Real Estate Appraisal Glossary

Adjusted Book Value Method

A process where all assets and liabilities are adjusted to their fair-market values. (Also called "Adjusted Net Asset Method".)

Adjusted Net Asset Method

A process where all assets and liabilities are adjusted to their fair-market values. (Also called "Adjusted Book Value Method.")

Appraisal

Also called a "Valuation". The act or process of determining the value of a business, business ownership interest, security or intangible asset.

Appraisal Approach

Also called a "Valuation Approach". A general way of determining a value of a business, business ownership interest, security or intangible asset using one or more valuation methods.

Appraisal Date

The exact point in time at which the appraiser's opinion of value applies. (Also referred to as the "Valuation Date" or "Effective Date".)

Amortization

The act of expensing capitalized assets over a period of time consistent with their economic life. Economic life is calculated as the time for which a capitalized asset can be expected to produce income, measured against its capitalized value.

Annualizing

The evaluation of the performance a company for a quarterly period and multiplying the result by four to determine an annual result.

Arbitrage Pricing Theory

A multivariate estimation model for equity capital. The Arbitrage Pricing Theory incorporates several systematic risk analyses.

Asset Approach

Determination of a value indication of a business, business ownership interest or security using one of more methods based on the value of a business.

Beta

A measure of systematic risk of a stock; the tendency of a stock's price to correlate with changes in a specific index.

Blockage Discount

An amount or percentage deducted from the current market price of a publicly traded stock to reflect the decrease in the per share value of a sizable block of stock.

Book Value Per Share

Shareholder's Equity divided by the number of common shares outstanding.

Business Enterprise

Also called "Business." A commercial, industrial, service or investment entity conducting economic pursuits.

Business Risk

Also: The possibility that a bond issuer will default by failing to repay principal plus interest in a timely manner. (Also referred to as "Financial Risk" "Default Risk" and "Credit Risk")

Business Risk

Also: The possibility that a bond issuer will default by failing to repay principal plus interest in a timely manner. (Also referred to as "Financial Risk" "Default Risk" and "Credit Risk")

Business Valuation

The process of determining the value of a business enterprise or ownership interest therein.

Capital Asset Pricing Model (CAPM)

A model in which the cost of capital for any stock or portfolio of stocks equals a risk-free rate plus a risk premium in proportion to the systematic risk of the stock or portfolio.

Capitalization

A conversion of a single period of economic benefits into value.

Capitalization Factor

Any multiple or divisor used to convert anticipated economic benefits of a single period into a value.

Capitalization of Earnings Method

A method within the income approach where the economic benefits of a single representative period are converted to value through division by a capitalization rate.

Capitalization of Expenses

When an expenditure occurs where the asset acquired will be useful and generate or participate in the generation of income over a period exceeding one year. The related asset would then be expensed (depreciated or amortized) over its expected life.

Capitalization Rate

Any divisor used to convert the anticipated economic benefits of a single period into a value.

Capital Structure

The composition of debt and equity financing into the invested capital of a business enterprise.

Cash Flow

A general term that defines cash generated over specific amount of time by an asset, group of assets or business enterprise. In professional context, the term is best utilized with a more specific qualification such as "operating" or "discretionary".

Cheap Stock

Existing largely as shareholder perception, the term "cheap" implies that based on common ratios P/E, Price to Cash Flow, etc., a company's stock may be priced less than that of industry peers, the market in general, or the company's own historical valuation range.

Common Size Statements

Financial statements in which each line is expressed as a percentage of the total.

Control

The power to direct the management and policies of a business enterprise.

Control Premium

An amount or a percentage by which the value of a controlling interest exceeds non-controlling interests in a business enterprise.

Cost Approach

A general way of determining a value indication of an individual asset by quantifying the amount of money required to replace the future service capability of that asset.

Cost of Capital

The expected rate of return required by the market to attract funds for a specific investment.

Debt Free

The sum of equity and debt in a business enterprise where the equity is greater than the debt. Debt typically includes all long and short-term interest-bearing debt.

Depreciation

Fixed assets like property, plant and equipment require an immediate expenditure. But since these assets are productive and will generate income over a period of their useful economic life, the expenditures are capitalized (recorded as an asset) and expensed (depreciated) over a period consistent with their life.

Discount for Lack of Control

An amount or percentage discounted from the pro rata share of value of 100% of an equity interest in a business that reflects the absence of some or all of the powers of control.

