1031 Exchange is a method of deferring capital gains taxes on the sale or disposition of an asset held for business or investment purposes by exchanging the asset,
A method of deferring capital gains taxes on property that is lost involuntary to condemnation, theft, or casualty, and a gain is realized from the insurance or condemnation proceeds. Although similar in scope to a 1031 exchange, the steps to transacting a 1033 exchange vary significantly. See Disasters and 1031 Exchanges (Part 2) for a list of these differences.
180-day exchange period is defined under IRC Section 1031, which states that an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their
721 UPREIT exchange results in the same tax deferral benefits that are achieved as with a 1031 exchange. Capital gains taxes are deferred until such time as the exchanger sells
The 90-Percent Test is applied by taking the average of the percentage of qualified opportunity zone property held by the QOF (1) on the last day of the first six-month period of the taxable year of the QOF and (2) on the last day of the taxable year of the QOF.
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their
Also known as a bondable lease, the most extreme form of NNN Lease, in which the tenant is responsible for all property related risks.
Absorption is the rate at which rentable space is leased within a market or submarket over a given period of time. Gross absorption measures total square feet
An independent person, company, or entity that enters into a written agreement with the exchanger to facilitate the transfer of proceeds
A tax on the assessed value of real or personal property. Translated from Latin to mean “according to value”, ad-valorem taxes are based upon the monetary value of the asset or good. Common ad-valorem taxes seen in practice are property taxes, sales taxes, and taxes on import goods. Ad-valorem taxes can be transactional or assessed yearly.
To provide an example, an 8% sales tax is based on the monetary value of the good being purchased, and is transactional based, as it only applies when a good is being bought or sold. Likewise, a 7% property tax in Travis County is based on the monetary value of the land as determined by a government assessor, however, is paid annually.
An adjustable rate mortgage, or ARM for short, is a mortgage loan which does not have a fixed interest rate throughout its term. With an adjustable rate mortgage (ARM) the interest rate is subject to periodic adjustment. The rate adjustment may be based on any time period (daily, monthly, quarterly, semi-annually, annually, etc.) and the adjusted rate is typically expressed as a spread or margin over a defined index rate. Typical index rates include LIBOR, Prime Rate, and the 30-Day US Treasury rate.
Adjusted basis is the original purchase price of an asset plus its acquisition costs plus any capital improvements less the cumulative depreciation deductions
Adjusted gross income (AGI) is a calculation used to determine how much income is taxable on a taxpayer’s tax return. Starting with gross income, which is a sum of all wages, investment income, capital gains, retirement income, among other things, AGI factors in a number of allowable deductions to arrive at the monetary amount a taxpayer will be taxed on.
The allowable deductions that can be factored into gross income to arrive at AGI include, but are not limited to: retirement plan contributions, medical expenses, capital losses, alimony payments, and school tuition and student loan interest.
The amount of money an investment generates after any tax liabilities have been paid. The first step in calculating after-tax cash flow is determining taxable income, then applying the appropriate marginal tax rate to produce one’s tax liability. As stated by the IRS, there are several deductions a taxpayer may claim that reduces taxable income, and thus his or her’s tax liability. Common deductions include mortgage interest payments and depreciation.
To provide an example, say a property generates $500,000 of Net Operating Income. Now assume that annual depreciation for the property is $400,000, taxable income would be $100,000. If an investor falls into a marginal income tax bracket of 35%, the tax liability would be $35,000. Deducting this number from the pre-tax income of $500,000, after-tax cash flow would equate to $465,000.
Alternative investment is an investment in asset classes other than the three traditional asset types (stocks, bonds, and cash). Most alternative investments are held
Defined as a desirable or useful feature of a building or place, amenities look to provide comfort and convenience for tenants occupying the property. Amenities encompass additions that are in excess of the basic needs of an individual, and usually include features such as pools, workout facilities, and internet.
Amortization is paying off debt over a period of time with a fixed repayment schedule in regular installments. Monthly mortgage payments are often comprised of
Anchor tenant is the tenant that acts as the primary draw to a commercial property. It is usually the largest tenant in a shopping center or retail development. A common example is a grocery store.
Appraisal is an estimate of a property’s fair market value by an authorized person with applicable knowledge and expertise. Appraisals can be used for taxation
Appreciated property is a property that has increased in value over time. This increase can occur for a number of reasons including increased demand or weakening supply,
Appreciation is the increase in the value of an asset over time, which can be affected by a number of factors such as increased demand, weakening supply, or changes in inflation.
The monetary value of property determined for tax purposes. Assessed values are given by government assessors, and act as the basis for property taxes. Each tax district has a different method for conducting assessments, although all tend to rely upon similar factors such as comparable home sales, replacement value, and any income being generated from the property. Assessed values are typically less than private appraisal valuations in most jurisdictions, as assessed values act as a percentage of fair market value. In Mississippi, for example, the assessed value is just 10% of the determined fair market value for single-family, residential real property.1
While market values may fluctuate substantially, increasing or decreasing every year, assessed values tend to be less volatile. This is commonly due to state legislation limiting how much the assessed value of a property may increase year to year. In Oregon, for example, it is prohibited that the assessed value of land, that has not been improved from the previous year, increase in value more than 3% from the prior year.2
A local government official who determines the assessed value of taxable property in a county or municipality. This valuation is used to determine the tax basis for a property in a given area.
After being appointed or elected, assessors are trained in common property appraisal techniques, reaching a degree of certification that varies city to city. In some cases, continuing education or even no certification is required for an assessor to maintain his or her status.
An asset is a resource owned by an individual, corporation or country that controls the item with the expectation that it will produce a benefit or cash flow in the future. Assets are typically reported on a firm’s balance sheet and are bought or created to increase a firm’s value or enhance a firm’s operations.
A group of investments that behave similarly in the market, and are subject to the same regulations. Today, the three main asset classes recognized are equities, bonds, and cash equivalents. Although real estate and commodities are included by some professionals as well, these investments typically fall in the alternative investment category.
Investments within an asset class are associated based on their underlying fundamentals. For example, fixed income investments are grouped because of their similar financial structure, and equities are grouped together because of what they represent and how they are traded. Because the fundamentals of each class differs, each represents a different risk and return profile. By allocating across different asset classes, investors may be able to achieve a degree of diversification in their portfolio. Diversification, however, does not guarantee profits or protect against losses.
Bad title is title to a property that does not grant distinct ownership. Often used in the context of real estate, bad title results in the interests in real property not being transferred properly to the new owner. A product of unpaid taxes and liens, faulty transfer documents, building code violations, among other reasons, any encumbrance causing the cloud on title must be remedied before title can be fully transferred.
A balloon payment is a large payment due at the end of a loan’s life. This type of payment usually occurs over the life of a short-term loan, which has only been amortized partially over the course of the loan’s term. The balloon payment is the final repayment of the loan’s remaining balance.
Bankruptcy remote is typically used when discussing a special purpose entity. A bankruptcy remote entity is a separate legal entity whose bankruptcy or insolvency
Base rent is the minimum monthly rent due pursuant to a lease. Base rent does not account for expense reimbursements or percentage rent, which
Basis, in the context of commercial real estate, is an asset’s basis is the original purchase price or cost of investment property plus any out-of-pocket
The basis point is a common unit of measurement used in the field of finance. One basis point is equal to 1/100th of 1% (0.01%). Basis points are used primarily for noting changes in interest rates, yields, and equity indexes, and are used by analysts to minimize confusion when discussing percent changes in financial instruments.
A beneficial interest, typically referred to in manners concerning trusts, is the right to receive benefit from assets held by another party.
Beneficiary is any person who is eligible to receive distributions from a trust, will, or life insurance policy.
A measure of systematic risk given to a security or portfolio, beta measures the volatility of a given financial instrument in comparison to the market as a whole. Often used in financial analysis, beta helps determine an asset’s expected return based off the capital asset pricing model.
A blanket mortgage is a type of mortgage that finances more than one piece of real estate. Similar to a conventional mortgage, the real estate acts as collateral under the loan, and depending on the terms, the individual pieces of real estate may be sold without retiring the entire mortgage.
In practice, blanket mortgages allow the mortgagee to aggregate its debt obligations under a single loan to a single lender. Due to the size and scope of the loan, the borrower may have the ability to negotiate better terms and achieve a lower interest rates. In addition, a borrower may be able to save on application and closing costs associated with taking on multiple mortgages.
The disadvantages of a blanket mortgage include the capability of the lender to foreclose on all of the properties serving collateral in the scenario that the borrower defaults. In addition, blanket mortgages are typically unable to cover properties across numerous states, as each state has unique guidelines regarding how blanket mortgages are issued.
Boot, although not specifically defined (or even mentioned) in IRC Section 1031, is commonly used and refers to the fair market value of cash,
Bridge loan is a short-term loan that is used until a person or company secures permanent, longer-term financing or fulfills an existing obligation.
Broker dealer is a person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction.
Built-to-suit is a way of leasing commercial property whereas the developer/owner has constructed a building to the specifications of a particular tenant or type of tenant. This type of property is popular among tenants because of its ability to offer efficient layouts, reduce operating costs associated with the property, or create a building design that may be more favorable in the public eye.
Build-to-suit properties are common in retail and industrial property types, but may exist in any type of real estate such as office space. Given that a building is designed specifically for the tenant, leases are typically longer-term, and tenants may be less inclined to vacate the property.
“Capital” and “money” are commonly interchanged, but the two terms are distinct. Capital is deployed to crate growth and expand a company’s capacity to provide its service or develop its product, while money is a means purchasing and developing a company’s specific source of capital.
Capital assets, for corporations and business entities, are assets that have a useful life longer than one year and are not held for sale in the ordinary course of business.
Capital Expenditures are, in the context of commercial real estate, funds used by a company to acquire or upgrade physical assets that cannot be expensed as
In the context of commercial real estate, capital reserves are funds designated for long term capital investment projects or
Capital stack is a term used to describe the composition of total capital invested in a project. Listed from most risky to least risky, capital stacks in real estate are usually comprised of common equity, preferred equity, mezzanine debt, and senior debt. Usually, the riskier positions in the capital stack tend to earn higher expected returns due to the increased risk taken on.
