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Abatement

A reduction in amount or intensity. Usually applies to decreases in taxes or rent.

Absorption

An estimate of the new occupancy, or amount of inventory that is being “absorbed,” of a particular type of land use.

Adjusted Tax Basis

In real estate, this is generally the original cost of property (the original tax basis) less any depreciation deductions plus any capital expenditures. The adjusted tax basis is important when determining final taxes (and tax rates) upon the sale of a property. Alternative Investment An alternative investment refers to any investment which does not qualify as “traditional”. Traditional investments are widely considered to be stocks, bonds and cash.

Active Income

Active income is income earned as a direct result of a specific effort. In other words, input is correlated to output.

Appreciation

An increase in value is referred to as “appreciation”.

Amortization

As opposed to an interest-only loan in which each repayment installment consists only of interest payments with a single lump-sum principal repayment at the end of the loan period, each repayment installment of an amortizing loan consists of both principal and interest.

Accredited Investor

An accredited investor is a term used by the U.S. Securities and Exchange Commission (SEC) under Rule 501 of Regulation D.

Basis Point

A basis point (bps) is a unit that is equal to 1/100th of 1%, in other words one basis point is equal to 0.01%, similarly a 1% change is equal to a 100 basis point change.

Cost Basis

The cost basis of an investment is an investor’s initial stake in an investment, which is typically the initial price they pay to acquire that investment.

Census Tract

Census tracts are typically small subdivisions of communities that are delineated for the purposes of the US Census.

Capital Gains Taxes

A capital gains tax is a tax applied to realized capital gains upon the sale of an asset, such as stocks or real estate.

Capital Gain

A capital gain is any increase in value of an asset (such as stocks or real estate) that exceeds the purchase price. A capital gain is unrealized until the asset is sold.

Cash-on-Cash Return

Cash-on-cash return is one of the most widely used metrics in commercial real estate. As the name implies, this metric is calculated by dividing annual before tax cash-flow by the total cash invested in a project.

Capital

Capital is any financial asset or the value of an asset.

Crowdfunding

Funding a product, idea, or venture using small amounts of money raised from the “crowd.”

Capitalization (Cap) Rate

The capitalization or cap rate measures a property’s yield in a one-year time frame, making it easy to compare one property’s cash flow to another on an equal basis – without taking into account any debt on the asset.

Common Equity

Common Equity means that investors have one-to-one (or equal) participation in each dollar invested and any potential profits or losses.

Commercial Property

Property designed for uses other than personal residential purposes, often times related to business activity. Commercial property includes (among other things) retail shopping centers, multi-family apartment buildings, office buildings, hotels and motels, and self-storage facilities.

Development

Development is the process of building or adding to existing structures to increase the value of a property.

Distributions

Payments made to investors periodically, typically over the course a calendar year, either from profits or interest payments.

Debt

An amount of money (obligation) owed by one party (the debtor) to another party (the creditor).

Due Diligence

A reasonable effort to obtain accurate and complete information in advance of a major decision; in real estate, this usually refers to the inquiries made in advance of a purchase or investment in a property. Due diligence considers the physical, financial, legal, and social characteristics of a property and its expected investment performance. The underwriting of a loan or investment is a form of due diligence, in the sense that it constitutes a relatively detailed risk assessment of that loan or investment.

Depreciation

A charge against the value of an asset relating to its estimated wear and obsolescence. The term is most often used to refer to tax code provisions that exclude from taxable income a portion (the depreciable amount) that can be attributed to “wasting assets.” In real estate, buildings and improvements constitute such assets; these things have a finite life, and thus can take a depreciation “deduction” not always available in other investment classes. The value of a property must therefore be allocated between the amount attributable to the building or other “improvements,” and that of the land. Land is deemed to have an infinite life (because it never goes away) and so is not depreciable. A tax depreciation deduction may even be claimed when the property’s value has increased. Depreciation allows an investor to gain a tax deduction without having to make any cash payment. It thus provides an important benefit to real estate investors. It results in an adjusted tax basis for the property; this adjusted basis will result in some additional tax at the time of sale, but the tax will have been deferred and may well be at a lesser rate than would have earlier applied.

Escrow

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.

Encumbrance

Any right to, or interest in, land that affects its value. Includes outstanding mortgage loans, unpaid taxes, easements, and deed restrictions.

Equity

As it relates to real estate, equity can be measured as the amount of capital a sponsor (property owner/developer) puts into a property.

Fair Market Value

The most probable price that a property should bring in a competitive and open market under all conditions needed for a fair sale, assuming that the price is not affected by undue stimulus and that the buyer and seller are each acting prudently and knowledgeably. The fair market value is the theoretical highest price that a buyer would pay, and the lowest price a seller would accept, assuming that both parties were willing — but not compelled — to act.

Free Cash Flow (FCF)

Free cash flow is a measure of a property’s ability to generate cash after setting aside reserves for capital expenditures such as future development, tenant improvements, and leasing commissions.

