Earnings Form
Business interruption insurance where the payment is a specified amount only when the loss is caused by an insured peril.

Embezzlement
Theft or use of money or property by an individual in whose care the money or property had been entrusted.

Endorsement
A written agreement modifying a standard insurance policy to meet certain conditions or to complete a policy.

Entity
A partnership, corporation, LLC, S corporation, trust, estate, or joint venture of any kind recognized for tax purposes.

Equity Kicker
See Kicker, below.

Escalation
1. Additional rent payments owed by a tenant based on the increase in the costs of operating the building. See Base, above. 2. A clause in a purchase contract providing for upward adjustment of the contract price if specified contingencies occur.

Excess Liability Insurance
A policy that covers losses that exceed those covered under another policy. For example, your regular policy covers losses up to $300,000. You purchase an excess liability policy that covers losses from $300,000 to $2,000,000. In effect, an excess liability policy is one with a very high deductible. Also known as an umbrella policy.

Experience Rating System
Insurance premiums in such a system are based on the insured's past experience.

Extra-Expense Insurance
A policy that pays for any extraordinary expenses incurred to keep a business in operation after a loss caused by an insured peril.

Extra Risk
An insured that does not fall within the standard risk range. Insurance can only be obtained for a higher than normal premium or with less coverage.

Fair Market Value
The price at which an item can be sold by a willing seller to a willing buyer, neither of which are under any pressure to buy or sell. Furthermore, it's assumed that both parties are dealing rationally, have knowledge of relevant facts, and are not related.

Fidelity Bond
A bond which pays an employer up to an amount stated in the bond for losses caused by dishonesty or infidelity on the part of an employee.

Fiduciary
A person to whom property is entrusted to hold, control, or manage for another. The fiduciary of a trust is the person who is legally responsible for managing the assets of the trust in a competent manner.

Fixed Costs
Costs that do not vary with the number of units produced. For example, depreciation. In the long run all costs are variable and some costs have both a fixed and variable component.

Fixed Price Contract
A contract which provides for a firm price.

Flow-Through Entity
An entity where the income, losses, and certain other items of income and deduction are passed through to the owners. For example, partnerships, trusts, and S corporations.

Forward Supply Contract
A contract for future supply of definite quantities of goods or services over a fixed period.

Free and Clear
In real estate the term is used to indicate that the investment analysis has ignored any debt on the property. (Debt can distort the analysis by increasing the return if the interest rate is lower than the rate of return on property and vice versa if the interest rate is higher.)

Full Absorption Costing
Method of computing costs that starts with Direct Costs (materials, direct labor, variable overhead) but adds non-variable overhead.

Full Costs
All costs including Direct Costs and general and administrative expenses as well as selling expenses.

Garage Liability Insurance
A policy for businesses that work with autos. The policies provide coverage for operations in progress and completed operations as well as the premises.

General Crime Exclusions
Refers to perils in an insurance policy that are excluded because they are usually covered under another type of policy.

General Property Form
A standard form for insuring commercial buildings and their contents.

Graduated Payment Mortgage
A loan where the initial payments are lower than the amount needed to amortize the loan. Debt service grows each year till it reaches a set amount. Used to increase the affordability of a home or real estate investment.

Gross Lease
As opposed to a net lease, a gross lease is one where the tenant is responsible for either none of the increase in operating expenses of the building, or only the amount above a stop. If a base or stop is involved, the lease is sometimes known as a modified gross lease.

Hard Costs
The direct costs of acquiring a business (such as the purchase price), constructing a building (brick and mortar), etc., as opposed to legal, accounting, consulting, financing, costs, which are called soft costs.

Hedged Position
A hedged position occurs if you own a second asset that should move in the opposite way the first asset would react to changes in the market. For example, you own a stock and a put and/or a call on the stock.

Holdback
The portion of a loan not paid out to the borrower until a certain requirement is completed. For example, a lender may release 10% of the total amount of a loan on completion of the foundation, an additional 15% when rough plumbing is in, etc.

Hold Harmless
An agreement where one party agrees to release another party from any legal liability that may occur as the result of a specific event.

Immediate Notice
In insurance parlance, a clause requiring the insured to provide notice to the insurer (or a representative) as soon as reasonably possible following a loss.