Capitalization rate is the initial rate of return an investment property is expected to generate. The Capitalization Rate is determined by dividing the
Carry costs are any expenses the owner must pay on investment property over the course of owning it. These costs usually include utilities, debt service payments, taxes and insurance, among other items.
Cash flow is the net amount of cash moving in and out of a business, usually measured during a specified, limited period of time.
Cash reserves, in the context of commercial real estate, is cash and cash equivalents held in short term accounts used to cover things such as
A cash sweep is commonly activated in scenarios where a borrower fails to meet certain financial requirements or loan covenants as laid out in the loan terms. These may include failure to meet a minimum debt service coverage ratio, leverage ratio, or debt to equity ratio.
Cash-on-cash return is the ratio of annual before-tax cash flow from an investment to the total amount of cash invested, represented as a percentage.
Small, relatively permanent statistical subdivisions of a county or equivalent entity that are updated by local participants prior to each decennial census as part of the Census Bureau's Participant Statistical Areas Program. The primary purpose of census tracts is to provide a stable set of geographic units for the presentation of statistical data.
Certificate of Occupancy is a document issued by a local government agency, certifying that a building meets certain requirements and codes that indicate its fitness to house tenants. These requirements differ across building types, as well as cities and states, and are usually required to be met by new developments.
Closing costs are expenses over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction.
A lease provision that protects retail tenants in the event that major tenants leave an area or a certain percentage of the retail center they occupy is vacant. Based on the belief that high occupancy with strong tenants drives traffic, co-tenancy clauses remedy smaller tenants when larger tenants vacate the premises. These remedies can include a reduction in rent or the ability to terminate a current lease.
Heavily negotiated in lease contracts, co-tenancy clauses create a degree of risk for the landlord. Contingent on the property, lawful acts of third-party tenants, co-tenancy clauses may create a “domino effect” of vacancies in the event that a major tenant does not comply with the terms its lease.
A property or asset that a borrower pledges to a lender in the event of default. When a borrower fails to make debt service payments as stated in the loan agreement, collateral looks to secure repayment of the loan, providing protection to the lender. In real estate, typically the property that is being financed by the loan serves as collateral, whether this be a house or commercial property. Other common types of collateral include: plant and equipment, marketable securities, and personal property.
Commercial Mortgage-Backed Securities are securities collateralized by loans secured by commercial property. A CMBS loan is a first-mortgage secured by commercial real estate which is
Commercial real estate is real estate intended to generate income or profit for the owner of the property. Generally includes all categories of non-residential real estate
Common area maintenance charges are the contribution or fee paid collectively by individual tenants for the maintenance and upkeep of the non-exclusive areas of the premises.
Promotes economic revitalization in distressed communities throughout the United States by providing financial assistance and information to community development financial institutions (CDFI).
In the context of real estate transactions, properties similar to the one being sold or appraised used to determine the fair market value of the property.
Compound interest is “interest-on-interest”, or the ability of a financial instrument to generate earnings on its earnings.
A benefit given by a buyer, seller, landlord or tenant in order to help facilitate a real estate transaction. Concessions can be given in both residential and commercial real estate, and are often predetermined during the negotiation period. Concessions are often included in closing costs, but come in various forms: covering moving expenses and repair costs, rent reduction, or even cash back to the buyer.
Condemnation is the seizure of property by a public authority for a public purpose. Condemnation typically occurs when a taxpayer owns property in a place
A landowner voluntarily agrees to sell or donate certain rights associated with his or her property – often the right to subdivide or develop – and
Constructive receipt is direct access to tax-deferred like-kind exchange funds or other property by an exchanger completing a tax-deferred like-kind exchange.
A measure of the change in the value of consumer goods and services, such as food, medical care, and recreation. CPI is used to gauge inflationary and deflationary periods, providing an economic indicator as to the effectiveness of current monetary policy. The index is calculated and published by the U.S. Bureau of Labor Statistics each month.
A clause commonly written in retail leases that requires a tenant to continuously operate at a property for the entire term of the lease. As anchor tenants may act as a demand driver for a retail center, landlords may enforce this clause to minimize the risk of a major tenant “going-dark.” In situations that a continuous operation clause is not included in the lease terms, a non-profitable tenant may leave the premises, and the center may suffer as a whole. Smaller tenants may negotiate rent abatements to make up for the loss in traffic due to the anchor tenant ceasing operation.
For example, assume a major grocery store has begun to operate at a loss in a shopping center, and has requested to “go-dark.” Knowing that the grocery store may drive a substantial amount of people to the area, the landlord may have negotiated a continuous operation clause that requires that the tenant maintain full operations. Although the grocery store may not be profitable, staying open continues to drive traffic and traffic helps to maintain the value of the overall retail center.
A contract between a seller and a buyer of real property in which the seller provides financing to the buyer to purchase the property.
Core properties exhibit the lowest risk and lowest potential returns amongst the four major commercial real estate risk profiles, and represent
Core-plus properties are generally similar to core properties, but have a slightly higher degree of risk and potential for slightly higher returns than core properties.
A measure of a person or entity’s ability to meet certain financial requirements or obligations. Credit ratings are based on credit history, current financial position, and ability to generate future income, and look to predict the likeliness of the debtor defaulting. Common rated debt instruments include government bonds, municipal bonds, corporate debt, and collateralized securities.
The risk of loss resulting from a borrowers inability to repay its loan obligations. When a borrower is given funds from a lender, there is always risk that the borrower may not be able to meet its obligatory principal and interest payments. Although impossible to quantify, managing credit risk may reduce risk of loss. Common methods of managing credit risk on loans include assessing a consumer’s credit history, ability to repay, and access to capital. A lender may also look at loan conditions and the collateral securing the loan, to ensure that the risk of loss is compensated for.
Credit tenant is a tenant with the size and financial strength worthy enough of being rated as investment grade by one of the three major credit agencies: Fitch, Moody’s,
Credit tenant lease is a method of financing real estate where the landlord borrows money to purchase the property and pledges the rent to be received from the tenant as security.
The act of using multiple properties to secure one or more loans. Common in situations where a borrower lacks the capital to purchase a property, a cross-collateralized loan allows the borrower to use the untapped equity in another property to secure the loan on another property. This type of loan reduces the lender’s risk by securing their position in multiple properties.
For example, say John wants to buy Property A for $2 million. He currently has $200,000 in cash, and needs to borrow $1.8 million to close. The lender, however, will not lend past an 80% loan-to-value, leaving John $200,000 short on his down payment. Given that the lender will accept additional property in the place of the down payment, John looks to use a property he already owns, Property B, as further collateral. Property B has a $400,000 loan in-place, with John’s equity representing about $600,000.
Together, the market value of these properties is $3 million. The combined debt is $2.2 million, representing a loan-to-value of 73.33%. John’s debt level is then below the 80% threshold, making the lender more inclined to fulfill his loan request. The Lender now has claim to both properties in the event of default.
Crowdfunding is a form of financing that utilizes small amounts of capital from a large number of people to fund a new venture or project. Originally brought forward as a way for organizations and entrepreneurs to secure general funding and donations from the public, regulatory changes passed in the JOBS Act have allowed for equity crowdfunding to emerge so that investors could gain a return on their crowdfunding investment.
Any space or suite which is physically vacant or “dark”, but for which the tenant is still contractually obligated to pay rent. Dark space typically results from a tenant ceasing operations at an unprofitable location, in hopes of saving cash on employee wages and other operating expenses. The ability of a tenant to allow its space to go “dark” is governed by any go dark provisions and/or continuous operations clauses in its leases. Dark space may be subject to recapture rights by the landlord.
Debt is an amount of money owed by a borrower to a lender. It is used by individuals and corporations to make large purchases that they otherwise would be incapable of making given current cash holdings. A debt agreement provides terms that include the amount borrowed and the date at which principal and interest need to be repaid.
A method of raising capital through borrowing. Although commonly associated with lending from a bank, debt financing includes selling debt instruments to individual and institutional investors, often seen in practice by corporations through the use of bonds. The cost of debt is the price of interest payments to either the lender or bondholder.
Debt service is the cash that is required for a particular time period to cover the repayment of interest and principal on a debt.
In the context of commercial real estate, a measure of the cash flow available to pay current debt obligations. It is calculated as the annual
Deed in lieu of foreclosure is a deed instrument in which the mortgagor (borrower) conveys all interest in a real property to the lender to satisfy a loan that is in default and avoid
A deed of trust, like a mortgage, is a security instrument used to finance real estate. A deed of trust transfers legal title in real property to a trustee,
In a tax-deferred exchange, the deferred gain is the amount of gain that escapes current taxation and is deferred until a later date.
A separate legal entity created as a trust under Delaware state laws. Despite the name, neither the property nor the investor need to be located
In a Delaware Statutory Trust (DST), the Delaware trustee maintains a physical address in the state of Delaware in order to prevent the DST from
In real estate, delivered means the total square footage or number of properties in a particular asset class that have been completed (status changing from under construction to inventory) and received a certificate of occupancy during a given period of time. Once a certificate of occupancy has been given, the property will be deemed delivered, regardless if tenants have occupied the space or not.
Depreciation, in our context, refers to the allocation of an asset’s cost over the timeframe of its “useful life”, or duration for which it will be useful
Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset
Discount rate is the interest rate used to determine the present value of future cash flows in discounted cash flow analysis.
For example, an investor has estimated that a project they are investing in will generate a FCF of $50,000 over the next 5 years with a cost of capital of 9%. Taking into account the time value of money, the investor determines that the present value of the investment is approximately $195,000. If the initial cost of the project is $200,000, the NPV would be about -$5,000, showing a poor investment opportunity.
Low-income community census tracts are the basis for determining eligibility in Qualified Opportunity Zones.
Diversification is an investment strategy that seeks to mitigate downside by allocating proceeds across a variety of assets or products. The goal of diversification is to build a portfolio of investments across unrelated markets, so a downturn in one particular market may not drastically affect the returns of the portfolio as whole. Diversification looks to create a smoothing effect, allowing the negative performance of some investments be counteracted by the positive performance of an unrelated asset. Diversification is only a strategy, however, and does not guarantee returns and does not protect against losses.
