Following its deep downturn, the global economy appears to be on the mend. However, the recovery is likely to be sluggish and it would be foolish to think that risks no longer remain, according to US Federal Reserve Chairman Ben Bernanke.

‘After contracting sharply over the past year, economic activity appears to be levelling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,’ said Bernanke in preparation for an annual Fed conference in Jackson Hole, Wyoming.

‘Although we have avoided the worst, difficult challenges still lie ahead,’ cautioning that the ‘recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.’

Bernanke said ‘critical challenges remain’ from global financial markets that are still strained from the crisis that broke two years ago. The difficulties households and businesses face in getting loans is another source of stress.

The crisis has served to highlight the need to ‘urgently’ examine structural weaknesses in the financial system. Mainly in the way governments set and supervize their rules, he said.

He was set to deliver the remarks at a conference sponsored by the Kansas City Federal Reserve Bank which draws top bankers from around the globe, along with leading economists.

Germany, Japan and France have risen out of recession and the US economy seems to be stabilizing after a devastating financial crisis and economic downturn that eliminated almost seven million jobs.

While the US economy appears to be gaining health, some analysts worry that a recovery could prove fleeting. Expectations for solid growth in the second half of the year reflect the impact of a government program to spur car buying and an anticipated restocking of inventories.

The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, it is the net operating income divided by the sales price or value of a property expressed as a percentage.

For example, if a building is purchased for $1,000,000 and it produces $100,000 in positive net operating income (the amount left over after fixed and variable costs are subtracted from gross lease income) per annum, then: $100,000 / $1,000,000 = 0.10 = 10%
The asset’s capitalization rate is therefore ten percent.

A market cap rate can be determined by evaluating the financial data of similar properties which have recently sold in a specific market. Once this is applied one can estimate a purchase price for the property, or conversely a selling price.

The Loan to Value ratio (LTV ratio) is a key term in real estate financing.

Quite simply, it is the ratio of equity and debt that combined make up the fair market value of a particular property. In the case that the loan is used for financing a property purchase, the ratio displays the amount the lending instituion is willing to lend against the total cost.

Using an example – if one is hoping to acquire an office building for 20,000,000 and the LTV offered by the bank is 80:20, it follows that the purchaser requires $4,000,000 (excl. purchase costs).

The basic rule is that the higher the LTV, the higher the interest rate charged. This reflects the risk taken on by loaning a larger percentage of the property. However, many lending institutions are currently attempting to minimise risk after recent global events, and so higher LTV’s are becoming increasingly difficult to secure.

A triple net lease is a type of commercial leasing agreement. In a triple net lease, the lessee pays, in addition to rent, all expenses associated with the property such as property taxes, insurance and maintenance and operation charges. The length of a triple net lease can vary, but many leases last for at least 50 years.

The triple net lease is sometimes called a true net lease, because the landlord has no responsibilities related to building upkeep. This hands-off type ownership is the reason that many commercial landlords favor triple net leasing options. The building can generate a high level of income while the tenant keeps it in good condition, generally making improvements as well.

While at first glance it may seem like an attractive rent structure, the landlord should be aware of inherent risks. The main risk being the inability of the tenant to pay fees, and subsequently allowing the building to fall into disrepair. In extreme cases, a tenant may intentionally damage a building in order to collect insurance money. For this reason, it may be prudent to include a reserve fund. The tenant makes regular payments into the reserve fund, which can be used to cover essential repairs in the case of emergency.

A very common term, ROI is a performance measure used to evaluate the efficiency of an investment. it is also a useful indicator when comparing numerous investments.

Calculating the ROI is fairly straightforward and is done by dividing the return on an investment by the cost of the investment; the result being expressed as a percentage or a ratio.

Basic Example:
Money Invested: 100,000
Money Returned: 120,000
Gain: 20,000
ROI = 20%

Return on investment is a popular measure due to its versatility and simplicity. However, one needs to be careful as its flexibility has a downside. ROI calculations can be easily manipulated to suit the user’s purposes, and the result can be expressed in many different ways. With this in mind, Its vital to know and understand which inputs are being used to derive the figure.

Investors will come across this term when examining the financials behind an existing property. Essentially, it is the assets gross income less operating expenses.

NOI = Gross income – Operating expenses

Gross income incorporates both rental income and other income derived from the property, such as parking fees, laundry, vending machine receipts, etc.  Basically, all income associated with the property.

Operating expenses are costs incurred through the operation and maintenance of the property.  These tend to include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc.  It is important to note that the following costs are not classed as operating expenses – capital expenditures, depreciation, principal and interest, income taxes, and amortization of loan points.

NOI can give a potential investor a good insight into an assets performance, particularly as it is less susceptible than other figures to manipulation by management.