Glossary of Terms

1031 Exchange (aka like-kind exchange)

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, 

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1033 Exchange

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.

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180-Day Exchange Period

Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale

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200% Rule

Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date

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45-Day 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

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721 UPREIT Exchange

The same tax deferral benefits are achieved as with a 1031 exchange. Capital gains taxes are deferred until such time as the exchanger sells 

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95% Rule

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

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Absolute Triple Net Lease

Also known as a bondable lease, the most extreme form of NNN Lease, in which the tenant is responsible for all property related risks. 

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Absorption

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

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Accommodator

An independent person, company, or entity that enters into a written agreement with the exchanger to facilitate the transfer of proceeds

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Accredited Investor

An accredited investor, also referred to as a sophisticated investor, is an investor with special status under financial regulations.
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Actual Receipt

Actual receipt is physical possession of, exchange proceeds or other property by an exchanger completing a tax-deferred like-kind exchange.

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Ad-valorem Tax

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.

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Adjustable Rate Mortgage (ARM)

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.

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Adjusted Basis

The original purchase price of an asset plus its acquisition costs plus any capital improvements less the cumulative depreciation deductions

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After-Tax Cash Flow

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.

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Alternative Investment

An investment in asset classes other than the three traditional asset types (stocks, bonds, and cash). Most alternative investments are held

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Amenities

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.

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Amortization

Paying off debt over a period of time with a fixed repayment schedule in regular installments. Monthly mortgage payments are often comprised of

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Anchor Tenant

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.

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Appraisal

An estimate of a property’s fair market value by an authorized person with applicable knowledge and expertise. Appraisals can be used for taxation

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Appreciated Property

A property that has increased in value over time. This increase can occur for a number of reasons including increased demand or weakening supply,

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Appreciation

Increase in the value of an asset over time, which can be affected by a number of factors such as increased demand, weakening supply,

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Assessed Value

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

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Assessor

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.

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Asset Class

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.

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Assets Under Management (AUM)

Assets Under Management (AUM) is the total market value of assets an investor has managed by a financial institution. These financial institutions vary, but mainly fall under bank deposits, mutual funds, and brokerages.
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Balloon Payment

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.

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Bankruptcy Remote

Typically used when discussing a special purpose entity. A bankruptcy remote entity is a separate legal entity whose bankruptcy or insolvency

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Base Rent

The minimum monthly rent due pursuant to a lease. Base rent does not account for expense reimbursements or percentage rent, which 

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Basis

In the context of commercial real estate, an asset’s basis is the original purchase price or cost of investment property plus any out-of-pocket

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Basis Point

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. 

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Beneficial Interest

Typically referred to in manners concerning trusts, a beneficial interest is the right to receive benefit from assets held by another party. 

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Beneficiary

Any person who is eligible to receive distributions from a trust, will, or life insurance policy.

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Beta

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.

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Bondable Lease

See Absolute Triple Net Lease.

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Boot

Although not specifically defined (or even mentioned) in IRC Section 1031, the term “boot” is commonly used and refers to the fair market value of cash,

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Bridge Loan

A short-term loan that is used until a person or company secures permanent, longer-term financing or fulfills an existing obligation. 

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Broker Dealer

A person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction.

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Build-to-Suit (BTS)

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.

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Capital Asset

For corporations and business entities, assets that have a useful life longer than one year and are not held for sale in the ordinary course of business.

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Capital Expenditures (CapEx)

In the context of commercial real estate, funds used by a company to acquire or upgrade physical assets that cannot be expensed as

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Capital Gain

Capital gain is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the basis of the asset. Capital gains can also

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Capital Gains Tax

Capital gains tax is tax payable on capital gains realized from the sale of a capital asset. Capital Gains Taxes are assessed by the federal government in the United States

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Capital Improvement

See Capital Expenditures (CapEx).

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Capital Reserves

In the context of commercial real estate, capital reserves are funds designated for long term capital investment projects or

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Capital Stack

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.

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Capitalization Rate (Cap Rate)

The initial rate of return an investment property is expected to generate. The Capitalization Rate is determined by dividing the

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Cash Flow

Cash flow is the net amount of cash moving in and out of a business, usually measured during a specified, limited period of time.