General Partner

In a partnership, a partner whose liability is not limited. All partners in an ordinary partnership are general partners, while in a limited partnership most members enjoy limited liability (although one partner must still be a general partner). Green Building A building that is built or developed specifically to minimize utility costs or to maximize positive environmental considerations (i.e. to reduce damage to the environment).

Hold Period

The time span of ownership, usually for investment real estate.

Hard Asset

A tangible object of worth that is owned by a business or individual.

Illiquid Asset

An asset that is not readily convertible to cash. Real estate is generally considered an illiquid asset because it may take an extended period of time to accomplish a sale, depending on market circumstances.

Improvements

Additions to raw land that tend to increase the property’s value; similar to developments. Improvements include not only buildings but also public enhancements such as streets and sewers.

Income Property

Real estate that generates rental income. Multi-family apartment buildings, retail shopping centers, office buildings, industrial properties, resort and recreational properties, self-storage facilities, and hotels are all considered income properties. By comparison, personal residences, schools, churches, parks, and undeveloped land not earning significant agricultural sales or extraction royalties are all not considered income properties.

Institutional Lender

Financial intermediaries that invest in loans and other securities on behalf of their depositors or customers.

Investment Property

An investment property is a real estate asset purchased with the sole purpose of earning income. Income from an investment property can be generated through leasing space within an asset or an eventual sale of the asset. Intrastate Crowdfunding While the Securities and Exchange Commission (SEC) regulates public securities on a national level, each state also has its own regulatory entity serving a similar function. Since the passage of the JOBS Act, advocates of equity crowdfunding have moved to legalize intrastate – or in state – crowdfunding. Internal Rate of Return (IRR) In real estate, the Internal Rate of Return (IRR) is a metric used to evaluate the profitability of an investment over its lifetime and is represented as the average annual return percentage. The IRR of an investment can be calculated forward-looking to estimate potential future returns or backward looking to measure the performance of a completed investment.

Jumpstart Our Business Startups (JOBS) Act

The JOBS Act was a law passed in 2012 in the United States that eased regulations related to funding small businesses. Intended to increase American job creation and foster economic growth, the JOBS Act aims to provide easier access to public capital markets and small, growing companies.

Letter of Intent (LOI)

The expression of a desire to enter into a contract without actually doing so.

Leverage

The use of borrowed money — debt — to complete an investment. Leverage can increase the size of the property a purchaser is able to afford, or reduce the investment required for a similar sized property. The lender will, however, typically require a lien on the property to assure that the borrowed funds are repaid, so a purchaser has increased his risk in this respect (the lender must be repaid before the purchaser can fully realize his profits). Moderately leveraged properties (where the debt service is not too high) can provide greater returns to equity investors, thus maximizing investment profits.

Lien

A charge against property making it security for the payment of a debt, judgment, mortgage or taxes; it is a type of encumbrance.

Liquidity Premium

The liquidity premium represents the incrementally higher price an investor is willing to pay for a more liquid asset or security, all other factors held equal.

Liquidity

Liquidity refers to the ease with which an asset can be purchased or sold. Marketable securities that are traded in high volume tend to be the most liquid, or easy to trade without creating wild fluctuations in price.

Linear Income

Linear income is earned in direct relation to the number of hours you work.

Loan-to-Value Ratio (LTV)

A risk assessment ratio that lenders perform when considering a real estate loan.

Loan-to-Cost Ratio (LTC)

The Loan-to-Cost Ratio is the ratio of a loan used to help finance a project compared to the total cost.

Multifamily Housing

Multifamily buildings include any building that includes more than a single-family residence, but in common usage the term generally refers to apartment buildings of more than four units. Multifamily residential buildings vary by location (urban or suburban) and size of structure (high-rise or garden apartments). Economic drivers of apartment buildings include demographic trends, home ownership and household formation rates, and local employment growth. Leases are typically short-term (one to two years), and adjust quickly to market conditions. Larger apartment buildings are only minimally affected by any single vacancy. Multifamily properties are generally considered to be one of the more defensive investment types within commercial real estate, though they are still subject to competitive pressures from newer construction.

Mezzanine Debt vs. Preferred Equity

Mezzanine Debt is generally a loan that is secured by a property and senior to any equity, but junior to the senior loan on the property. Preferred Equity, on the other hand, is an equity investment in the property-owning entity. It is not secured by the property but rather by an interest in the entity investing in (or owning) the property.

Net Asset Value (NAV)

The Net Asset Value (NAV) per share represents the estimated value of a single share based on a variety of factors.

Net Operating Income (NOI)

In real estate, the net operating income, or NOI, represents the annual revenue (or income) generated by an investment property after annual operating expenses.

Net Worth

The sum of an individual’s assets less the sum of all obligations; a measure of personal wealth.

Occupancy Rate

The percentage of total units that are currently rented. Contrast with vacancy rate.

Operating Expenses

Amounts paid to maintain a property. Excludes financing expenses, income taxes and depreciation.

Opportunity Zones

Opportunity Zones are census tracts generally composed of economically distressed communities that qualify for a community development program called the Opportunity Zone program, which was created under the Tax Cuts and Jobs Act of 2017.