An example of employing a diversification technique would be owning a portfolio of single family homes, corporate equities, and treasury bonds. Although some inherit systematic risk may still exist, an investor would not be fully exposed to the same non-systematic risk across the entire portfolio.
A dividend represents the distribution of a reward, usually in the form of cash, to a firm’s shareholders paid in exchange for the shareholder’s investment in the company’s equity. A dividend is managed by a company’s board of directors and typically paid from a company’s net profits regularly on a monthly, quarterly or annual basis.
Double net lease is a lease agreement in which the tenant is responsible for their pro-rata share of both property taxes and premiums for insuring the building,
Down payment is a payment used in the context of purchasing an expensive good or service, whereby the payment is the initial upfront portion of the total amount due
DST Interests represent equity ownership in a large property by multiple investors through an investment structure known as a
A DST Sponsor is a person or entity that creates a Delaware Statutory Trust (DST) to hold real property asset(s) and arranges for the issuance of
An investigation or audit of a potential investment to confirm all material facts regarding a transaction. For example, when analyzing a potential property
Earnest money is a payment made to a seller indicating a buyer’s willingness to enter into an arrangement. Typically, buyers provide earnest money to acknowledge that they are serious about a potential purchase, or that their intent to transact is “in good faith.” For the seller, earnest gives assurance that the buyer won’t backout of negotiations without valid cause. Earnest money does not obligate a buyer to transact, however, as issues with the property may be found later while being appraised or inspected.
Easement is a non-possessory right that allows the holder to occupy or use real property that he or she may not actually own. Easement rights are limited in nature, and are restricted to whatever is “convenient or necessary” to satisfy the purposes of the easement. There are two main types of easements that are common in real property: easements appurtenant and easements in gross.
Economic life is the period an entity expects to be able to use an asset, assuming a normal amount of usage and maintenance. Different from physical life, economic life is used to determine how long a capital investment, or investment in real estate, will be useful towards the operations of a business. Economic life doesn’t just refer to a predetermined amount of time, and can be applied to other forms of measurement such as mileage. For example, one may refer to an automobiles economic life as 200,000 miles, instead of 15 years.
Effective Gross Income (EGI) is income generated by a property including base rent and miscellaneous income, less vacancy and collection losses.
Net rental income received by landlord from a lease after deducting the value of concessions and costs incurred to secure the lease such as
The right to exit a property or the act of going out of or leaving a place. From a real estate standpoint, egress and ingress may be important components of site feasibility. Properties typically have entry and exit points along public streets, however that is not always the case. In situations of a landlocked or difficult to access property, access easements may be necessary in order to provide reasonable access to and from the property. Note that easements rights to enter and exit a property may be separate from legal ownership of the property itself.
Elasticity is a concept used to measure the sensitivity of one variable to change in another variable. Typically used to gauge consumer demand for a good or service, elasticity can be measured by the change in aggregate quantity demanded following a change in price or quality.
Economically distressed communities designated by government for aid—but this aid is intended primarily to lift the communities out of poverty by stimulating business enterprise and creating jobs.
Encumbrance is any limitation on the ownership of real property. Similar to a lien, an encumbrance can restrict both the free use and the transferability of the property until removed. Encumbrances include leases and mortgages, but are not always financially related. Encumbrances are non-possessory, holding no interest in the title of real property.
Equity is the value of an asset less the value of all liabilities on that asset. For example, if an investor owned a property with a market value of
A method of raising capital through the sale of ownership interests in an enterprise or other business entity. Equity financing can range in size from seed money for a start-up to an IPO for a multinational corporation. This type of financing isn’t limited to business endeavours, however, and can include raising capital for a real estate acquisition or other asset that may churn a profit. Equity ownership includes, but is not limited to, common stock, convertible preferred stock, and ownership interests in a Delaware Statutory Trust.
Equity Interests are ownership interest in a business entity, from the concept of equity as ownership.
Equity investments are one or more shares in the ownership of a business or corporation that are purchased by investors. In contrast to debt investments, equity investments
Escrow agent is an entity that has fiduciary responsibilities in the transfer of property from one party to another. The escrow agent acts as a custodian of
Escrow funds are capital held by a neutral entity in an account for the benefit of the parties of a financial arrangement whereby the funds are distributed only after certain
The process of arranging the transfer of one’s wealth and assets after his or her death. Estate planning helps govern how these assets will be managed and distributed, while looking to minimize estate taxes to preserve wealth. Real estate, personal property, stock and other securities, life insurance, and debt are a few of the assets that are considered to be part of an individual’s estate.
Per the IRS, an estate tax is a tax on the transfer of property upon death. An estate tax considers the fair market value of all the property within one’s estate, and not what the assets were originally purchased for. The total of these items is known as the Gross Estate, and can include cash, securities, ownership interests in either a business or real estate, annuities, among other asset classes. As of 2019, a filing is only required for estates with a gross assets and prior taxable gifts above $11,400,000.
Once the Gross Estate has been determined, one may be able to take deductions to determine the actual taxable amount of the estate. These include mortgages, estate administration expenses, and property that is given to eligible charities. Note, that property passed to a living spouse may be transferred tax free.
Used when completing a reverse exchange, an Exchange Accommodation Titleholder (EAT) is an unrelated party who holds legal title to either
For Exchange Accommodator Titleholder see Accommodator.
Exchange period, under IRC Section 1031, is when an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale
Exchanger is the taxpayer or owner of the property or properties being exchanged during a tax deferred exchange (aka 1031 exchange or like-kind exchange).
Exclusive right living is a formal agreement between a seller and a real estate agent, under which the real estate agent has the sole right to sell a specified property.
Exclusive-agency listing is an agreement established between the seller and one real estate agent, where the seller reserves the right to sell the property on his or her own,
A planned approach to liquidating one’s position in an asset, investment, or venture in hopes of minimizing loss or maximizing gain. Exit strategies may be executed when an investment has stopped being profitable, or has met its objective. Other factors that may contribute to an exit include a change in market conditions or legal reasons.
Expected return is the amount an investor would anticipate receiving on an investment that has various known or expected rates of return.
Expense stops, as stated in a commercial lease, mark the extent of operating expenses and taxes a landlord will be responsible for on a tenant-filled property. All expenses past this threshold will be held liable by the active tenant.
Fannie Mae is the more common alias of The Federal National Mortgage Association (FNMA) is a publicly traded
The Federal Deposit Insurance Corporation is an independent federal agency tasked with insuring customer deposits at US banks and thrifts. Created in 1933, the FDIC seeks to maintain public confidence and stability throughout financial crises by promoting sound banking practices.
The interest rate at which banks lend reserve balances to each other on an overnight basis. Depository institutions are required by law to maintain a certain percentage of their customer’s money in reserves, causing banks to lend money back and forth to maintain an acceptable level of cash on hand. Banks will try to stay as close to the minimum reserve limit as possible, as excess reserves earn a rate of return of zero and can lose value over time due to inflation.
The most absolute type of ownership of land. The owner has complete rights over the property, and may possess, use, and dispose of the land as he or she desires. Contrary to a leasehold ownership, an owner of a fee simple interest in a property has taken title, and owns both the land and any improvements that exist on the land indefinitely. Expect for a few unique situations, no one can legally take ownership of land from someone with pre-existing fee simple ownership.
Finance is a term that describes the study and system of money, investments and various other financial instruments. Generally, finance is broken into three categories: public finance, corporate finance and personal finance.
Financial leverage is the use of borrowed funds to acquire an investment. In the context of commercial real estate, this typically involves the use of a mortgage
FinTech, which is short for Financial Technology, is the word used to describe new technology that is developed to automate and improve the financial and banking services sectors. Typically delivered through different algorithms and software packages on computers and smartphones, FinTech looks to help corporations, business owners, and consumers facilitate and manage their financial operations and needs.
First loss position is an investment’s or security’s position that will suffer the first economic loss if the underlying assets lose value or are foreclosed upon.
A type of loan where the interest rate is predetermined, and does not fluctuate during the term of the loan. Fixed rate loans allow borrowers to accurately calculate future financial obligations, in the form of both principal and interest payments.
A fixture is something that is permanently attached to real property. Examples include items such as HVAC systems, ceiling lights, awnings, window shades,
Refers to a tax system that utilizes the same marginal tax rate across individual taxpayers or businesses. Opposite of the progressive tax structure, this method ensures that higher income earning entities don’t pay a proportionately higher amount of taxes.
If an investor holds its interest in the QOF for 10 years or more, for purposes of determining the gain or loss the investor recognizes from the sale or exchange of such QOF interest, the investor may elect for the basis of such QOF interest to be equal to its fair market value on the date such QOF interest is sold or exchanged.
Foreclosure is the legal process by which the mortgage holder attempts to recover the balance of a loan from a borrower who has defaulted by forcing the sale
Foreign Investment in Real Property Tax Act (FIRPTA) is a United States tax law that imposes a tax on foreign persons disposing of United States real property interests. To ensure tax collection from
One of the several tax forms distributed by IRS, Form 1099 is used in the United States to report various types of income other than wages, salaries, and tips. The form is primarily used to report payments to independent contractors, income from rental properties, and income from interest and dividends.
Form 8824 is a form to be filled out with an exchanger’s tax return in order to report the completion of a 1031 like-kind exchange to the IRS.
Percentage ownership over real property. A common structure for assets that require significant pooling of capital, fractional ownership allows the costs and profits of a particular investment be split amongst the owners of title. Percent ownership is typically determined by the amount contributed to the entity’s overall capitalization.
There are two primary options one can take when considering 1031 eligible fractional ownership in investment property: Delaware Statutory Trusts (DSTs) and Tenant-In-Common investments (TICs). These structures allow smaller investors to enter into larger, investment-grade properties that were originally restricted to institutional investors, such as banks and insurance companies.
Freddie Mac is the more commonly known alias of the Federal Home Loan Mortgage Corporation (FHLMC) which is a publicly traded
A fully amortizing loan is a type of loan which is completely paid off by the end of its term, given the borrower makes complete payments based on the loan’s amortization schedule. Whereas fixed rate loans will have equal payments of interest and principal over its term, debt service on floating rate loans will change as the interest rate changes. Due to the fact that all principal will be paid off, fully amortizing loans will not see a balloon payment at the end of its term, regardless of whether it is fixed or floating.
