Real Estate Crowdfunding

Glossary

A

The amount of inventory or units of a specific commercial property type that become occupied during a specified time period in a given market, typically reported as the absorption rate.

In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:

Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income OR have a net worth exceeding $1 million, either individually or jointly with his or her spouse.

To accumulate or increase; generally refers to payments owed but which have not yet been paid.

Total cost recovery deductions taken throughout the holding period of a property.

Income from salary, wages, tips, commissions, and activities in which the taxpayer materially participates.

With respect to a lease of commercial space, the ratio of rentable to useable square feet.

The original cost basis of property plus capital improvements, less total accumulated cost recovery deductions, and partial sales taken during the holding period.

Cost reductions or savings that come about from efficiency gains associated with the concentration or clustering of firms/producers or economic activities and the formation of localized production network.

The repayment of loan principal through equal payments over a designated period of time consisting of both principal and interest.

The total amount of principal and interest to be paid each year to satisfy the obligations of a loan.

The true annual interest rate payable for a loan in one year taking account of all charges made to the borrower, including compound interest, discount points, commitment fees, and mortgage insurance premiums.

Regular fixed payments or receipts over a designated period of time.

An estimate of value, generally made by a professional appraiser, using a systematic approach or process in order to reach a conclusion.

The possibility or probability that a real estate investment will increase in value during the holding period.

The value of real property established by the tax assessor for the purpose of levying real estate taxes.

The average annual effective rent divided by the square footage.

A simple technique used to forecast next years’/periods’ vacancy rate by averaging previous years’ vacancy rates; especially effective where vacancy rates have remained relatively flat or show little variability over time.

B

The amount left over after subtracting the amount paid from the amount owed.

The final payment of the balance due on a partially amortized loan.

The minimum rent due to the landlord. Typically a fixed amount.

The total amount paid for a property, including equity capital and the amount of debt incurred.

An investment program in which funds are invested into an entity without investors knowing which properties will be purchased.

The stage at which an investment produces an income that is just sufficient to cover recurring expenditure.

The sales threshold over which percentage rent is due. It is calculated by dividing the annual base rent by the negotiated percentage applied to the tenant’s gross sales.

Financing between the termination of one loan and the beginning of another loan.

The uncertainty associated with the possible profit outcomes of a business venture.

Refers to long-term equity investing, meaning that investors will take an ownership stake in a property and hold that position for some period of years while the property is managed toward improved performance and returns.

The point at which there is a recognizable shift of expenditure allocations away from owner-occupied housing and to the rental housing market as a result of changing market conditions.

C

A request made to existing equity owners for additional money in order to fund deficits due to construction or operating costs, if cash flow is not otherwise deemed sufficient to do so.

Property improvements that cannot be expensed as a current operating expense for tax purposes. Examples include a new roof, tenant improvements, or a parking lot. Such items are added to the basis of the property and can be depreciated over the holding period.

Taxable income derived from the sale of a capital asset. It is equal to the sales prices less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery.

Established markets for buying and selling equity and debt instruments.

A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price.

The net cash received in any period, taking into account net operating income, debt service, capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash.

The “cash on cash return,” also sometimes called the “equity dividend rate”, is a simple ratio measurement of an investor’s return in relation to the cash actually invested.

Property designed for uses other than personal residential purposes. Examples include office, retail, multifamily, industrial, storage, hotel and medical.

Interest computed on the original principal and accumulated interest.

A type of calculation in which interest earned is reinvested and earns additional interest.

A method of determining the market value of a property by evaluating the costs of creating a property exactly like the subject.

An annual deduction based on the class life of an asset.

D

The periodic required payments of principal and interest due on a loan.

Ratio of net operating income to annual debt-service. Expressed as net operating income divided by annual debt service.

A written document that conveys title to real property.

A legal instrument used in many states in lieu of a mortgage, where legal title to a property is vested in one or more trustees to secure the repayment of a loan.

Failure to fulfill an obligation or promise, or to perform specific acts.

In mortgage finance, a shortfall of funds recovered through the sale of property securing a foreclosed loan compared to the amount of debt, accrued interest, foreclosure expenses, and damages incurred by the lender.

Having an unpaid amount after the due date and any grace period has passed.

The volume or quantity of a product or service purchased, or willing to be purchased, in relation to price.

The loss of utility and value of a property.

The percentage rate at which money or cash flows are discounted. The discount rate reflects both the market risk-free rate of interest and a risk premium.

A method of reducing risk by investing in assets that vary by asset class, duration, location and risk.

The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented.

E

The interest or value that an owner has in a property that is over and above the mortgage or other liens against it.

The return on the portion of an investment financed by equity capital.

An agreement between two or more parties providing that certain instruments or property be placed with a third party for safekeeping, pending the fulfillment or performance of a specified act or condition.

F

The process of evaluating a proposed project to determine if that project will satisfy the objectives set forth by the investors involved.

The use of borrowed funds to acquire an investment.

A mortgage, deed of trust or other encumbrance on an asset that has priority over all other encumbrances.

A type of business strategy involving the purchase of properties requiring some immediate repairs, which when made will hopefully translate into a more valuable property that can quickly be re-sold at a profit.

Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.

A lease in which the lessee pays a fixed rental amount for the duration of the lease term.

A loan with a repayment schedule of equal periodic payments that completely repay the loan over a scheduled time period.

An estimate of what a sum of money today would be worth in the future assuming a specified rate of interest.