Implied Warranty
A warranty that is assumed or assumed to be part of a contract despite the fact that it is not expressly stated.

Imprest Funds
Funds set aside as a cash reserve for expenditures expressly designated. Also, a petty cash fund.

In-the-money
For options, if exercising the option will result in a gain, the option is in-the-money. For a call option, it is in-the-money if the market price of the stock is greater than the exercise price. A put option is in-the-money if the market price of the stock is less than the exercise price.

Indirect Costs
Costs that can't be directly related to the cost objective or a product.

Industrial Property Form
An all-risk or specific peril type of insurance for manufacturers or businesses engaged in processing.

Inflation Endorsement
A clause in a homeowners policy where the coverage is automatically increased periodically to account for changes in a price index.

Insured Bonds
Generally, municipal bonds that are covered by insurance against default (loss of interest or principal). The insurance premium is paid by the issuer. Insured bonds generally have a lower yield because of this protection.

Intangible Asset
An asset that is a right and nonphysical, as opposed to equipment, buildings, etc which are tangible assets. Examples include copyrights, patents, trademarks, goodwill, capitalized advertising costs, computer software, leases, licenses, etc.

Intangible Costs
Expenditures incurred to create an intangible asset. For example, legal fees to negotiate a lease, the cost to acquire a license, etc.

Integrated Operations
Two or more business operations which are conducted as though they were one single economic unit.

Interest-Only Loan
A loan where the borrower pays only interest and not principal during the course of the loan. Some loans have an interest-only period, then require payment of interest and principal. The total amount borrowed is payable as a balloon payment at maturity. Sometimes referred to as a bullet loan.

Interim Financing
Short-term financing that's conditional upon securing intermediate or long-term financing. Also known as a bridge loan.

Interim Statement
A financial report that covers only a part of the company's year. Often used to refer to a quarterly financial statement.

Joint-and-Last Survivor Annuity
A type of annuity where income is payable during the lifetimes of two or more annuitants and continues until the death of the last survivor.

Joint-and-Last-Survivorship Option
When paying out the proceeds of an insurance policy, payments continue until the death of the last survivor of two persons.

Junior Mortgage
A lien that is below that of another mortgage. The holder of a junior mortgage can usually be satisfied only after a more senior lender is paid off. Thus, the interest rate on a junior mortgage is usually higher.

K-1
The information form from a partnership, S corporation, trust or estate, which provides the flow-through income and losses to be reported on an investor's individual return.

Kicker
An additional benefit a lender or investor receives as an inducement to make the loan or investment. For example, a lender may receive an Equity Kicker allowing him to receive a share of the income from the property if it exceeds a specified amount or giving the lender warrants to purchase shares of stock in the investment at a price below market value.

Kiting
Generally, it's the action of drawing checks on one account while depositing checks in another account and depending on the float to avoid overdrafts. A common form of embezzlement.

Latent Defect
A defect which could not be discovered by ordinary and reasonable inspection.

Leasehold Interest
The right to the use of real property created by a lease. If the rent payable on the lease is below the current market, the lease has a number of years to run and is for a very desirable property, etc. the lease can be a valuable asset, particularly if the space can be subleased.

Lessee
A party who rents property from another under a lease.

Lessor
A party who owns property and leases it to a tenant.

Level Premium Plan
Premiums due on an insurance policy that remain level throughout the term, regardless of any dividends that may be paid.

Leverage
1. Financial leverage is the act of increasing the return on an investment by borrowing some of the funds at an interest rate less than your return on the project. 2. Operating leverage has the same objective, but you increase your return by increasing cheaper fixed costs. Leverage can be positive or negative. If the return on an investment is greater than the cost of borrowing, leverage is positive. If the return is less, leverage is negative.

Lien
A type of encumbrance that makes designated property security for a debt or for an obligation. For example, a mortgage or a tax judgment.

Life Income Period-Certain Annuity
The annuitant is guaranteed payments for the rest of his life, but should he die before a certain time, there is a payout based on a minimum number of payments.

Like-Kind Exchange
A tax device for deferring gain on the transfer of a property by exchanging it for similar property. For example, you exchange investment property in New Hampshire for investment property in Colorado. If you receive no cash or unlike property, there is no tax on any gain.