Future value is a time value of money (TVM) concept that represents the expected value, as of a defined date in the future, resulting from
Gross domestic product (GDP) is a broad measure of a nation’s productivity. GDP is defined as the monetary value of all finished goods and services a nation produces within its borders in a specific time period.
General market factors refers to the overall conditions within a defined market that affect all properties within that market.
A go dark provision is clause often used in retail leases which governs whether or not a tenant may vacate a space, while continuing to pay rent, prior to lease maturity. Opposite of a continuous operating covenant, go dark provisions allow a tenant to cease business operations when they turn unprofitable. Landlords often dislike this type of provision, as they can lead to rolling vacancies and gradually shrinking traffic in a retail center.
Grantee is one to whom the grant is made. The recipient who will be taking title, as named in the legal document used to transfer the real estate.
A grantor is the person or entity making the grant. For example, if Alice sells her property to Bob, then Alice would be the Grantor.
Gross absorption measures total square feet absorbed or leased without regard for vacated space during the same period,
A gross lease is a lease in which the tenant pays a flat sum for rent out of which the landlord must pay all expenses such as taxes, insurance, maintenance, utilities, etc.
Gross rent is rent charged to occupy a premise without any additional rent for operating or other expenses.
An investment property valuation method which is the ratio of a property’s price to its gross revenue.
Gross square footage is the total square footage of a building including all rentable spaces as well as all “non-rentable” space including common areas,
Ground lease is a lease of the land only, on which the tenant usually owns a building or is required to build as specified in the lease.
A hard asset is a type of asset with underlying intrinsic value that can be used to produce or purchase other goods or services. Hard assets typically include commodities such as oil, natural gas, gold, silver, and diamonds, as well as other tangible assets such as farmland and commercial real estate.
Also called “brick and mortar expenses,” hard costs are any costs involved in the physical construction of a project. Included in hard costs are
Hard money loan is a type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by
A health ration, also known as an occupancy cost ratio, it the relationship between a retailer’s sales and total occupancy costs.
Properties held for investment purposes can be any property or asset that are acquired and held for income production (rental or leasing activities) or
Membership fees that must be paid by an owner of property within a homeowner association’s jurisdiction. HOA fees are collected to pay for maintenance and improvements of properties owned by the association, including common areas or necessary features such as roofing or elevators. HOA fees are very common in condominium developments, but can exist in neighborhoods of single family homes.
Holding period is the real or expected period of time which an investment is attributable to a particular investor.
Holding title refers to the legal structure in which title to real property is owned. In the sale of real property, the title must be transferred from the seller to the buyer
Homeowners Association is an organization within a living community that creates and enforces a set of rules for the properties within its jurisdiction. Residents that own property within an HOA’s area of authority automatically become members and are subject to HOA fees. Property types that are often apart of associations include subdivisions, planned communities, or condominiums.
Identification period, under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their
Income is money or compensation that an individual or business earns in exchange for a product or service. For individuals, income is typically earned via wages, salary or via interest, dividends or capital gains obtained from investment holdings. For businesses, income is the difference between its total revenues and expenses and taxes.
Independent trustee is a trustee who is not related to the beneficiary of the trust and does not stand to inherit any property under the trust.
An index fund is a type of mutual fund or exchange traded fund (ETF) that is constructed to mimic the components of a market index, such as the S&P 500. Index funds are used to achieve broad market exposure, in an effort to reduce risk specific to a particular industry or stock. Index funds allow investors to capture the performance of the stock market in aggregate, instead having to go through the research and guesswork of investing in an individual stocks or industries.
Due to the fact that index fund investments require less effort on behalf of its manager, fees are typically less than more actively managed funds. While index fund expense ratios sit around 0.05% to 0.07%, actively managed funds typically see fees within the 1% to 3% range.*
Infill Location is a real estate development site that exists within a mostly built out market. Usually located within an urban area, infill locations look to fill the few vacant lots that exist between other developments in the area. Infill locations are characterized by having a high level of demand, due to increased property values in desirable locations, with high barriers to entry.
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
While not a precisely defined term, an institutional-grade, or institutional-quality property generally refers to a property of sufficient size and stature to
The maximum dollar amount an insurance policy will cover in the event that an insured asset is deemed lost. In real estate, this can include the improvements on the land, as well as the physical property that existed on the property, such as machinery and other equipment. Insurable value is can be a function of the full replacement cost of the property, reproduction cost, or depreciated value. Insurable value is typically less than the market value, as it excludes the value of land.
Insurance is a form of a contract or policy in which an individual or corporate entity exchanges payments for financial protection or reimbursement against losses from the insurer.
Intangible personal property is something of individual value that cannot be touched or held.
Interest expense deduction is defined as a borrowing expense that a taxpayer can claim to reduce their taxable income. There are many types of interest that can be tax-deductible such as mortgage interest, student loan interest, investment property loan, interest on some business loans.
For example, if an investor has a 30% marginal tax rate and has $10,000 in tax deductible income, they would save $3,000 in taxes. Effectively that $10,000 loan only cost $7,000.
The interest rate is the percent of principal charged by a lender for the use of its money. Interest rates are typically expressed on an annual basis, or annual percentage rate (APR). To the borrower, the interest rate is the cost of debt, and to the lender, the interest rate will be the rate of return. Interest rates are reflective of how much risk the lender thinks it is assuming by lending to a particular borrower. Higher interest rates are typically given to entities more susceptible to default, or a lower credit rating.
In addition to credit rating, interest rates are determined by other extraneous factors. This includes the supply and demand for credit, inflation, and monetary policy set by the U.S. Federal Reserve. In situations where a loan is backed by collateral, a borrower may be able to obtain a lower rate than if the property was not secured.
Interest rate risk is the risk that an investment's value will change due to a change in the level of interest rates. These changes usually have an inverse effect on
An interest rate swap is a forward contract between lender and borrower that trades one stream of future debt service payments with another based on a change in the interest rate on a specified principal amount. This change in interest rate is typically done as an exchange of a floating rate for a fixed rate, or vice versa, in order to reduce the risk of fluctuating short-term interest rates, or potentially pay lower interest payments.
Interest-Only loan is a loan in which, for a set period of time, the borrower pays only interest on the principal balance, with the principal balance remaining unchanged.
Investment portfolios are built based upon one’s financial goals and risk tolerance. Catering towards diversification and the management of unsystematic risk in a single investment, building a portfolio of investments across various asset classes may help an investor achieve a desired level of risk-adjusted return.
Investment property is a broad term for a real estate property that has been purchased with the intention of earning a return on the investment, either through
Any product used by investors to achieve a positive return on their money, although a favorable return is not guaranteed. Investment vehicles span all asset classes, and include ownership investments, lending investments, cash equivalents, and pooled investment structures such as a mutual fund.
For investors looking to diversify past asset classes as a whole, holding several types of investment vehicles may help further spread risk.* For example, corporate bonds and Treasury Inflation-Protected Securities (TIPS) each allow an investor to put his or her money into a debt instrument, but are subject to different market pressures and risks. Likewise, from a real estate perspective, investment may be made through various investment vehicles including LLCs, Limited Partnerships, REITs, or Delaware Statutory Trusts, with each vehicle having its own set of strengths and risks.
*Diversification does guarantee returns and does not protect against loss.
Joint tenancy is ownership of real estate by two or more individuals with the right of survivorship. A right of survivorship means that
A jumbo loan is a type of mortgage that exceeds the loan limitations set by Fannie Mae and Freddie Mac. Thus, unlike a conventional loan, these type of mortgages can’t be purchased or securitized by these two entities.
A legal document outlining the terms under which one party agrees to rent property from another party.
Lease termination fee is a payment made by the tenant or resident to the landlord in order to legally end a lease early and not be held liable for the remaining time.
Claim or right to enjoy the exclusive possession and use of an asset or property for a stated definite period, as created by a written lease.
Fees paid to real estate agents in connection with leasing space at a property. Leasing commissions may be due to a “tenant rep” which is an
A letter of credit is a letter from a bank or other financial institution which guarantees an investor’s payments to a third party. If the investor does not make its payments pursuant to its agreement with the third party, the party issuing the letter of credit will be required to make the payment of fund any shortfall.
For example, imagine Company ABC is interested in purchasing 1,000 widgets from Supplier XYZ for $1 million. Given Company ABC’s weak credit rating, Supplier XYZ is worried that Company ABC will not be able to pay in full within 60 days. In order to ensure Supplier XYZ that it will make good on it payment, Company ABC gets a letter of credit from the bank stating that it will pay any outstanding liability within the set time period, with the bank acting as insurance in the event that it can’t meet its financial obligations.
A lien is a right to possess property belonging to another person, given that an underlying obligation is not met. In finance, a lien often serves as a guarantee that a borrower will fulfill his or her responsibility of repaying a loan.
A method of deferring capital gains taxes on the sale or disposition of an asset held for business or investment purposes by exchanging the asset,
Limited liability company is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
Two or more investors who pool their money to develop or purchase income-producing properties. In a limited partnership, each limited partner's
Line of credit is a credit arrangement in which a financial institution agrees to lend money to a borrower up to a specified limit. The borrower can draw down on the
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.
The multiplier to a tenant's useable space that accounts for the tenant's proportionate share of the common area (restrooms, elevator lobby, mechanical rooms, etc.)
A loan is an agreement between and lender and a borrower in which a lender agrees to provide funding, property or material goods to a borrower in exchange for repayment of principal and interest at a later date.
The loan to cost ratio is the ratio of the loan balance to the total cost of the project the loan is financing, expressed by the formula loan balance divided by total cost.
The ratio of a loan to the value of an asset as determined by the formula of loan balance divided by the market value of the asset securing the loan.
Local tenant, also known as a “mom-and-pop", is a small scale company with a narrow footprint typically limited to a single market.
A low-income community census tract has an individual poverty rate of at least 20% and median family income up to 80% percent of the area median [Section 45D(e)].