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Cash Reserves

In the context of commercial real estate, cash and cash equivalents held in short term accounts used to cover things such as

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Cash Sweep

A cash sweep is the use of a borrower’s excess free cash flow to pay down a loan’s principal balance or build a reserve account for the benefit of the lender. Commonly used in situations where a borrower’s cash flow is uncertain or volatile, a lender may implement a cash sweep provision to protect itself from the financial risk that may occur in years where a borrower’s cash flow may not be sufficient enough to satisfy its financial obligations to the lender.

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.
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Cash-On-Cash Return

Ratio of annual before-tax cash flow from an investment to the total amount of cash invested, represented as a percentage.

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Certificate of Occupancy (CO)

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.

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Closing Cost Expenses

See Closing Costs.

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Closing Costs

Expenses over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction.

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Collateral

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.

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Commercial Mortgage-Backed Securities (CMBS)

Securities collateralized by loans secured by commercial property. A CMBS loan is a first-mortgage secured by commercial real estate which is

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Commercial Real Estate

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

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Common Area

The areas of a building that are available for the nonexclusive use of all its tenants, such as lobbies, corridors, and parking lots.

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Common Area Maintenance (CAM) Charges

The contribution or fee paid collectively by individual tenants for the maintenance and upkeep of the non-exclusive areas of the premises. 

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Comparables (Comps)

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.

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Compound Interest

Simply put, compound interest is “interest-on-interest”, or the ability of a financial instrument to generate earnings on its earnings.

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Concessions

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.

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Concurrent Exchange

Refers to a method of executing a tax deferred exchange (aka 1031 exchange or like-kind exchange) where the sale of the relinquished property

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Condemnation

The seizure of property by a public authority for a public purpose. Condemnation typically occurs when a taxpayer owns property in a place

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Conservation Easement

A landowner voluntarily agrees to sell or donate certain rights associated with his or her property – often the right to subdivide or develop – and

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Constructive Receipt

Direct access to tax-deferred like-kind exchange funds or other property by an exchanger completing a tax-deferred like-kind exchange.

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Consumer Price Index (CPI)

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.

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Contract for Deed

A contract between a seller and a buyer of real property in which the seller provides financing to the buyer to purchase the property.

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Contract Rent

This term is used synonymously with Stated Rent.
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Core Property

Core properties exhibit the lowest risk and lowest potential returns amongst the four major commercial real estate risk profiles, and represent

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Core-Plus Property

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.

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Credit Rating

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. 

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Credit Risk

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.

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Credit Tenant

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,

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Credit Tenant Lease

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

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Crowdfunding

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.

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Dark Space

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.

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Debt Financing

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.

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Debt Service

The cash that is required for a particular time period to cover the repayment of interest and principal on a debt. 

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Debt Service Coverage Ratio (DSCR)

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

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Deed in Lieu of Foreclosure

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

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Deed of Trust

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,

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Deferred Gain

In a tax-deferred exchange, the deferred gain is the amount of gain that escapes current taxation and is deferred until a later date.

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Delaware Statutory Trust (DST)

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

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Delaware Trustee

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

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Delayed Exchange

Refers to a method of executing a tax deferred exchange (aka 1031 exchange or like-kind exchange) in which the exchanger or taxpayer sells

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Depreciation

In our context, depreciation refers to the allocation of an asset’s cost over the timeframe of its “useful life”, or duration for which it will be useful

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Depreciation Recapture

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

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Discount Rate

The interest rate used to determine the present value of future cash flows in discounted cash flow analysis.

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Discounted Cash Flow (DCF)

A valuation method used to estimate the feasibility and attractiveness of an investment opportunity. DCF analysis utilizes future free cash flow (FCF) and discount rate estimates to determine a net present value (NPV) of the investment. If the present value of the cash flows is higher than the initial cost of the investment, the DCF analysis will show a favorable investment, or positive net present value (NPV). If the initial cost is higher, however, the NPV will be negative, showing an unfavorable investment.

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.

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Diversification

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.