Limited Liability Company
A entity created under state law that is taxed like a partnership (i.e., income and losses are passed through to the partners), but where the liability of the owners is limited to their investment in the company. That is, they can't be held personally liable for the debts of the company.

Limit of Liability
When an insured is covered by more than one policy for a loss, each insurer pays according to a predetermined formula.

Limited Partner
An investor in a partnership whose personal liability is limited. Such investors are generally considered passive for income tax purposes.

Limited-Pay Life
Premiums on a life insurance policy that are payable for a stated period or until the insured reaches a certain age.

Liquidated Damages
A specific sum of money, set as part of a contract, to be paid by one party to the other if the first should default on the contract.

Liquidity Premium
The part of an interest rate or other return that is intended to cover the fact that the investment is illiquid.

Liquidity Risk
The risk that a party will not be able to have enough cash to meet its obligations as they come due.

Loan Commitment
A agreement by a lender to make a loan in the future if all the conditions in the agreement are satisfied.

Loan-to-Value Ratio
The percentage a lending institution will loan to the appraised value of a property. For example, if the property is appraised for $100,000 and a bank will loan only $70,000, the loan-to-value ratio is 70%.

Long Position
In stocks, bonds, etc. it means you own the stock, bond, option, etc. Often just referred to as simply long.

Long Bond
A bond that matures in more than 10 years.

Lost Instrument Bond
A bond that guarantees that the owner of a lost stock, bond, etc. certificate or other financial instrument will hold the firm harmless against loss if it will issue a replacement certificate.

Lowest Responsible Bidder
The bidder who is awarded a contract because his bid is lower than any of the other bidders whose reputation, past performance, and business and financial capabilities are acceptable.

Lump Sum
A price for a group of goods or services where there is no breakdown of price for the various items.

Manufacturer's Output Policy
An insurance policy that covers the loss of property owned by a manufacturer but located off the premises.

Manufacturing Costs
All costs necessary to manufacture the product.

Market-Value Clause
A clause in an insurance policy that allows for the settlement of a claim based on the market value rather than the actual cash value.

Material Participation
Regular, substantial, and continuous involvement in a business on the part of either the taxpayer and/or spouse. Allows losses from trades or businesses to be deducted without limitation under the passive loss rules. Applies to S corporations and partnerships.

Maturity Date
The date on which a loan, mortgage, bond, etc. is due and any outstanding principal must be paid.

Mechanic's Lien
A claim in favor of mechanics, contractors, laborers or material suppliers against a building or other structure. The lien can only be filed by persons who worked on the building or supplied materials.

Modified Adjusted Gross Income
Your AGI (adjusted gross income) computed without considering any passive activity loss, IRA or SEP plans, taxable social security or the deduction for one-half of the self-employment tax.

Mortgagee
A lender who loans money to a mortgagor. The loan is usually secured by real estate or other property.

Multiple Line Insurance
An insurance policy that combines both liability and property damage coverage and insures against a range of perils.

Naked Position
An investor is said to hold a naked position if he holds only a stock, bond, put, call, etc. If he holds both the underlying asset and a put, call, etc. he is said to have a hedged position.

Named Nonowner
A policy designed to protect nonowners who drive an uninsured vehicle.

Name Schedule Bond
A fidelity bond that covers only the persons listed.

Naked Position
An investor is said to hold a naked position if he holds only a stock, bond, put, call, etc. If he holds both the underlying asset and a put, call, etc. he is said to have a hedged position.

Name Schedule Bond
A fidelity bond that covers only the persons listed.

Negative Amortization
A situation where the outstanding principal on a loan increases because debt service payments are insufficient to cover even all the interest, and the unpaid interest is added to the principal amount.

Net Capitalized Cost
In leasing, it's the price of the vehicle after deducting manufacturer's discounts, dealer participation allowances, and cap cost reduction (down payment) from the manufacturer's suggested retail price.

Net Operating Income
In real estate parlance, it's gross income less operating expenses but before items such as debt service, brokerage commissions, tenant improvements, and other capital items.