Discount for Lack of Marketability

An amount or percentage deducted from the per share value of an ownership interest that reflects the absence of marketability.

Discount for Lack of Voting Rights

An amount or percentage deducted from the per share value of a minority interest voting share that reflects the absence of voting rights.

Discount Rate

A rate of return used to convert a future monetary sum into present value.

Discounted Cash Flow Method

In the income approach, the present value of future expected net cash flows is calculated using a discount rate.

Discounted Future Earnings Method

In the income approach, the present value of future expected economic benefits is calculated using a discount rate.

EBITDA

Earnings before interest expense, taxes, depreciation, and amortization.

Economic Benefits

Inflows of revenue, net income, net cash, etc.

Economic Life

The period of time that property generates economic benefits.

Effective Date

The exact point in time at which the appraiser's opinion of value applies. (Also referred to as the "Valuation Date" or "Appraisal Date".)

Enterprise

A commercial, industrial, service or investment entity conducting economic pursuits. (Also called "Business" or "Business Enterprise")

Equity

The owner's interest in property after deduction of all liabilities.

Equity Net Cash Flow

Dividends paid out to equity holders after funding operations of the business enterprise, making necessary capital investments and increasing or decreasing debt financing.

Equity Risk Premium

The extra return that must be provided to compensate for market risk.

Excess Earnings

The amount of anticipated economic benefits that exceeds an appropriate rate of return on the value of a selected asset base being used to generate anticipated economic benefits.

Excess Earnings Method

A specific way of determining a value indication of a business, interest or security. The sum of the value of assets as defined by capitalizing excess earnings and the value of the selected asset base. The Excess Earnings Method is often used to calculate the value of intangible assets.

Fair Market Value

The price that an interested but not desperate buyer would be willing to pay and an interested but not desperate seller would be willing to accept on the open market assuming a reasonable duration for an agreement.

Fairness Opinion

The professional opinion of an investment bank, provided for a fee, regarding the fairness of a price offered on a merger or a takeover from a solely financial point of view.

Financial Risk

The degree of uncertainty of realizing expected future returns of the business resulting from financial leverage. Also: The possibility that a bond issuer will default by failing to repay principal plus interest in a timely manner. (Also referred to as "Business Risk" "Default Risk" "Credit Risk")

Forced Liquidation Value

The amount at which assets are sold as quickly as possible, as in an auction.

Free Cash Flow

Operating cash flow (net income plus amortization and depreciation) minus capital expenditures and dividends. Free cash flow is the amount of cash that a company has left after paying all of its expenses; mature businesses generate free cash flow, while rapidly growing businesses often must reinvest to add assets to meet rapid demand growth. Frequently, the absence of free cash flow in a supposedly profitable business indicates the company's products are in need of constant upgrade to stay competitive. This may indicate profits are not what they seem.

GARP

Growth at a reasonable price. GARP is the price-to-earnings ratio of the company in relation to the growth of the business. This is represented by the analyst's mean estimate of sustainable growth for the business forecasting 3 to 5 years in the future. A ratio of less than one is viewed as low while ratios well over 1 are viewed as expensive. If a company has a forecast growth of 15% over the next 3 to 5 years, but is selling at a P/E over 35, this might be viewed as a non-GARP. However, a growth rate of 30% with a P/E of 20 times, would, subject to further analysis, represent a possible GARP stock.

Going Concern

The idea that a company will continue to operate indefinitely, and will not go out of business and liquidate its assets.

Going Concern Value

The value of a business enterprise that is expected to continue to operate, including the intangible elements such as having a trained workforce, patents and licenses, systems, processes and operational skills to effectively conduct business.

Goodwill

An intangible asset that provides a competitive advantage; often relates to perception such as brand, reputation or morale.

Goodwill Value

In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount by which the purchase price exceeds the net tangible assets of the acquired company.

Guideline Public Company Method

A method in the market approach where the market multiples are taken from the market prices of similar stocks in similar or same industries and actively traded on a free and open market.

High Margin Business

The relationship between a dollar of expense and a dollar of income. In other words, a high margin business might only spend $.60 to generate $1.00 of income.

Income Approach

A general way of determining the value indication of a business, interest, security or intangible asset that uses one or more methods that convert anticipated economic benefits into a present single amount.

Intangible Assets

Non-physical assets such as franchises, trademarks, goodwill, equities, rights, securities and contracts that grant privileges and have value for the owner.