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Double Net Lease

A lease agreement in which the tenant is responsible for their pro-rata share of both property taxes and premiums for insuring the building,

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Down Payment

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

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Downtime

Also expressed as average space downtime, downtime is the general term used to describe the typical amount of time expected between the expiration of a lease and the commencement of a replacement lease for a particular property. Downtime pertaining to real estate is usually expressed in weeks or months.
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DST Interests

DST Interests represent equity ownership in a large property by multiple investors through an investment structure known as a

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DST Sponsor

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

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Due Diligence 

An investigation or audit of a potential investment to confirm all material facts regarding a transaction. For example, when analyzing a potential property

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Earnest Money

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.

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Easement

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.

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Effective Gross Income (EGI)

Effective Gross Income (EGI) is income generated by a property including base rent and miscellaneous income, less vacancy and collection losses.

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Effective Rent

Net rental income received by landlord from a lease after deducting the value of concessions and costs incurred to secure the lease such as

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Egress

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.

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Encumbrance

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.

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Environmental Site Assessment (ESA)

A report prepared for a real estate holding that identifies potential or existing environmental contaminations liabilities.

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Equity

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

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Equity Financing

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.

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Equity Interests

Ownership interest in a business entity, from the concept of equity as ownership. For example, if an investor owned a 10% interest in

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Equity Investments

One or more shares in the ownership of a business or corporation that are purchased by investors. In contrast to debt investments, equity investments

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Equity Load

A commission paid by an investor on his or her investment in a security (in this case a beneficial interest in DST or TIC). The sales charge is paid to

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Escrow Agent

An entity that has fiduciary responsibilities in the transfer of property from one party to another. The escrow agent acts as a custodian of

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Escrow Funds

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

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Estate Planning

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.

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Exchange Accommodation Titleholder (EAT)

Used when completing a reverse exchange, an Exchange Accommodation Titleholder (EAT) is an unrelated party who holds legal title to either

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Exchange Accommodator Titleholder (EAT)

See Accommodator.

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Exchange Agreement

A written agreement between the exchanger and the Qualified Intermediary defining the transfer of the relinquished property, the ensuing purchase

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Exchange Period

Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale

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Exchange Proceeds

Cash proceeds from a transfer of relinquished property held in a qualified escrow account set up by a qualified intermediary whereby the funds

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Exchanger

In a tax deferred exchange (aka 1031 exchange or like-kind exchange), the taxpayer or owner of the property or properties being exchanged

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Exclusive Right Listing

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.

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Exclusive-Agency Listing

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,

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Exit Cap Rate

See Terminal Cap Rate.

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Exit Strategy

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.

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Expected Return

The amount an investor would anticipate receiving on an investment that has various known or expected rates of return.

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Expense Stops

As stated in a commercial lease, an expense stop marks 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.

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Face Rent

This term is also known as Stated Rent.

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Fannie Mae

The Federal National Mortgage Association (abbreviated as FNMA and commonly referred to as “Fannie Mae”) is a publicly traded

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Federal Funds Rate

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.

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Federal Home Loan Mortgage Corporation (FHLMC)

See Freddie Mac.

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Federal National Mortgage Association (FNMA)

See Fannie Mae.

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Fee Simple Ownership

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.

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Financial Leverage

The use of borrowed funds to acquire an investment. In the context of commercial real estate, this typically involves the use of a mortgage

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First Trust Deed

See Deed of Trust.

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First-Loss Position

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.

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Fixed Rate Loan

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.

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Fixture

Something that is permanently attached to real property.  Examples include items such as HVAC systems, ceiling lights, awnings, window shades,

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Flat Tax

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. 

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Foreclosure

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

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Foreign Investment in Real Property Tax Act (FIRPTA)

A United States tax law that imposes a tax on foreign persons disposing of United States real property interests. To ensure tax collection from

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Form 1099

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.

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Form 8824

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.

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Fractional Ownership

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.

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Freddie Mac

The Federal Home Loan Mortgage Corporation (FHLMC), more commonly known as “Freddie Mac” is a publicly traded

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Future Value (FV)

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

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General Market Factors

General market factors refers to the overall conditions within a defined market that affect all properties within that market.

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Go Dark Provision

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.

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Going-in Cap Rate

Going-in-cap rate is the cap rate based on the ratio of the first year of net operating income to the property purchase price. 