Typically used in accounting practice, mark-to-market refers to the measure given to asset and liability accounts that are in accordance with current market values. Having the ability to increase or decrease over time, this method looks to give a current, accurate depiction of an individual’s or business’s financial standing. To provide an easy, relatable example, stocks in the S&P 500 are marked-to-market everyday. Values are determined based on investor demand, and fluctuate based on how much the market values a particular piece of equity. Mark-to-market valuations may be more difficult in non-public markets and illiquid assets as much less real-time data exists.
Although the mark-to-market model may provide an effective representation as to the current value of a company or asset, this measure may not prove as effective in times of uncertainty. When the market is shifting, and buyers continuously leave and enter the market, pricing becomes volatile and the mark-to-market method may prove inefficient and inaccurate.
A market adjustment is a change in market parameters or conditions brought about in response to one or more market signals (including price changes from shifts in
Market analysis is the process of studying certain characteristics and trends of a market to determine its strengths, weaknesses, opportunities and threats.
Master lease rate is the current rental rate that a space would likely command in the open market, indicated by current rents paid for comparable space within a given market.
The most probable price that a property would command in a competitive and open market under fair sale conditions. Market value also refers to
The primary lease that controls other sub-leases and may cover more property than all sub-leases combined.
Tenant which is party to direct lease with the property owner which subsequently sub-leases all or a portion of the property to other occupants.
Medicaid is a government-sponsored insurance program that works to assist low-income families and individuals in costs associated with medical care (e.g. doctor visits, hospital stays, long-term medical, custodial care costs). Primarily funded by the federal government, Medicaid operates at the state level and is available only to individuals and families that meet certain criteria that include legal and permanent residency in the United States and low-income generation.
Building or project that provides more than one use (e.g., a loft or apartment project with retail, an apartment building with office space,
Modern portfolio theory is based on the thought that one may be able to maximize expected return, given a level of market risk, by constructing a portfolio of assets based upon an “efficient frontier”. Modern Portfolio Theory is an extension of diversification, and is the idea that owning assets across various asset classes exposes you to less risk than owning just one. MPT argues that an investment’s risk and return profile should not be viewed in isolation, but looked at in aggregate with the portfolio as a whole.
A modified gross lease is a rental agreement where the tenant pays base rent at the lease’s inception, but in subsequent years, also pays a proportional share, or
Short-term tenancy terms in which a tenant rents from a landlord month to month. Although increasing vacancy and turnover risk, month-to-month tenancy offers several advantages to landlords that include the chance to negotiate lease terms more often, providing the opportunity to raise rent, while also providing the ability to get rid of troublesome tenants. Often times long-term leases convert to month-to-month tenancies at the end of the original lease term, if another lease has not been signed. This type of tenancy is most commonly found in residential leases, but can include commercial leases as well.
Mortgage is a legal instrument that pledges the rights of ownership of an asset or property to a lender as security for a loan.
A mortgage broker is a type middleman that connects mortgage borrowers with mortgage lenders. Tasked with helping qualify borrowers for a loan, whether it be for a purchase mortgage of refinance, mortgage brokers help borrowers shop interest rates with potential lenders, determine appropriate loan amounts and loan-to-value ratios, and help execute the application process. Similar to a real estate broker on the buy-side, mortgage brokers are compensated by the lender through an origination fee.
A mutual fund is an investment vehicle that pools money from the public and provides individual investors access to professional managed portfolios of equities, bonds and other security types. The value and performance of a mutual fund is thus based upon the pro rata performance of the various securities that comprise the fund.
National tenant refers to a tenant that has a national footprint with locations throughout the US. The term is most frequently used in the context of retail properties.
The amount of occupied space at the end of a period less the amount of space occupied at the beginning of the same period.
Net asset value, or NAV, is defined as the total value of an entity’s assets less the total value of its liabilities. NAV is typically used to determine the share price of a pooled investment fund, based off how many shares are currently outstanding at a given time. In practice, NAV is used by funds registered with Securities and Exchange Commission, such as a mutual fund or real estate investment trust. In reality, however, any business or financial product that records its assets and liabilities can have a net asset value.
For example, say a REIT holds $15 million worth of real estate in its portfolio, and has a 10,000 shares outstanding. Given that the REIT is 50% leveraged, it would be assumed to hold $7.5 million in debt. NAV would then be calculated as so:
($15 million - $7.5 million) / 100,000 shares outstanding = $75 NAV
Net income is the total revenue minus total expenses. It represents the amount of money remaining after all operating expenses, interest, taxes and preferred stock
Net operating income is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue generated from the property less
Net present value (NPV) represents the amount by which the expected cash flows of an investment exceeds the initial amount invested.
Net square footage is the usable or “rentable” area of a specified space (e.g. a suite, floor, or an entire building). This measurement generally excludes non-rentable areas
Net worth is a gauge of financial health typically defined as the difference between an individual’s or a business’s assets and liabilities. It is a measure that seeks to quantify the value of an entity’s owned assets, and the abilities of these assets to satisfy all outstanding liabilities. Ultimately, it provides insight into an entity’s financial position at a given point in time.
Designed to increase the flow of capital to businesses and low-income communities by providing a modest tax incentive to private investors.
An investor who does not meet the special requirements for an accredited investor under the Securities & Exchange Commission’s Rule 501 of
Non-Traded REITs are a type of security that invests in real estate properties and mortgages, but is not listed on an exchange and is not publicly traded. Like any REIT, non-traded REITs distribute at least 90 percent of the company’s taxable income to shareholders in the form of dividends, however, non-traded REITs are very illiquid and usually constitute a minimum holding period per investment. Non-traded REITs are difficult to value as well, lacking an organized exchange for valuing purposes.
Nonqualified financial property’’ is defined in §1397C(e) as: debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities and other similar property.
Occupancy costs are the total amount of property-related expenses paid by a tenant for use of a particular space. Occupancy costs include base rent as well as
Office percentage is the percent of an industrial property’s square footage that is attributed to office usage. In scenarios where mezzanine office space been built above an area that would have otherwise been used for industrial use, the additional square footage is not factored into the total square footage of the building.
Fixed operating expenses are the actual costs associated with operating a property that do not vary in the short term. These costs do not change with a property’s occupancy rate.
Variable operating expenses are the actual costs associated with operating a property that vary in relation to a property’s occupancy rate or volume of some activity.
Opportunistic properties exhibit the greatest risk but highest potential returns within the four major commercial real estate risk profiles
Opportunity cost represents the benefits an individual or business forgoes when it makes one decision in place of another. Opportunity costs are oftentimes unseen in that the consequences of choosing not to pursue one strategy in place of another, but individuals and firms can benefit greatly from working to quantify the cost of not pursuing a particular option.
An Opportunity Zone is an economically-distressed community (see also “low-income communities”) where new investments, under certain conditions, may be eligible for preferential tax treatment.
Ordinary income is the income earned from providing services or the sale of goods. Ordinary income is composed mainly of wages, salaries, commissions and
A fee charged by a lender for processing your loan application. Similar to a broker’s commission, an origination fee is the Lender’s way of getting paid for its services. Origination fees range from 0.5% to 1.00%, and are often negotiated with the terms of the loan. In situations where a borrower desires a lower origination fee, the lender may demand an increase in the interest rate. Origination fees usually represent a higher percentage of smaller loans, as the lender is looking to make their time spent worthwhile.
Outsourcing is a practice of a firm hiring third-party labor to replace services previously performed in-house. Firms typically use outsourcing to significantly reduce labor costs by enlisting the help of an outside organization that has the capacity to perform the service or production of a good at a materially lower cost. Outsourcing can also help a business to focus more directly on its core operations.
Par value is the stated value of either a stock or bond at the time it is issued. Most typically used in the bond market, par value is used to describe the amount of cash the bond issuer agrees to pay the purchaser at the bond’s maturity. The market price set to buy the bond initially is a function of par value, considering other factors such as interest rates, coupon rate, and the bond’s credit rating to set the price.
Although par value exists within the equity market as well, it is less commonly used in practice, and is often set to adhere to regulations that require that a particular stock not be sold below par value. Due to this fact, companies will set their par value at a very low nominal amount. For example, Google’s current stock par value is $0.001.1
Total rentable square footage of a property divided by the number of parking spaces; typically expressed as a ratio of spaces per 1,000 square
To the extent less than 100% of the proceeds of a relinquished property are reinvested, the difference will result in mortgage boot and/or cash boot.
A pass-through entity is any business organized as a partnership, limited-liability company, S-corporation or sole-proprietorship that reports any profit on its owners’ tax returns -- "passing it through" to them. Pass through entities avoid taxes at the corporate level, reducing the effects of double taxation. Instead, income is allocated amongst the owners, based on percent ownership, and taxed at the individual owner’s marginal tax rate.
For example, Company A has four owners, which each individual owning an equal 25%. After a successful year, Company A saw a net income of $500,000, with each owner having claim to $125,000 of the profits that will be reported on their respective tax returns. Note that if the owners elected to retain the earnings within the business, not distributing it, the owners would still be liable for the taxes on the income they would’ve received, creating a phantom income situation.
Earnings collected from investment property, partnerships, or other enterprise in which the person is not actively participating in operations. Used loosely, passive income is used to describe money that required little to no effort to obtain. Passive income is typically received on a regular basis, and is taxed as ordinary income on a person’s tax return.
One caveat of passive income is that passive losses can only offset passive gains (ex. Schedule E income, some Partnership income). Active income, or income that is derived from activities that a person is materially involved in, can not be reduced by passive income.
Percentage rent is rent due in lieu of, or in addition to base rent that is paid to landlords based on tenant sales. A percentage rent clause is nearly exclusive to
A type of property which, in its most general definition, can include any asset other than real estate. The distinguishing factor between personal
For purposes of Qualified Opportunity Zone Program, if the taxpayer has not sold the qualified investment by December 31, 2026, the inclusion of the deferred gain may result in phantom gain at that time.
12/31/26. At this date, the deferred capital gain must be recognized. All or part of the deferred gain is includible in taxable income when the taxpayer sells the investment in the Qualified Opportunity Fund or on December 31, 2026, whichever occurs first.
