Definitions

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arm’s length transaction – (1) a sale between a willing buyer and a willing seller that are unrelated and are not acting under duress, abnormal pressure, or undue influences  (2) a sale between two unrelated parties, both seeking to maximize their positions from the transaction and possess reasonable knowledge of prevailing market conditions

assessment date – the status date for tax purposes.  Appraised values reflect the status of the property and any partially completed construction as of this date

capitalization – the conversion of income into value 

contribution – the basis for applying the adjustment in the sales comparison approach

cost manual – a guide, containing pictures, specifications of structures, and cost schedules, used to help classify construction quality and estimate the cost of replacing a structure 

depreciation – loss in value of an object, relative to its replacement cost new, reproduction cost new, or original cost, whatever the cause of the loss in value.  Depreciation is sometimes subdivided into three types:  physical deterioration or wear and tear, functional obsolescence, and economic obsolescence

net operating income (NOI) – the actual or anticipated net income remaining after deducting all operating expenses from effective gross income, but before deducting mortgage debt service and book depreciation.  May be calculated before or after deducting replacement reserves

operating expenses – the periodic expenditures necessary to maintain the real property and to continue the production of the effective gross income

potential gross income (PGI) – the total income attributable to real property at full occupancy before deduction for vacancy and operating expenses

substitution – market value of a property tends to be set by the cost of acquiring an equally desirable and valuable property

vacancy and collection loss – an allowance for reductions in potential income attributable to vacancies, tenant turnover, and nonpayment of rent