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Grant

To transfer an interest in real property by deed or other legal instrument.

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Grantee

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. 

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Grantor

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.

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Gross Absorption

Gross absorption measures total square feet absorbed or leased without regard for vacated space during the same period,

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Gross Lease

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. 

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Gross Rent

Gross rent is rent charged to occupy a premise without any additional rent for operating or other expenses.

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Gross Rent Multiplier (GRM)

An investment property valuation method which is the ratio of a property’s price to its gross revenue.

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Gross Square Footage

The total square footage of a building including all rentable spaces as well as all “non-rentable” space including common areas, 

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Ground Lease

A lease of the land only, on which the tenant usually owns a building or is required to build as specified in the lease.

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Hard Asset

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.

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Hard Cost

Also called “brick and mortar expenses,” hard costs are any costs involved in the physical construction of a project. Included in hard costs are

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Hard Money Loan

A type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by

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Health Ratio

A health ration, also known as an occupancy cost ratio, it the relationship between a retailer’s sales and total occupancy costs.

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Held for Investment

Properties held for investment purposes can be any property or asset that are acquired and held for income production (rental or leasing activities) or

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HOA Fees

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.

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Holding Period

The real or expected period of time which an investment is attributable to a particular investor.

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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

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Homeowners Association (HOA)

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.

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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

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Independent Trustee

A trustee who is not related to the beneficiary of the trust and does not stand to inherit any property under the trust.

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Infill Location

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.

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Inflation

The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.

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Institutional-Grade Property

While not a precisely defined term, an institutional-grade, or institutional-quality property generally refers to a property of sufficient size and stature to

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Insurable Value

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.

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Interest Expense Deduction

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.

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Interest Rate Risk

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

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Interest-Only Loan

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.

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Intermediary

An entity that acts as the middleman between two parties in a financial transaction.

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Internal Rate Of Return (IRR)

The discount rate at which the net present value of all cash flows (both positive and negative) from a project or investment equal zero.

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Investment Property

A broad term for a real estate property that has been purchased with the intention of earning a return on the investment, either through

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Joint Tenancy

Ownership of real estate by two or more individuals with the right of survivorship. A right of survivorship means that

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Lease

A legal document outlining the terms under which one party agrees to rent property from another party.

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Lease Co.

A legal entity established to operate as a master tenant under a Delaware Statutory Trust (DST) ownership structure.

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Lease Coverage Ratio

In the context of a Delaware Statutory Trust (DST), the lease coverage ratio is calculated by dividing the property’s NOI by the sum of the

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Lease Termination Fee

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.

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Leasehold Interest

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.

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Leasing Commissions

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

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Lien

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. 

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Like-Kind Exchange

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,

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Like-Kind Property

Upon the sale of an investment property, capital gains may be deferred by completing a 1031 exchange provided that the investor purchases

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Limited Liability Company (LLC)

A business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

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Limited Partnership

Two or more investors who pool their money to develop or purchase income-producing properties. In a limited partnership, each limited partner's

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Line of Credit

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

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Liquidity

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.

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Load Factor

The multiplier to a tenant's useable space that accounts for the tenant's proportionate share of the common area

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Load on Equity

See Equity Load.

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Loan-to-Cost Ratio (LTC)

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.

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Loan-To-Value (LTV)

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.

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Local Tenant

Also known as a “mom-and-pop", a local tenant is a small scale company with a narrow footprint typically limited to a single market.

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Lock-out Period

A predetermined period of time following loan origination in which the loan cannot be prepaid, as set forth in the loan documents.  The lock-out period can vary greatly from no lockout period at all to nearly the entire loan term.  From a lender’s perspective, a lock-out clause is a form of call protection as it prevents prepayment. There is considerable time and effort involved to underwrite and originate a loan, thus the lender wants to ensure a certain level of minimal return on the loan.
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Mark-to-Market

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.

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Market Adjustments

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

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Market Analysis

The process of studying certain characteristics and trends of a market to determine its strengths, weaknesses, opportunities and threats.

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Market Lease Rate

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.

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Market Value

The most probable price that a property would command in a competitive and open market under fair sale conditions. Market value also refers to

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Master Lease

The primary lease that controls other sub-leases and may cover more property than all sub-leases combined.