Income paid to a taxpayer during the tax year that is not constructively received at the taxpayer’s end. Although not commonly seen, phantom income can happen in investments such as limited partnerships, in scenarios where there are earnings that are not directly received by a partner. This includes earnings that rolled over into retained earnings or reinvested into the business.
Phantom income can occur with zero-coupon bonds as well, that are issued as a discount and mature at par. The interest payments for zeros are credited to the taxpayer, but they do not receive the cash. The bondholder effectively is paid a maturity, when the bond is redeemed at a higher par value.
Positive leverage is when a business or individual borrows funds and then invests the funds at an interest rate higher than the rate at which they were borrowed.
Potential rental income is the total amount of rental income for a property if it were 100 percent leased at competitive market rates.
The amount of money an investment produces after the collection of all revenue items and payment of operating expenses and debt service. This cash flow comes before the calculation of one’s income tax liability, and does not factor in deductions for depreciation allowance, mortgage interest expense or other non-cash items.
Pre-tax cash flow allows investors to calculate their current return on investment, and when comparing to after-tax cash flow, provides context to the extent of tax shelter a particular investment may generate.
Preferred Equity is an equity investment which is superior in interest to common equity but subordinate to debt. Preferred equity is secured by a
A prepayment penalty is a mortgage provision that states that a penalty, or fee, will be assessed to a borrower if an outstanding liability is paid off before a certain time period. Lenders typically calculate these fees as a percentage of the outstanding loan balance, the cost of lost interest payments, or as a flat fee. For example, if $300,000 of principal is still owed on a mortgage and a lender charges a 2% prepayment penalty, the borrower would owe an additional $6,000 in fees to the lender for the privilege of repaying the loan before its maturity date.
These fees are used in practice to protect a lender from the loss of interest payments that would have been received if the borrower had not prepaid the loan balance early.
Present value is expected value, as of the date of valuation, resulting from discounting future amounts.
The interest rate banks charge their most creditworthy customers, or customers with the least risk of defaulting. In other words, the minimum rate a bank would be willing accept on an outstanding debt. Prime rates directly affect other lending rates, as the prime rate serves as a basis for determining interest rates for mortgages, business loans, and personal loans.
Private equity is a type of alternative investment class that involves deploying capital into investments or businesses that are not listed on a public exchange. In practice, private equity is used to invest in private companies, to initiate buyouts or bolster its financial statements, or to invest in privately held assets, such as real estate. Due to the fact that private equity requires placing substantial amounts of cash for long periods of time, investors are usually institutionally backed or have achieved some degree of accreditation.
For investors in operating companies, these long hold periods are due to the considerable amount of time it takes to turnaround a distressed business, or to achieve a liquidity event such as an initial public offering or sale to a public company. In real estate, longer hold periods can be attributed to value-add initiatives, predetermined lock-up periods, as well as the overall illiquidity of real estate investments.
Private equity real estate funds are an asset class consisting of equity and debt investments in property. These types of funds usually involve active management from private equity entities, and follow low-risk to high-risk strategies.
Private placement is an offering of securities that is not registered with the Securities and Exchange Commission (SEC) and which are sold not through a
Private placement memorandum is an offering document for a private placement that contains relevant disclosures so that an investor may make an informed investment decision.
Pro Forma is a forward-looking cash flow projection based on a set of assumptions. Pro forma financial statements depict future financial results if the underlying assumptions hold true.
Profit is defined simply as revenue less expenses. It is the financial benefit a business generates from its revenue after subtracting all expenses, costs and taxes it needs to pay to sustain operations.
A tax structure in which the tax rate increases as the amount of taxable income increases. “Progressive” due to the nature of the tax rate progressing from low to high, the net effect is that higher-earning individuals are taxed more heavily than lower-earning ones. In this structure, a taxpayer’s average tax rate is less than the person’s marginal tax rate.
For example, say Sarah reports $50,000 of taxable income on her tax return. Assuming she is filing as an individual, Sarah’s marginal federal income tax bracket will be 22%. Due to federal income tax being progressive in nature, however, Sarah will calculate her tax liability as so:
A promissory note is a financial instrument in which the issuer contractually agrees to pay a sum of money to a payee, either at a determinable time or at the demand of the payee. Similar to a note payable, promissory notes usually include the amount of principal that should be paid at maturity, any applicable interest rate, terms of repayment, and the date of maturity. Provisions regarding issuer default are usually included as well.
Although often issued by a financial institution, promissory notes offer businesses and individuals the opportunity to obtain financing from an entity that is not a bank. Any person or persons willing to provide financing under the agreed upon terms may become a lender under a promissory note.
Promoted equity (carried interest) is a share of the profits of an investment or investment fund that is paid to the investment manager as compensation. It is given in exchange for creating value or bearing a disproportionate share of downside risk.
Property condition report provides an analysis of a building or facility to help establish a buyer's risk due to the physical condition of the facility. The analysis includes architectural, structural, mechanical and electrical systems and elements.
Property identification number is a number assigned to parcels of real property by the tax assessor of a particular jurisdiction for purposes of identification and record keeping.
Property management is the supervision and oversight of residential and commercial real estate. Aiming to ensure that the property being managed meets a certain operational standard, property management looks to drive income growth while preserving the value of the property. Although some real estate owner-operators deploy their own property management division to oversee their assets, property management is often done through third party companies that specialize in a particular asset class. For example, Asset Campus Housing has specialized in student housing property management since 1986.
An ad-valorem tax applied to real estate, based off the value of the land and it’s improvements. Paid by the owner, this tax is calculated by multiplying the property’s current market value by the applicable tax rate. Market value is typically determined by a government hired assessor, who conducts an appraisal of the property to obtain the assessed value. Tax rates vary by state and jurisdiction.
When property taxes are left unpaid, a governing authority may impose a lien upon the property. A tax lien may restrict the transfer or refinancing of the property until satisfied. One should always be sure that a property is free of all outstanding liens before purchasing a property.
Short for “flexible”, flex properties are typically considered a subsect of industrial properties that contain a higher percentage of
Consists of a wide range of product types including hotels, travel centers, water parks, amusement facilities, golf courses, cruise ships and restaurants.
Industrial property type is one of the four main asset classes of commercial property, which is typically used for the purpose of production, manufacturing, or distribution.
Multifamily property types are typically considered apartment buildings that can accommodate more than one family. Condominiums can sometimes be covered in this property type as well.
Offices are commercial properties that are primarily used to maintain professional or business offices. Encompassing term that may include
Retail property types are properties used to market and sell consumer goods and services. This category includes single tenant retail buildings, small neighborhood
Self-storage are properties where storage space (such as containers, lockers, and/or outdoor space) is rented to tenants, usually on a short-term basis.
Senior living property is housing that is catered to seniors, typically over the age of 55. Contrary to standard multifamily properties, senior living communities usually include specialized amenities or services. Senior living covers a wide range of property types that include active-adult communities, assisted living, and memory care facilities.
A legal document between a buyer and seller of real estate that lays out the terms and conditions of a future transaction. The agreement looks to contractually bind the two parties, in hopes of ensuring that both will fulfill their promises and obligations regarding the sale.
Step 1: An investor with a recently realized capital gains elects to invest this gain into the Qualified Opportunity Fund (QOF), taking stock or a partnership interest in return. By so doing, the investor gets to defer capital gain income.
An independent person, company, or entity that enters into a written agreement with the exchanger to facilitate the transfer of proceeds from
To become a Qualified Opportunity Fund, an eligible taxpayer self-certifies. As of now, no approval or action by the IRS is required.
A trade or business (i) in which substantially all of the tangible property owned or leased by the entity is Opportunity Zone Business Property, and (ii) which (a) derives at least 50% of its gross income from the active conduct of a trade or business, (b) uses a substantial portion of any intangible property in such trade or business, and (c) has less than 5% of its assets invested in non-qualified financial property. Notwithstanding the preceding, a trade or business will not qualify as an Opportunity Zone Business if it is engaged in owning or operating any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.
Tangible property used in a trade or business of a Qualified Opportunity Fund if such property (i) was acquired by purchase after December 31, 2017, (ii) the original use of such property in the Qualified Opportunity Zone commences with the Qualified Opportunity Fund or the Qualified Opportunity Fund substantially improves the property, and (iii) substantially all of the use of such property was in a Qualified Opportunity Zone during substantially all of the Qualified Opportunity Fund holding period for the property.
An investment vehicle that is set up as either a partnership or corporation for investing at least 90% of its assets in eligible property (see “Opportunity Zone Property”) that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment (an unlimited amount) from the sale or exchange of any property (whether or not the asset sold was located in or related to a low-income community).
Qualified Opportunity Zone Property also includes certain interests in a partnership, with requirements substantially identical to those applicable to Opportunity Zone Stock but which would apply when the business is organized as a partnership rather than a corporation.
The 2017 tax reform reconciliation act (the Act), enacted December 22, 2017, includes a new tax incentive program, Internal Revenue Code Subchapter Z – Opportunity Zones, aiming to promote investments in certain economically distressed communities.
Is property that is (i) qualified opportunity zone stock, (ii) qualified opportunity zone partnership interest, or (iii) qualified opportunity zone business property.
Stock of any domestic corporation (i) acquired by the Opportunity Fund after December 31, 2017, at original issuance solely in exchange for cash, and (ii) which, at the time such stock is issued and during substantially all of the Opportunity Fund’s holding period, is a Qualified Opportunity Zone Business (“QOZB”).
"Qualified Purchaser" means, under Section 2(a)(51) of the Investment Company Act:
A quitclaim deed is a legal document that may be used to sell or transfer interests in real property. A quitclaim deed transfers whatever interest the seller or transferor actually holds in a property with no representations or warranties made to clear (unencumbered) title or the exact rights held by the grantor (seller).
Rate of return is the profit or loss on an investment over a specified period of time expressed as proportion of the investment amount.
Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water.
A licensed intermediary between buyers and sellers of real estate, typically working for commission. Real estate agent is a broad term which includes
A licensed intermediary between buyers and sellers of real estate, typically working for commission. A real estate broker typically has completed
Real estate debt is a debt instrument that the borrower is obliged to pay back with a predetermined set of payments. The debt instrument is secured by
Real estate equity is the difference between the current fair market value of a property and the amount of debt owed against the property.
