Below are some definitions that are used in this underwriting model^{1}.

# Assumptions Tab

**Acquisition/Development Cost**– gross price (cost) of acquisition (development).**Appreciation –**an increase in the value of a property. In real estate, appreciation may be caused by inflation, demand pressures for land and buildings, a physical addition, modernization, removal of a negative factor from within or outside of a property, and sweat equity.**Due Diligence/Closing Costs**– due diligence costs such as inspections, appraisal, title, etc.**Discount Rate –**a compound interest rate used to convert expected future income into a present value.**Loan Fee**– cost of acquiring a mortgage.**LTV –**Loan to Value ratio.**LTC –**Loan to Cost ratio.**Net Present Value –**a method of determining whether expected performance of a proposed investment promises to be adequate.**Preferred Equity Rate of Return –**The rate of return required for the equity investor. Also known as the*Discount Rate*.**Useful Life –**in accounting and taxation, the period to depreciate a building.

# Cash Flows Tab

**Effective Gross Income –**Gross Potential Income less Vacancy and Collection Loss plus Miscellaneous Income.**General Vacancy Rate –**the percentage of space or units that are either unoccupied or not rented.**Net Operating Income –**income from property or business after*operating expenses*have been deducted, but before deducting income taxes and financing expenses (interest and/or principal).**Cost Recovery Improvements –**Estimated annual depreciation of the improvements.**Loan Cost Amortization –**Annual amortization of the loan fees.- LCA = Loan Fee / Loan Term

**Taxable Income –**Taxable Income is calculated as:- TI = (NOI + Reserves) – (Interest Expense + Capital Expenditures + Cost Recovery Improvements + Loan Costs Amortization)

**Tax Liability –**Taxable Income x Ordinary Income Marginal Tax rate (from Assumptions tab).

# Summary Tab(s)

**Net Present Value (NPV) –**A method of determining whether expected performance of a proposed investment promises to be adequate.- Example: A proposed land investment required $10,000 of cash now and is expected to be resold for $25,000 in 4 years. For the risks involved, the investor seeks a 20% discount rate. The $25,000 amount to be received in four years, when discounted 20% annually, is worth $12,056 now. Since the investment costs $10,000 [now], the
*net present value*is $2,056.

- Example: A proposed land investment required $10,000 of cash now and is expected to be resold for $25,000 in 4 years. For the risks involved, the investor seeks a 20% discount rate. The $25,000 amount to be received in four years, when discounted 20% annually, is worth $12,056 now. Since the investment costs $10,000 [now], the
**Internal Rate of Return (IRR) –**The true annual rate of earnings on an investment. Equates the value of cash returns with cash invested.- Example: Abel sells for $200,000 land that he bought four years earlier for $100,000. There were no carrying charges or transaction costs. The Internal Rate of Return was about 19%. That is the annual rate at which compound interest must be paid for $100,000 to become $200,000 in four years.
- Example: Baker receives $3,000 per year for 5 years on a $10,000 investment. The internal rate of return was about 15%.

**Cash on Cash Return**– Net Operating Income minus Debt Service divided by Equity invested.

# Equity Investor Returns Tab

**Preferred Return (“Pref”)**– a priority return on cash invested.**Promote**– an additional share of profits granted to the Sponsor above and beyond their pro-rata cash invested.**Waterfall**– a way of providing a successively larger Promote to the Sponsor the better the transaction performs. In this way the Sponsor has a financial incentive to pay close attention and strive to outperform for the life of the transaction.

^{1}Jack P. Freidman and Jack C. Harris and J. Bruce Lindeman, Dictionary of Real Estate Terms 6th ed., Barron’s Educational Services, Inc., 2004 – (Find on Amazon)