## Envision Tomorrow Glossary

• Capitalization rates: A capitalization rate is the ratio of year one expected net operating income (NOI)to total project value. (It is not the annual return.)
• Year one NOI/value = Cap rate.  The cap rate can be used to value a property, or to compare two properties.
• Construction loan: A short-term interim loan for financing the cost of construction.
• Developer profit: The difference between total costs and total revenue.
• Gross square footage: The total area, measuring from the outside of the exterior walls and including all vertical features such as elevator shafts.
• Internal rate of return (IRR): When an investment creates differing amounts of annual cash flow, a rate of return can be determined by calculating the Internal Rate of Return (IRR). Essentially an IRR is the rate needed to convert (or discount) the future uneven cash flow to equal your initial investment or down payment. Example: Assume a cash flow of \$100 in the second year. Also, assume that in order to generate that \$100, you had to invest \$500. In this example, you have an outflow of \$500 the first year and an inflow of \$600 in the second year (\$100 earnings plus the \$500 return of your initial investment). To convert or discount the \$600 back to today’s dollars to equal your initial investment of \$500, a discount rate of 20% is required. Thus, your IRR is 20%.
• Net operating income (NOI): Income after deducting for operating expenses but before deducting for income taxes and interest.
• Net square footage: The gross square footage of a building (see above) minus common areas.
• Operating expenses: These are costs, such as utilities and maintenance, required to run a building.
• Parking ratio: The number of parking spaces required for each unit of residential development or per 1,000 sq ft of retail, office or industrial use.
• Permanent loan: A long-term loan of not less than 10 years that is fully amortized and taken out after the construction of a building is finished.
• Return on investment (ROI): A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the net operating income (NOI) is divided by the total project costs; the result is expressed as a percentage.