Net Lease Property
Property where the tenant or lessee pays most, if not all, of the expenses. The tenant may pay the expenses directly, or reimburse the landlord. If the tenant is responsible for all the expenses, the lease is often called triple net or NNN. For tax purposes, a net lease is where the deductions allowed solely by reason of IRC Sec. 162 (general business expenses) are less than 15% of gross rents from that property or property where the lessor is either guaranteed a specific return or is protected in whole or part against loss of income. Deductions allowed solely by reason of Sec. 162 are deductions other than interest, taxes and depreciation.

Nonpassive Activity
A trade or business in which the taxpayer materially participates, that is, on a regular continuous, and substantial basis. Losses can be deducted without limitation as to the passive loss rules. Income cannot be offset by passive losses, except those passive losses remaining after disposition of a passive activity.

Nonprobate Property
Property owned by a decedent or in which the decedent had an interest on the daste of his or her death which passes to an heir by provisions other than a will or the laws of intestacy. That can include assets held jointly or by a trust, life insurance not payable to the estate, etc. Nonrecourse Loan. A loan where the debtor does not assume personal responsibility for the loan. CAUTION. Such a loan has special tax implications.

Notice as Soon as Practicable
A clause in an agreement that requires one party to give notice to the other party as soon as practical, relative to all the circumstances.

Notice of Claim or Suit
A provision in an insurance policy that requires the insured to forward to the insurer immediately all notices received by the insured.

Office Burglary and Robbery Policy
An insurance policy for businesses that have no stock or merchandise for sale; the policy only covers the contents of the office.

Office Personal Property Form
An insurance policy that covers all risks related to occupancy of an office for physical damage.

Open-End Contract
A contract in which the quantity and/or duration is not specified.

Open-End Lease
A lease in which the lesse assumes the risk for depreciation at the end of the lease. That is, if the equipment is worth less at the end of the lease than the residual value set at the beginning of the lease, the lessee must pay the difference.

Open-End Mortgage
A mortgage where the amount that can be borrowed with the property as security can be increased, i.e., there is no fixed amount of principal.

Opportunity Cost
The cost of not doing something. For example, if your business has excess cash and uses it to purchase an item of equipment, the opportunity cost is the interest you would have earned had that money been earning interest in say, a money market account.

Option Premium
The amount paid for an option.

Option
The right to buy (or sell) or lease a property at a certain price for a limited period of time. For example, you pay $2,000 for a option to purchase 20 acres of land for $200,000. The option expires in one year. Depending on the terms, you may or may not be able to sell the option.

Out-of-the Money
In options, it means the current exercise of the option would produce a loss. Thus, a call option is out-of-the-money if the current price of the asset is less than the exercise price; a put option is out-of-the-money if the current price of the asset is more than the exercise price.

Overage Rent
Additional rent usually based on a tenant's sales. Such an agreement usually contains one or more breakpoints. For example, you rent space in a mall. The lease calls for you to pay 3% of all sales above $500,000. In 1998 your sales are $700,000. You owe the landlord $6,000 (3% of $200,000).

Owner's Equity
The amount of an owner's interest in an entity that is at-risk should the company become bankrupt. In the case of a corporation, it consists of capital stock, additional paid-in capital, and retained earnings. Capital stock may be par value or no par value. If par value, the total capital stock is equal to the number of shares outstanding times the par value. Additional paid-in capital is additional amounts paid for the stock over an above the par value. Retained earnings come from the net profits of the corporation. Profits increase retained earnings, losses and distributions decrease them.

P.I.T.I.
Payments that cover Principal, Interest, property Taxes, and Insurance.

Parol Evidence Rule
Provides that the formal, written contract governs the parties. Statements made before the drafting of the policy can not be used in evidence.

Participation
Where two or more lenders share in a mortgage loan. Often used on large loans to spread the risk.

Passive Activity
For taxes, rentals, regardless of participation and trades or businesses where you do not materially participate. Losses are limited to passive income plus a special $25,000 allowance for rental real estate.

Passive Loss
Loss from a passive activity, that is, rental or trade or business in which you do not materially participate.

Passive Income
Income from a passive activity. In other words, income from rentals or businesses in which you do not materially participate.

