <br />as the net cash flow after interest costs divided by the developer equity. It does not include payments towards principal <br />as interest costs. <br />Internal Rate of Return (IRR) – The internal rate of return is the true annual rate of earnings on an investment and equates <br />the value of cash returns with cash invested. It reflects projected net cash flows throughout the duration of the <br />investment period. <br />Terminal Capitalization Rate – The capitalization rate used to estimate the value of the asset at the end of the forecast <br />period, in this case used to calculate a reversion value of the property. <br />September 11, 2019, Work Session – Item 1