Passive Investor

One who invests money but does not actively manage the business or property.

Portfolio

A group of investment assets.

Passive Income

Passive income (also known as residual or recurring income) is commonly used to refer to income that continues to be earned even after the work is done.

Private Equity Fund

A private equity (PE) fund is a collective investment model where money from separate investors is pooled together into a single fund and then used to make investments, most often in various illiquid equity and debt assets.

Preferred Return

A Preferred Return is paid to investors before a sponsor receives any share of the cash flow.

Pro-Forma

A financial model often used in real estate to predict future cash flows and total investment returns.

Preferred Equity

Typically in a Preferred Equity investment, all cash flow or profits are paid back to the preferred investors (after all debt has been repaid) until they receive the agreed upon “preferred return.”

Real Estate Investment Trust (REIT)

A REIT (which is pronounced “reet” and stands for Real Estate Investment Trust) is a company which makes investments in and owns income-generating real estate properties.

Recurring Income

Also known as residual or passive income, recurring income is earned by creating or acquiring an asset that continues to pay of profits regardless of if there is still active work being done to the asset.

Residual Income

The term residual income (also known as passive or recurring income) is commonly used to refer to income that continues to be earned even after the work is done.

Regulation D

Regulation D permits raises of unlimited amounts from accredited investors without registering a public sale through the SEC, as it’s assumed that accredited investors are financially able to bear the burden of investment decisions without a review by the SEC.

Regulation A+

Regulation A+ is the SEC’s proposed revision of the current Regulation A, which was mandated by the JOBS Act in 2012.

Regulation A

Regulation A allows unaccredited investors to purchase small offerings of securities that do not exceed $5 million in a 12-month period.

Redemption

In the event of back taxes or unpaid liens, a borrower who pays off those debts may reclaim their property, preventing foreclosure or the auctioning of their property. Real Estate Real estate includes a parcel of land and any of its permanent structures (buildings, parking lots, etc.).

Securities and Exchange Commission (SEC)

The federal agency created in the 1930s to carry out the provisions of the Securities Act of 1933, the Securities Exchange act of 1934, the Investment Company act of 1940, and many other laws related to the selling of investment securities. Generally, the agency seeks to protect the investing public by preventing misrepresentation, fraud, market manipulation, and other abuses in the securities markets.

Single Family Residence

In real estate, generally refers to a stand-alone property intended to house one family. Individual apartment or condominium units are usually thought of as being part of a multi-family building, even though individual units are usually occupied by a single family.

Step-Up In Basis

A step-up basis is the adjustment of a cost basis for an asset for an investor. Certain factors may initiate a step-up in an investor’s original cost basis, thereby reducing their realized capital gain and associated tax liability.

Secured vs Unsecured Position

A secured position in the Capital Stack retains the right to foreclose on a property in the event of a default, or non-performance. Unsecured creditors do not have the right to foreclose on the property, and therefore have less collateral backing their investment claim.

Sponsor

An individual or firm in charge of finding, acquiring, and managing a piece of real estate.

Senior Debt

Senior debt generally secured at the “base” of the capital stack. Because it sits at the base of the capital stack, it must be repaid first.

Title III Regulation Crowdfunding

Outlined in the 2012 JOBS Act, Title III instructed the SEC to create an exemption from registration that, when implemented, will enable issuers to engage in crowdfunding equity offerings to the general investing public.

Term

In real estate, the term refers to the lifespan of a given asset or liability. At the end of the term, the loan is or investment is repaid.

The Capital Stack

The Capital Stack orders the seniority of claims to the collateral and cash waterfall of an entity.

Transaction Costs

The costs associated with buying and selling real estate.

Tenancy / Occupancy

Occupancy is generally referred to as a percentage of the total square feet or units leased – it is a building’s revenue source.

Underwriting

Underwriting is the process by which real estate investments are evaluated to determine their viability. Unaccredited Investor An investor who does not meet the wealth requirements of an accredited investor set forth by the SEC.

Vacancy Rate

The percentage of all units or space that is unoccupied or not rented. On a pro forma income statement,, a projected vacancy rate is used to estimate the vacancy allowance. This allowance is then deducted from the potential gross income in order to calculate the “effective” gross income.

Value-Add

A real estate property categorization, or investment “style,” referring to properties requiring some degree of improvements in order to gain increased returns. “Value-add” generally refers to a property that is currently in less than stellar condition and in need of improvements that are of somewhat higher risk, such as performing more-than-usual renovations like upgrading exteriors and interiors and curing deferred maintenance. The “value-add” categorization implies higher risk than the category of “core plus,” but less than “opportunistic.” Returns on the properties will be driven both by current income and by expected capital appreciation.

Yield

In the context of commercial real estate, yield refers to the annual cash return on the investment, expressed as a percentage of the investment’s initial cost, or less frequently, its estimated current value.

Zoning

A legal mechanism for local governments to regulate the use of privately owned real property by applying their power to prevent conflicting land uses and promote orderly development. Designated zones limit the type and intensity of permitted development.