Internal Rate of Return

A discount rate at which the present value of the future cash flows of the investment or opportunity equals the current market cost of the investment or opportunity. (Also called the "Dollar Weighted Rate of Return")

Intrinsic Value

The perceived value of a security, as opposed to its market price or book value.

Invested Capital

The sum of equity and debt in a business enterprise.

Invested Capital Net Cash Flows

Cash flows available to pay out to equity holders (dividends) and debt investors (principal and interest) after expenses, investments and operations have been funded.

Investment Risk

The degree of uncertainty as to the realization of expected returns.

Investment Value

The estimated price a convertible security would sell for on the open market based on the values of a particular investor's individual requirements and expectations. (Also called "Value to the Owner")

Key Person Discount

An amount or percentage deducted from the value of an ownership interest to reflect the reduction in value that results from an actual or potential loss of a key person within an enterprise.

Levered Beta

The beta reflecting the capital structure that includes debt.

Limited Appraisal

A professional opinion, usually written, that determines the value of a business, ownership interest, security, or intangible asset with limitations in analyses, procedures or scope.

Liquidity

The ability to quickly convert property to cash or pay a liability.

Liquidation Value

The net amount that would be realized if the business were terminated and the assets sold piecemeal. If the liquidation value per share for a company is less than the current share prices, then it usually means that the company should go out of business (or that the market is miscalculating the value of the stock).

Low Margin Business

A business that spends a high amount to generate revenues. For instance, a company spending $1.00 to generate $1.10 in revenues is a low margin business.

Majority Control

The degree of control provided by a majority position.

Majority Interest

An ownership interest greater than 50%.

Margins

The relationship between the expenses of the businesses to revenues. The lower the expenses of the business in relation to income the higher the margins and the higher the expenses the thinner the margins.

Market Approach

Determining a value indication of a business by using one or more methods that compare the subject to similar businesses, ownership interests, securities or intangible assets that have been sold. (Also called a "Market-Based Approach".)

Market Capitalization of Equity

The share price of a publicly traded stock multiplied by the number of shares outstanding.

Market Capitalization of Invested Capital

The market capitalization of equity plus the market value of the debt component of invested capital.

Market Multiple

The market value of a company's stock or invested capital divided by a company measure. (Examples include percentage of market share, number of customers, units sold, etc.)

Market Share

The company's sales in a product line versus total industry sales in that product category.

Marketability

A measure of the ability of a security to be bought and sold.

Marketability Discount

A discount for the lack of marketability for a given security. (Also known as "Discount for a Lack of Marketability")

Merger and Acquisition Method

A market approach method where pricing multiples are derived from transactions of significant interests in companies engaged in the same or similar lines of business. (Also called a "Transaction Method")

Mid-Year Discounting

Used in the Discounted Future Earnings Method that reflects economic benefits being generated at midyear, used to estimate the outcome of economic benefits being generated evenly throughout the year.

Minority Discount

A discount for lack of control; applicable in a minority interest.

Minority Interest

An ownership interest less than 50% of the voting interest in an enterprise.

Multiple

The inverse of the capitalization rate.

Net Book Value

The net value of an asset. Equal to its original cost minus depreciation and amortization. (Also called "Depreciated Cost")

Net Cash Flows

A measure of a company's financial health. Equals cash receipts less cash payments over a given period of time. Also equal to net profit plus amounts charged for depreciation, depletion and amortization.

Net Present Value

The value, as of a specific date, of future cash inflow less all cash outflow. These are calculated using an appropriate discount rate and include the cost of investment.

Net Tangible Asset Value

The value of the enterprise's tangible assets minus the value of its liabilities.

Non-Operating Assets

Assets not necessary to ongoing operations of the business enterprise. (Also called "Redundant Assets")

Normalized Earnings

Earnings adjusted for economic cycles.

Normalized Financial Statements

Financial statements adjusted for economic cycles. Used to eliminate anomalies and facilitate comparisons.

Orderly Liquidation Value

Liquidation value at which the asset or assets are sold over a reasonable period of time to maximize proceeds received.

Premise of Value

An assumption regarding the most likely set of transactional circumstances that may be applicable to the subject valuation.

Present Value

The current value of one or more future cash payments, discounted at an appropriate interest rate.

Portfolio Discount

An amount or percentage deducted from the value of a business enterprise to reflect the ownership of dissimilar operations or assets.

Price/Book Value per Share

Price of the stock divided by the company's book value per share.