Real estate investment is real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence or personal use.
Real Estate Investment Trust is a trust or company that owns, finances, or invests in real estate and/or real estate-related assets. REITs provide individuals the ability to invest in
An investor who evaluates the real estate market and purchases property with the intention of building wealth.
Real estate syndication is a method of pooling capital from multiple investors for the common goal of acquiring real estate.
Realized gain is the amount of gain that the investor made from the sale of an asset. It is calculated as the net sales price received (sales price of the asset less any
A lease provision that grants a landlord the right to terminate a current lease, and take back possession to specific space or tenant suite. To take effect, there is typically a negotiated triggering event that has to occur. This includes a tenant “going dark” or failing to meet its percentage rent terms. Although common in commercial real estate leases, recapture clauses can be included in any contract in which an asset is exchanged.
For example, say Sarah owns XYZ Retail Center. The space is currently leased to Yummy Grocery, with a stated rent of 2% of its sales for a minimum of $2,000. Meaning, Yummy Grocery has to have sales of $100,000 to meet its rent obligation.
The next month, Yummy Grocery only does $80,000 in sales. Because Sarah negotiated a recapture clause in the lease, she may be able to terminate the lease and take back the space from Yummy and potentially replace it with a different tenant.
A recession is a macroeconomic term that represents a significant and extended period of declining or stagnant economic performance in a region or country in the world. Investors, businesses, public entities and governments all track various indicators that can predict or signal the onset of a recession.
A term used to describe real estate assets that are tied to lifestyle trends, as opposed to economic cycles. These assets are less subject to downturns, and are subject to forces of the underlying market demographic. Recession-resistant real estate typically falls under three main asset classes: student housing, self-storage, and senior living.
Recognized gain is the taxable portion of realized gains arising from the sale of an asset or assets. Recognized gains are typically less than realized gains due to
Recourse is a type of loan that allows the lender to recover against the personal assets of a party in the event of default by the borrower to the extent of the
The payoff and replacement of an existing loan with a new loan, typically under different terms. Refinancing differs from debt restructuring, which is the modification of an existing loan. There are several reasons an investor may consider refinancing an existing loan including: 1) to improve on the loan’s interest rate; 2) to extend the loan’s maturity date; 3) to change the interest rate from variable to fixed, or vice versa; or 4) to access embedded equity by increasing the loan amount. Reasons 1 through 3 above are often referred to as “rate-and-term refinance” while reason 4 may be referred to as a “cash-out refinance.”
The ability of an investor to refinance a loan is dependant on a variety of factors including general market conditions, the availability of financing, the borrower's credit worthiness, and the value of the underlying property. Note however, that an investor may be constrained from refinancing a loan due to lockout provisions or prepayment penalties. Additionally, there may be costs associated with refinancing that may make it a less attractive option.
Reg A+ Offering is a Securities and Exchange Commission (SEC) regulation that allows public investment in private companies up to $50 million. Like an IPO, this type of offering allows companies to raise capital by offering shares to the general public.
A person or firm that is compensated for providing investment advisory services. Contrary to a broker who is transaction based, RIAs are typically compensated based off a percentage of assets under management, and have a fiduciary responsibility to their clients. RIAs compete with mutual funds, hedge funds, and wire house firms for clients.
A Regulation D Offering is a Securities and Exchange Commission (SEC) regulation governing private placement exemptions that allows companies to raise capital through
Related parties transaction is a business deal or arrangement between two parties who are joined by a personal or other relationship prior to the deal.
Generally speaking, related party issues are technical and we recommend consulting with your CPA or tax attorney to understand how the “related party” rules may impact your specific situation.
A provision or clause to release certain collateral from a loan or mortgage in exchange for the borrower’s payment of a defined amount.
In a tax deferred (aka 1031 exchange or like-kind) exchange, the property being sold or disposed of is referred to as the relinquished property.
In the context of commercial real estate, rent bumps refer to periodic adjustments on the rental rates pursuant to a lease, typically stated as a
Rentable Square Footage equals the usable square footage plus the tenant’s pro rata share of the building common areas, such as
Replacement property, during a tax deferred (aka 1031 exchange or like-kind) exchange, is the property being purchased or acquired.
Replacement Property InterestsTM is the term Realized uses to describe equity ownership in large properties by multiple 1031 exchange investors through Delaware Statutory Trusts (DST) and Tenant-In-Common (TIC)
A retail investor is any individual who purchases and sells securities for his or her own investment portfolio. Similar to institutional investors, retail investors have the ability to engage in stock and bond markets, mutual funds, exchange traded funds, and other alternative investments, conducting trades through brokerage firms or saving accounts. Note, however, that a retail investor may need to meet a certain level of accreditation to participate in some investments, such as private equity, hedge funds, and certain private placements.
Return on investment measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is
A contractual obligation by the owner of an asset to offer a sale to the rights holder before negotiating with any third party. Often included in tenant-landlord contracts, right of first offer provisions allow a tenant to make a reasonable offer before anyone else, with the intent of not having to move his or her business.
Although similar to a right of first refusal, a right of first offer is thought to favor a seller, as it can reduce transaction costs while locking in a serious buyer. In addition, a seller has the option to deny the right holder’s offer, with the opportunity to negotiate with other buyers. In the event that negotiations with other buyers are unsuccessful, the seller may come back to the rights holder to pursue a new offer.
The right of first refusal is the contractual right, but not obligation, to enter into a buy-sell transaction with the owner of an asset before any other third party. In commercial real estate, the right of first refusal allows an interested party to buy a property before the seller negotiates any other offer. In the scenario that the party with the right of refusal declines to buy, the seller is then free to negotiate and sell with other interested parties.
Risk adjusted returns is the measure of the return on an investment relative to the expected risk of that investment, over a specific period.
Risk premium is the minimum incremental yield by which the expected return on a risky asset must exceed the known return on a risk-free asset in order to
Defined as an evaluation of an individual or organization’s willingness to take risks, as well as the threats to which an organization is exposed. Risk profiles are important for determining which asset classes and allocations are appropriate for a portfolio. This risk profile signals the tolerable level of risk that is accepted. A corporation’s risk profile attempts to determine how a willingness to take risk will affect overall decision-making strategy.
Safe harbor is a statutory or regulatory provision that provides protection from a penalty or liability. In the context of a 1031 exchange, safe harbor refers to any one of
A sale-leaseback is an agreement where the seller of real estate leases back the same property from the buyer the seller sold it to. Once a seller has given title to the buyer, the seller immediately enters into a lease agreement with the new owner, making rent payments to occupy the property. Sale-leaseback provisions are often used in situations where a company needs to access capital tied up in an asset such as real estate, but still needs to use the property in order to operate.
Salvage value is the approximate value of an asset at the end of its useful life. Using both purchase price and a given accounting method, such as straight-line or double declining balance, one can calculate the amount of annual depreciation being attributed to an asset based on its salvage value. Salvage value is an estimate, while depreciation is a calculation based off this amount.
A requirement in a 1031-exchange transaction, the same taxpayer provision states that the taxpayer who owned the relinquished property must be the same taxpayer who takes ownership of the replacement property. This ensures that the taxpayer’s basis is carried over into the new property, and that there is a continuity of deferral.
A Schedule K-1 is a type of tax document used to report partnership incomes, losses, and dividends. Each individual partner is obligated to complete one of these forms, whenever necessary, and must include it with their respective personal tax returns.
A second mortgage is a subordinate mortgage taken on by a borrower while a first mortgage is still in place. In situations where a homeowner has built up equity in his or her property by paying down a first lien mortgage, or property appreciation as occurred, one may want to borrow against this new equity to fund projects or other expenditures. Due to the fact the second mortgages only receive payment when the first mortgage has been paid off, they typically hold higher interest rates.
There are two main types of second mortgages that exist: a home equity loan and a line of credit. A home equity loan is where a borrower receives a upfront lump sum from the lender, and makes interest and principal over the mortgages term, similar to a conventional loan. A line of credit is where the lender allots a predetermined amount of money for the borrower to draw from, with the borrower able to borrow and repay the line of credit as often as they wish. Note that in a line of credit type loan, the borrower is not required to take any funds from the borrower.
Securitization is a financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or
Seller financing is a loan provided by the seller of a property or business to the purchaser of that property or business.
Debt that takes priority over other unsecured, “junior” debt. Senior debt sits at the bottom of the capital stack, and offers the lowest risk with the lowest return.
Single tenant property is property that is fully occupied by a single user. Single tenant properties often feature a triple-net (NNN) lease structure and generally have remaining lease terms of at least 10 years.
Individuals over the age of 62 who have paid into the system for 10 years or more qualify for Social Security retirement benefits.
Soft costs are fees that are not directly related to labor and direct constructions costs. Soft costs include architectural, engineering, financing, and legal fees, and
Special purpose entity is a legal entity established by the sponsor or borrowing entity whose operations are limited to the acquisition and financing of specific assets.
In the context of real estate partnerships, a sponsor is an individual or company in charge of finding, acquiring, and managing the real estate property on behalf of
Stabilized occupancy is the long-term average occupancy rate that an income-producing property is expected to achieve after exposure for leasing in the open market for
Stated rent is the rent amount paid by the occupant to the landlord as specified in the lease. Stated rent does not account for any concessions or landlord costs
When a taxpayer bequeaths an asset to a beneficiary upon death, the beneficiary’s tax basis in the asset is “stepped up” to the fair market value of
A stock is a security that represents a shareholder’s proportionate ownership in the assets and earnings of the issuing corporation. Stocks are primarily bought and sold on exchanges. In exchange for cash, stockholders obtain a piece of a corporation and a claim to that firm’s assets and earnings.
A submarket is broadly defined as a distinct part of a larger market. In the commercial real estate context, a market is typically a city or an MSA and
Qualified Opportunity Zone Business Property (“QOZBP”) is substantially improved for this purpose if during any 30-month period following acquisition of such property there are additions to basis that equal the adjusted basis as of the beginning of such 30-month period.
A capital loss that cannot be realized in a given tax year due to passive activity limitations. The losses are suspended until they can be netted against passive income in a future tax year. These suspended losses are a result of passive activities, and can only be carried forward. Suspended losses that are a result of the disposition of a passive interest are subject to an annual capital loss limit.