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Master Tenant

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.

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Master-Planned Community

Master-planned community is a large scale, mixed-use development that is constructed based off a long-term, comprehensive plan. These communities include a wide range of residential property types, such as townhouses and single family homes, complemented by a variety of commercial properties that serve the resident’s needs. Commercial properties include strip centers, restaurants, and office space. Other common features of a master-planned community include public parks, schools, and recreation areas such as a golf course.
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Mezzanine Financing

Financing that is junior in interest to the mortgage but senior in interest to equity. Mezzanine financing has a similar risk and return profile to

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Mixed-Use

Building or project that provides more than one use (e.g., a loft or apartment project with retail, an apartment building with office space,

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Modified Gross Lease

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

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Month-to-Month Tenancy

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.

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Mortgage

A legal instrument that pledges the rights of ownership of an asset or property to a lender as security for a loan.

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Multi-Tenant Property

Property that has two or more tenants. Compared to single tenant properties, multi-tenant properties can be more management intensive and may have

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National Tenant

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.

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Net Absorption

The amount of occupied space at the end of a period less the amount of space occupied at the beginning of the same period.

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Net Cash Flow

Net cash flow can be determined using the formula net operating income (NOI) less debt service payments, tenant improvements,

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Net Income

Total revenue minus total expenses. It represents the amount of money remaining after all operating expenses, interest, taxes and preferred stock

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Net Operating Income (NOI)

A calculation used to analyze real estate investments that generate income. Net operating income equals all revenue generated from the property less

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Net Present Value (NPV)

Net present value (NPV) represents the amount by which the expected cash flows of an investment exceeds the initial amount invested.

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Net Square Footage

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

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Non-Accredited Investor

An investor who does not meet the special requirements for an accredited investor under the Securities & Exchange Commission’s Rule 501 of

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Non-Recourse Loan

A loan that limits the lender’s remedies to foreclosure of the mortgage and acquisition of the collateral or property in the event of financial default

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Non-traded REITs

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.

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Occupancy Costs

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

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Operating Expenses

The actual costs associated with operating a property including maintenance, repairs, management, utilities, property taxes and insurance. 
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Operating Expenses, Fixed

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.

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Operating Expenses, Variable

The actual costs associated with operating a property that vary in relation to a property’s occupancy rate or volume of some activity.

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Opportunistic Property

Opportunistic properties exhibit the greatest risk but highest potential returns within the four major commercial real estate risk profiles

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Ordinary Income

The income earned from providing services or the sale of goods. Ordinary income is composed mainly of wages, salaries, commissions and

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Origination Fee

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.

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Parking Ratio

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

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Partial 1031 Exchange

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.

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Pass-Through Entity

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.

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Passive Income

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.

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Percentage Lease

A lease in which a tenant pays percentage rent in lieu of, or in addition to base rent. The amount is typically determined by a formula

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Percentage Rent

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

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Personal Property

A type of property which, in its most general definition, can include any asset other than real estate. The distinguishing factor between personal

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Positive Leverage

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.

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Potential Rental Income

Potential rental income is the total amount of rental income for a property if it were 100 percent leased at competitive market rates.

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Pre-Tax Cash Flow

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.

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Preferred Equity

Preferred Equity is an equity investment which is superior in interest to common equity but subordinate to debt. Preferred equity is secured by a

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Preferred Return

Preferred return is a priority return (often in the 5-10% range) that is paid to investors prior to any profit sharing or promote to the sponsor.

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Prepayment Penalty

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.

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Present Value (PV)

Expected value, as of the date of valuation, resulting from discounting future amounts.

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Prime Rate

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.

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Private Equity Real Estate Funds

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.

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Private Placement

An offering of securities that is not registered with the Securities and Exchange Commission (SEC) and which are sold not through a

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Private Placement Memorandum (PPM)

An offering document for a private placement that contains relevant disclosures so that an investor may make an informed investment decision.

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Pro Forma

Forward-looking cash flow projection based on a set of assumptions. Pro forma financial statements depict future financial results if the underlying

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Progressive Tax

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:

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Promoted Equity (Carried Interest)

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

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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

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Property Identification Number

A number assigned to parcels of real property by the tax assessor of a particular jurisdiction for purposes of identification and record keeping.