Payback Period
The length of time it will take for an investor to recoup his cash outlay. Often used as a quick way to analyze an investment, usually in personal property. For example, a new machine will cost you $10,000. It will generate income before depreciation of $3,000 the first year; $4,000 the second year and $3,000 the third year. The payback period is 3 years.

Performance Bond
A contract of guaranty by a successful bidder to protect the buyer from loss due to the bidder's inability to complete the contract as agreed.

Personal Articles Floater
Generally, an endorsement on an insurance policy that provides for all-risk coverage on scheduled (named) valuable personal property.

Personal Property
Generally, tangible and intangible assets other than buildings, leasehold improvements, land, etc. The tax law often limits personal property to physical assets such as equipment, furniture, etc. that can be moved without affecting a building or other structure.

Personal Property Floater
Generally, an endorsement on an insurance policy that covers all property individually owned no matter where it's located.

Personal Property Replacement Cost Endorsement
A provision in an insurance policy that changes the recovery from an actual cash value basis to a replacement cost basis.

Placed in service
Strictly a tax term. You can only start depreciating property (or take a Sec. 179 expense election) when the property is 'placed in service.' That means when the property is available for use in its assigned function. For example, you purchase a machine and it's not delivered until 2003. Even though you may have paid for the machine in 2002, you can't begin depreciation until 2003. Similarly, if the machine is delivered in 2002, but the technicians didn't arrive to install and test the machine until 2003, you can't begin depreciation until 2003.

Points
Payments to secure a loan, stated as a percentage of the borrowed amount. For example, 2 points is 2% of the loan.

Policy Face Amount
The maximum amount payable under an insurance policy, so-called because the amount is printed on the face of the policy.

Portfolio Income
Interest, dividends, royalties, and gains from the sale of stocks and bonds as well as other investment activities. Portfolio income is generally not considered passive income. Portfolio income cannot be offset by passive losses except those passive losses remaining after the disposition of a passive activity.

Power of Sale
A clause in a mortgage or similar instrument that gives the lender the power to sell the property in case of a default. The property must generally be sold at auction, but the lender does not have to go through a court proceeding to do so.

Percentage Rent
See Overage Rent.

Prepayment Privilege
The right to prepay a mortgage without penalty.

Price At The Time of Delivery
A term used in sales contracts when market prices are so volatile that a vendor will not give a firm price or use an escalator clause but will only agree to charge the price charged other customers for similar purchases on the day he ships or delivers the goods.

Price Protection
An agreement by a vendor with a purchaser to grant the purchaser any reduction in price which the seller may establish prior to, or within a certain time after, shipping of the purchaser's order.

Private Letter Ruling
These are written pronouncements from the IRS interpreting the Internal Revenue Code with respect to a specific set of facts and circumstances. Letter rulings arise from a taxpayer's request to interpret the law, usually before engaging in a transaction. For example, when two corporations decide to merge, they typically request a letter ruling to insure the transaction will be tax free. The ruling applies only to the taxpayer requesting it and cannot be cited as precedent. However, letter rulings often give important insight into the way the IRS would rule under similar circumstances. Despite the filing fee and legal costs involved in obtaining a ruling, if the tax consequences are substantial, a ruling is often advisable.

Private Limited Partnership
A partnership that does not have to be registered with the SEC, but can have no more than 35 accredited partners.

Private Placement
Also known as a private offering, the sale of an investment or business to a small group of accredited investors that conforms to certain exemptions from registration with the SEC.

Pro Forma
Generally, financial information that reflects a hypothetical or projected transaction. For example, reconstructing a balance sheet or income statement to reflect the effects of a loan. (The loan will increase assets and liabilities and interest expense.) Also used to describe projected financial statements in general.

Pro Rata Liability Clause
When more than one insurance company covers a property, the clause provides a formula for sharing liability among the companies.

Probate Property
Assets owned by the decedent in his or her name alone or as tenant in common on the date of his or her death that pass by will or the laws of intestacy to another party. Publicly Traded Partnership. A partnership whose interests are traded on an established securities market or are readily tradable on a secondary market.

Purchase Money Mortgage
A mortgage made by the seller to a buyer. Often a junior mortgage used in connection with the sale of investment property or a business where the buyer can't meet the full purchase price through his own and borrowed funds.