For example, if a taxpayer incurs a $10,000 suspended loss from a passive activity and participates in the activity in the following year and earns $20,000, then the suspended loss may be applied against $10,000 of the earned income, leaving the taxpayer with $10,000 of declarable income for the year.
The uncertainty caused by macroeconomic factors that affect all risky assets. Also known as “market risk”, systematic risk underlies the performance of most asset classes that trade publicly or privately. One can not diversify against systematic risk, as it includes events such as inflation, changes in interest rates, recessionary periods, and even war. These type of forces tend to affect the market as a whole, and typical portfolio diversification strategies may not be as effective.
Tangible personal property is everything other than real estate that is used in a business or rental property.
Tax basis, in the context of commercial real estate, is the original purchase price or cost of an investment property plus any out-of-pocket
A congressional revenue act originally introduced in Congress as the Tax Cuts and Jobs Act (TCJA). Public law no. 115-97 ("the Act") amended the Internal Revenue Code of 1986 based on tax reform advocated by congressional Republicans and the Trump administration.
Tax deferred is an instance where investment earnings such as interest, dividends, or capital gains accumulate tax-free until the payment of taxes related to the
A tax liability is the total amount of taxes owed by an individual taxpayer, corporation, or other organization. Payable to federal, state and local taxing authorities, tax liabilities are derived from income earned, capital gains on the sale of an asset, or other events that are considered taxable by the Internal Revenue Service (IRS).
Tax liabilities are not determined just from the income from a given year, and may include back taxes (taxes payable from a previous year), or other write offs that actually reduce taxable income, such as loss carryforwards. An individual’s tax liability, or tax rebate, is calculated using an IRS 1040 Form, while corporations use an IRS Form 1120.
A governmental claim on real property when a taxpayer fails to make property tax payments or has outstanding income taxes. While federal and state governments have the ability to assess liens over unpaid income taxes, local governments may assess liens over unpaid local income taxes and property taxes. Tax liens give taxing authorities priority over other creditors that may have claim to the property when liquidated.
In addition to affecting a taxpayer’s credit, a tax lien may affect the marketability of real property. While the lien is in-place, a taxpayer may not be able sell or refinance the property until the lien is satisfied. The two most basic ways to satisfy a tax lien is through the repayment of outstanding taxes or dismissal through bankruptcy court.
As laid out by the IRS, this policy allows an investor to use current realized losses to offset future taxable capital gains. Different from a NOL Carry Forward, this type of tax benefit can only offset gains made on the sale of assets, thus reducing your tax liability on this account in future years.
A document filed with the IRS that reports income, expenses, and other related tax information for an individual or entity. Tax returns allow taxpayers to calculate their taxable income and tax liability, while providing a medium to request tax refunds in situations that a taxpayer has overpaid. Typically, tax returns are filed annually.
Tax returns can be broken down into three sections: income, deductions, and tax credits. The income section lists all sources of income, including capital gains. The deduction section lists anything that reduces taxable income, such as interest deductions and charitable donations. Similar to deductions, tax credits will reduce taxable income as well, and typically includes credits given for the care of dependent children and seniors, education, and saving for retirement.
A tax shelter is a financial technique used by taxpayers to reduce taxable income. Tax shelters include both investments and investment accounts that provide favorable tax treatment, as well as deductions as laid out by the Internal Revenue Service (IRS).
Typical investment accounts that shelter returns from taxes are 401(k) accounts and traditional IRAs. Other items that lead to tax efficiency are interest expenses and depreciation, which are deductible from taxable income. In some cases, a taxpayer may be able to realize a loss after these deductions are factored in, resulting in tax loss carryforwards that may be able to offset future profits.
Certain real estate investments may provide income tax shelters through mortgage interest deductions and depreciation allowance and, depending on the legal structure, may provide the ability to defer capital gains via a 1031 exchange.
Taxable income is calculated as total revenue less total expenses and applicable deductions and exemptions that are allowed in that tax year.
Tenant improvement allowance is a leasing incentive offered by a landlord in order to entice tenants to lease space. The tenant improvement allowance is the dollar amount, typically
Tenant improvements are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that
The individual or company that packages and markets Tenant-In-Common (TIC) properties. The sponsor is in charge of a variety of different
Tenants-In-Common is a type of shared ownership of property, where each owner owns a share of the property. Unlike in a joint tenancy, these shares can be of unequal size,
The Three Property Rule is defined under IRC Section 1031, which states that an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of
Time value of money is the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
Title company is a company that examines and insures title claims for real estate purposes. The title company verifies legal title to a property through a review of
Title holding trust is a fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or private basis to better protect an investor’s assets.
Insurance that protects the holder from financial loss resulting from defects in title to real estate. The most prominent form of title insurance is lender’s title insurance, which usually must be obtained to secure a mortgage, however owner’s title insurance does exist as well. Whereas lender’s insurance is usually paid for by the buyer, owner’s title insurance is paid for by seller.The purpose of title insurance is to protect both real estate owners and lenders against potential damage or loss due to defects in title. These defects include claims of ownership by another party, fraud of title documents, unidentified
Traded REITs are a type of security that invests in real estate properties and mortgages, and trades like stock on major exchanges. Like any REIT, traded REITs must pay out at least 90 percent of the company’s taxable income each year in the form of shareholder dividends. Unlike non-traded REITs, however, traded REITs are very liquid and relatively easy to value, a tribute to it’s existence on a major exchange.
A retirement account that allows an individual to allocate pretax income toward investments that can grow tax-deferred. Income contributed to the account is limited, and may be deductible from taxable income based on the taxpayers amount of income and filing status. Capital gains taxes or dividend income taxes are only assessed once funds are withdrawn from the account.
Tranche is a slice of the capital stack that reflects an investor’s credit or equity ownership position in a company or project. Different tranches have different cash flows and risks involved, as well as different claims to cash distributions.
A lease agreement that states the tenant is solely responsible for all of the costs relating to the property being leased in addition to the rent.
Land trust is a fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or
Living trust is an arrangement created during a person’s life, in which the trustee holds legal title to assets for a beneficiary.
Trust, Real Estate is real property owned through a trust rather than by an individual. In this context, the exact legal form of ownership may take a variety of forms
A fully renovated property that is ready to be inhabited once purchased. Turnkey properties are often acquired from companies that focus on this type of property, restoring older properties to be bought by potential investors. These restorations can range from plumbing repairs to repainting. Often times, these same companies may offer on-going property management services to buyers, further reducing the time and effort of for the prospective buyer. As the name suggests, all the buyer has to do is “turn the key.”
Although a common term used for investment properties, a turnkey property can be used to describe residential properties as well. Similar in scope to commercial, residential turnkey properties have been renovated, and are capable for move-in by homeowners.
Underwriting is the process of evaluating the future performance of a property. Similar to an insurance underwriter, in the context of commercial real estate,
A labor union is an organization formed to protect the rights of workers in specific industries. Labor unions unite workers of similar trades to obtain leverage in negotiations with employers over wages, hours, benefits and other working conditions. Unions function like democracies in that leaders and officers are elected by peers to make decisions that are beneficial to the union as a whole.
Formed in 1945, the United Nations is an international organization aimed at promoting political and economic cooperation among its members. The UN was formed following World War II as a vehicle aimed to ease international tensions, foster human rights and minimize risk of international conflict.
As stated in the U.S. Internal Revenue Code, any income derived from a business activity that is not related to the tax-exempt purpose of the organization is subject to taxation. An exempt organization must file a Form 990-T if unrelated business income exceeds $1,000.
The risk attributed to the assets of a single industry or company. Commonly referred to as “specific risk”, unsystematic risk is not correlated to the performance of the overall market. Examples of unsystematic risk include new competition, regulatory changes, fraudulent behavior by a company’s senior management, and union strikes.
An Umbrella Partnership Real Estate Investment Trust (UPREIT) is a partnership formed between the owner of appreciated real estate and a
Useable square footage is the space that is actually occupied by a tenant, typically equal to the size of the tenant’s suite, without deductions for columns or other
VA Loans are mortgages issued by private lenders, but partially guaranteed by the Department of Veterans Affairs. To be eligible to apply for a VA Loan one must meet one of the following criteria1:
Vacancy allowance is a line item on a real estate pro forma that accounts for expected vacancy of the property. The specific allowance is dependant on the property type and
Vacancy rate is the percentage of all available units or space in a rental property that are vacant compared to the total supply of units or space at a particular time.
Cost approach valuation is a real estate valuation method that bases a property’s market value off the cost it would take to build an equivalent structure. The cost approach takes into account the cost of land plus the cost of construction, less depreciation. Similar to its counterparts, the cost approach may have other forces that prove it inaccurate. For example, if vacant land is not available to compare against, the professional valuing the property will have to derive an estimate, making the end value less accurate.
Valuation, income approach (direct capitalization) is a real estate appraisal method that values a property by taking net operating income and dividing it by a predetermined capitalization rate. The income valuation method is not suitable for valuing owner-occupied residential properties, as it relies on income produced as a function of the property’s overall value. The income capitalization formula is as follows:
Sales comparison valuation is a real estate appraisal method that estimates a property’s value by comparing it against other properties with similar attributes that have been sold recently. This approach considers all of the individual features of a property, adjusting the value to reflect a sum of all the property’s features. A sales comparison approach may be used to evaluate both commercial and residential property.
Investment properties that need corrective action to fully realize their value. Value-add is a term given to describe one of the four major risk profiles of
The amount of uncertainty associated with the size of change in a security or market index’s value. In statistics, volatility is determined by the standard deviation or variance of returns for the same security or index. A higher volatility means that a security’s value is more unpredictable, typically carrying a greater amount of risk. A lower volatility means that the security’s value does not fluctuate as much, and tends to be more stable.
For example, say Security A has fluctuated in value from $50 to $120 three times this year, while Security B has fluctuated between $70 to $80 three times as well. Given that Security A has changed in value at a higher variance from its average during this time period, it is said to be more volatile, or more unpredictable.
Warranty deed is a document that may be used to legally transfer property. A warranty deed states that the owner can legally transfer the property and that no other