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Property Tax

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.

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Property Type, Flex

Short for “flexible”, flex properties are typically considered a subsect of industrial properties that contain a higher percentage of

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Property Type, Hospitality

Consists of a wide range of product types including hotels, travel centers, water parks, amusement facilities, golf courses, cruise ships and restaurants.

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Property Type, Hotel

An establishment that provides lodging and sometimes meals, entertainment and various personal services for travelers and tourists.

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Property Type, Industrial

One of the four main asset classes of commercial property, which is typically used for the purpose of production, manufacturing, or distribution.

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Property Type, Multifamily

Typically considered apartment buildings that can accommodate more than one family. Condominiums can sometimes be covered in this property type

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Property Type, Office

Commercial property that is primarily used to maintain professional or business offices. Encompassing term that may include

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Property Type, Retail

Properties used to market and sell consumer goods and services. This category includes single tenant retail buildings, small neighborhood

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Property Type, Self Storage

Properties where storage space (such as containers, lockers, and/or outdoor space) is rented to tenants, usually on a short-term basis.

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Property Type, Senior Living

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.

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Purchase Agreement

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.

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Qualified Intermediary

An independent  person, company, or entity that enters into a written agreement with the exchanger to facilitate the transfer of proceeds from

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Qualified Purchaser

Under Section 2(a)(51) of the Investment Company Act, a "qualified purchaser" means:

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Quitclaim Deed

A legal document that may be used to sell or transfer interests in real property. A quitclaim deed transfers whatever interest the seller or

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Rate Of Return

The profit or loss on an investment over a specified period of time expressed as proportion of the investment amount.

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Real Estate

Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water.

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Real Estate Agent

A licensed intermediary between buyers and sellers of real estate, typically working for commission. Real estate agent is a broad term which includes

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Real Estate Broker

A licensed intermediary between buyers and sellers of real estate, typically working for commission. A real estate broker typically has completed

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Real Estate Debt

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

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Real Estate Equity

The difference between the current fair market value of a property and the amount of debt owed against the property.

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Real Estate Investment

Real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence or personal use.

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Real Estate Investment Trust (REIT)

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

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Real Estate Investor

An investor who evaluates the real estate market and purchases property with the intention of building wealth.

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Real Estate Syndication

A method of pooling capital from multiple investors for the common goal of acquiring real estate.

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Real Property

Land, and generally whatever is erected or affixed to the land, such as buildings, fences, and including light fixtures, plumbing.

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Realized Gain

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

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Recession-resistant Real Estate

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.

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Recognized Gain

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

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Recourse Loan

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

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Reg A+ Offering

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.

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Registered Investment Adviser (RIA)

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.

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Regulation D Offering

A Securities and Exchange Commission (SEC) regulation governing private placement exemptions that allows companies to raise capital through

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Related Parties Transaction

A business deal or arrangement between two parties who are joined by a personal or other relationship prior to the deal.

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Release Provision

A provision or clause to release certain collateral from a loan or mortgage in exchange for the borrower’s payment of a defined amount.  

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Relinquished Property

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.

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Rent Bumps

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

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Rent Roll

Rent roll is a distinctive document providing information as to the current re-occurring revenue gained from existing leases. The rent roll is the property owner’s representation of the rental income gathered from the underlying real estate asset, and serves as the most important document when valuing income generating property, like an apartment.
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Rentable Square Footage

Rentable Square Footage equals the usable square footage plus the tenant’s pro rata share of the building common areas, such as

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Replacement Property

In a tax deferred (aka 1031 exchange or like-kind) exchange, the property being purchased or acquired is referred to as the replacement property.

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Replacement Property Interests (RPI)

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)

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Replacement Reserves

See Capital Reserves.

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Return On Investment (ROI)

ROI 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

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Reverse Exchange

A reverse exchange Refers to method of executing a tax-deferred exchange (aka 1031 exchange or like-kind exchange) in which the exchanger or taxpayer acquires the

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Right of First Refusal

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.