Price/Cash Flow

Price of the stock divided by number of shares of common stock outstanding.

Price/ Earnings Multiple

Price of the stock divided by the earnings per share (EPS)

Price to Sales Ratio

Price of the stock divided by sales per share of the company.

Rate of Return

An amount of income and / or change in value realized or anticipated on an investment that is expressed in terms of a percentage of that investment.

Redundant Assets

Assets not necessary to ongoing operations of the business enterprise. (Also called "Non-Operating Assets")

Relative P/E

Analysis of the relationship between the current P/E, the company's industry group, the overall market, and the historical range of the company's P/E. For example, certain industry groups, such as the automobile industry, look inexpensive on a simple P/E basis. Historically, however, the low P/Es is due to the perception that the business is low growth and cyclical.

Report Date

The date conclusions are transmitted to the client.

Replacement Cost New

The current cost of an identical new property.

Required Rate of Return

The minimum rate of return acceptable by investors before they will commit money to an investment at a given level of risk.

Residual Value

The value a company expects to be able to sell a fixed asset for at the end of its useful life. (Also see "Terminal Value")

Return on Assets (ROA)

The company's net income divided by average assets for the annual period under consideration. Net Income, for purposes of this calculation, is after adding back interest expense on an after tax basis.

Return on Equity (ROE)

A measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income divided by book value, and expressed as a percentage.

Return on Investment (ROI)

A measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt. ROI measures how effectively the firm uses its capital to generate profit. So, the higher the ROI, the better.

Return on Invested Capital

The amount, expressed as a percentage, earned on a company's total capital for a given period.

Rich Valuation

This is a concept suggesting a stock is fully valued or overvalued based on P/E, price to book value, price to cash flow, or price to sales measured against its industry peers or the market as a whole.

Risk-Free Rate

The rate of return available in the market on an investment free of default risk.

Risk Premium

A rate of return added to a risk-free rate to reflect risk.

Rule of Thumb

A mathematical formula developed from the relationship between price and industry-specific variables based on experience, observation, hearsay or some combination thereof.

Special Interest Purchasers

Acquirers who believe they can enjoy post-acquisition economies of scale, synergies, or strategic advantages by combining an acquired business interest with their own.

Standard of Value

The identification of the type of value being used in a specific engagement.

Sustaining Capital Reinvestment

The periodic capital outlay required to maintain operations; net of the capital gains tax shield available from such actions.

Systematic Risk

Risk which is common to an entire class of assets or liabilities. The value of investments may decline over a given period of time due to economic changes.

Tangible Assets

Assets having a physical existence, such as cash, equipment and real estate; accounts receivable are also usually considered tangible assets.

Terminal Value

The value of any item at the end of a specified time period. Examples include the maturity value of a bond and the value of a fully depreciated asset. (Also see "Residual Value")

Transaction Method

A market approach method where pricing multiples are derived from transactions of significant interests in companies engaged in the same or similar lines of business. (Also called a "Merger and Acquisition Method")

Turnaround

A situation where a troubled company with a troubled stock is or could pursue certain strategies to unlock value and move the stock price positively. These strategies could include closing money losing businesses, reengineering the business to cut expenses, developing new marketing or product strategies, or merging with a like business to create synergies or better economies of scale.

Unlevered Beta

The beta reflecting a capital structure without debt.

Unsystematic Risk

The risk specific to an individual security that can be avoided through diversification.

Valuation

Also called an "Appraisal". The act or process of determining the value of a business, business ownership interest, security or intangible asset.

Valuation Approach

Also called an "Appraisal Approach". A general way of determining a value of a business, business ownership interest, security or intangible asset using one or more valuation methods.

Valuation Date

The exact point in time at which the appraiser's opinion of value applies. (Also referred to as the "Appraisal Date" or "Effective Date")

Valuation Method

Within approaches, a specific way of determining value.

Valuation Procedure

The act, manner and technique of performing the steps of an appraisal methodology.

Valuation Ratio

A fraction in which a value or price serves as the numerator and financial, operating or physical data serves as the denominator.

Value to the Owner

The estimated price a convertible security would sell for on the open market based on the values of a particular investor's individual requirements and expectations. (Also called "Investment Value")

Voting Control

Control of a business enterprise.

Weighted Average Cost of Capital (WACC)

The cost of capital (discount rate) determined by the weighted average, at market value, of the cost of all financing sources in the business enterprise's capital structure.