G

An evaluation of the difference in the demand and supply of space for a particular type of commercial property in a given market area where gaps are expressed as the amount of square footage demanded less the amount of square footage available in a given period of time.

Factors influenced by the demographic, economic, locational characteristics and organizational aspects of a market.

A lease in which all expenses associated with owning and operating the property are paid by the landlord.

A lease of the land only. Usually the land is leased for a relatively long period of time to a tenant that constructs a building on the property. A land lease separates ownership of the land from ownership of buildings and improvements constructed on the land.

H

Protecting oneself against negative outcomes.

With respect to real estate, that use which is physically possible, is appropriately supported, is financially feasible, and results in the highest value.

I

An asset that is not readily convertible to cash.

Additions to raw land that tend to increase the property’s value.

A method to estimate the value of an income-producing property by converting net operating income into a value. The cap rate is divided into the net operating income to obtain the estimated value.

A lease in which the rental amount adjusts accordingly to changes and/or movements in a price index, commonly the consumer price index.

Commercial properties that are used for the purposed of production, manufacturing, or distribution.

Improvements on land adjacent to and between existing developments.

A loss in the purchasing power of money; an increase in the general price level.

Cost of the use of money.

The percentage rate earned on each dollar that remains in an investment each year. The IRR of an investment is the discount rate at which the sum of the present value of future cash flows equals the initial capital investment.

L

The use of borrowed funds to finance a portion of the cost of an investment.

A legal claim against property making it security for the payment of a debt, judgment, mortgage or taxes.

A legal organizational form offering limited liability protection for the owners, which may be treated as a partnership for deferral income tax purposes.

A partnership structure where “limited partners” are passive investors whose liability is limited to the amounts invested, but where at least one partner is a “general partner” whose liability is general in nature and not limited.

The amount of principal remaining to be paid on an amortizing loan at a given time.

The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value.

M

The date upon which a loan must be paid in full.

A written legal instrument that creates a lien upon real estate as security for the payment of a specified debt.

Housing units that accommodate more than four families or households.

N

The potential rental income plus other income, less vacancy, credit losses, and operating expenses.

The sum of all future cash flows discounted to present value and netted against the initial investment.

O

The actual dollars paid out by the tenant to occupy the space. It can be expressed in either pre-tax or after-tax dollars.

A commercial property type used to maintain or occupy professional or business offices.

Cash outlays necessary to operate and maintain a property. Examples of operating expenses include real estate taxes, property insurance, property management and maintenance expenses, utilities, and legal or accounting expenses. Operating expenses do not include capital expenditures, debt service, or cost recovery.

An aggressive investment strategy that in real estate generally signifies investing in properties that require a high degree of rehabilitation in order to eventually earn “market” rental rates.

Income such as salaries, interest payments, dividends, and many other items that are taxed at regular rates.

The total amount paid for a property, including equity capital and the amount of debt incurred.

P

A loan secured by real property, with a stated interest rate that also provides for a share to the lender in annual net cash flow, gain on sale, or proceeds from refinancing the property.

One or more people or entities pursuing a common business enterprise for profit.

A lease in which the rent amount is based on a percentage of gross sales made by the tenant.

An individual’s responsibility for a debt.

A group of investment assets.

A rate of return paid to investors before the sponsor gets paid any distributional cash flow.

A report issued by a title company before a transaction, stating a willingness to insure title upon closing.

The satisfaction of a debt or installment payment before its maturity date.

The portion of a loan payment used toward reducing the original loan amount.

The sale of securities to a small number of select investors as a way of raising capital.

A financial document that contains a written promise by one party to pay another party a definite sum of money.

R

The public official who keeps records of documents concerning real property that are used to show evidence of title.

The act of entering the legal documents that affect title to a piece of property in a book of public records.

A SEC regulation governing private placement exceptions.

An investment vehicle in which investors purchase certificates of ownership in the trust, which in turn invests the money in real property and then distributes any profits to the investors.

Properties used exclusively to market and sell consumer goods and services.

The probability that actual cash flows from an investment will vary from the forecasted cash flows.

S

The U.S. Securities and Exchange Commission is an agency of the United States federal government.

Property that serves as collateral for a debt or an investment contract or other legal instrument.

A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions.

Single Family residence means that the building is usually occupied by just one household or family, and consists of just one dwelling unit or suite.

A sponsor is the managing leader of a real estate project who researches the market, identifies a property to be acquired, organizes the investors and bank financing in order to make the purchase, oversees the subsequent management of the property, and determines when it is to be sold.

A foreclosure proceeding not conducted under court supervision; contrast with judicial foreclosure.

A professional financial services group formed temporarily for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually. Syndication allows companies to pool their resources and share risks.

T

The right to the ownership and possession of any item that may be legally recognized as belonging to someone or something. In its most basic sense, title is the recognition of ownership.

Insurance that covers the loss of an interest in a property due to legal defects and that is required if the property is under mortgage.

A lease agreement that designates the lessee (the tenant) as being solely responsible for all of the costs relating to the asset being leased in addition to the rent fee applied under the lease.

A legal entity creating fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.

A person or firm that holds or administers property or assets for the benefit of a third party.

V | Y | Z

A real estate property categorization, or investment “style” referring to properties requiring some degree of improvements in order to gain increased returns.

A measure of investment performance that gauges the percentage return on each dollar invested.

The designation of specific areas by a local planning authority within a given jurisdiction for the purpose of legally defining land use or land use categories.