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Right of Redemption

Right of redemption is the legal right of any borrower who owns real estate to reclaim his or her property, given that the owner has paid off the necessary obligation or lien that caused the foreclosure to begin with.
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Risk Adjusted Returns

Measure of the return on an investment relative to the expected risk of that investment, over a specific period.

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Risk Premium

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

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Risk Profile

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.

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Safe Harbor

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

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Sale-Leaseback

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.

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Sales Load

See Equity Load.

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Same Taxpayer Provision

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.

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Schedule K-1

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.

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Seasoned DST Interest

Previously owned equity interests in a 1031 exchange-qualified Delaware Statutory Trust (DST) whose properties have at least twelve (12) months 

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Securitization

A financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or

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Seller Financing

Seller financing is a loan provided by the seller of a property or business to the purchaser of that property or business.

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Senior Debt

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.

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Signatory Trustee

A signatory trustee is the individual who will be managing the Delaware Statutory Trust (DST). The Sponsor of the DST typically serves as the Signatory Trustee.

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Simultaneous Exchange

See Concurrent Exchange.

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Single Tenant Property

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.

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Soft Costs

Fees that are not directly related to labor and direct constructions costs.  Soft costs include architectural, engineering, financing, and legal fees, and

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Special Purpose Entity (SPE)

A legal entity established by the sponsor or borrowing entity whose operations are limited to the acquisition and financing of specific assets.

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Sponsor

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

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Stabilized Occupancy

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

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Stated Rent

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

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Step-Up In Basis

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

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Submarket

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

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Syndicated Investment

See Real Estate Syndication.

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Systematic Risk

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.

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Tax Basis

In the context of commercial real estate, an asset’s basis is the original purchase price or cost of an investment property plus any out-of-pocket

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Tax Deferred

Instance where investment earnings such as interest, dividends, or capital gains accumulate tax-free until the payment of taxes related to the

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Tax Lien

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.

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Tax Return

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.

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Tax Shelter

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.

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Taxable Income

Taxable income is calculated as total revenue less total expenses and applicable deductions and exemptions that are allowed in that tax year.

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Tenant

A person or entity who rents real estate from another though a lease. A tenant also may be referred to as a lessee.

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Tenant Improvement Allowance

Leasing incentive offered by a landlord in order to entice tenants to lease space. The tenant improvement allowance is the dollar amount, typically

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Tenant Improvements (T.I.'S)

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

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Tenant-In-Common (TIC) Investments

Any syndicated investment created through a Tenant-In-Common (TIC) structure. Under a Tenant-In-Common structure, each investor

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Tenant-In-Common (TIC) Properties

Any property purchased by multiple investors via a Tenant-In-Common structure. See Tenant-In-Common Investments.

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Tenant-In-Common Sponsor

The individual or company that packages and markets Tenant-In-Common (TIC) properties. The sponsor is in charge of a variety of different

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Tenants-In-Common (TIC)

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,

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Terminal Cap Rate

The estimated or actual cap rate of a property on date of disposition or sale. Also known as the Exit Cap Rate. The terminal cap rate, also known as

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Terminal Value

The value of an investment at the end of its holding period. In the context of commercial real estate, the terminal value of an investment property is

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Three Property Rule

Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of

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Time Value of Money (TVM)

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.

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Title Company

Company that examines and insures title claims for real estate purposes. The title company verifies legal title to a property through a review of

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Title Holding Trust

A fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or

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Title III Regulation Crowdfunding

Title III Regulation Crowdfunding is a Securities and Exchange Commission (SEC) regulation that exempts non-accredited investors from registering with the SEC to invest in crowdfunded equity offerings. Title III requires that issuers gather funds through either a broker-dealer or registered funding platform.
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Title Insurance

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
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Total Return

The actual rate of return of an investment or a pool of investments over a given evaluation period which includes income and appreciation.

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Traded REITs

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. 

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Traditional IRA

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.

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Tranche

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.

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Triple Net (NNN) Lease

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.

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Trust, Irrevocable

A trust that cannot be modified or terminated without the permission of the beneficiary. The grantor effectively gives up all of his or her rights to

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Trust, Land

A fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or

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Trust, Living

An arrangement created during a person’s life, in which the trustee holds legal title to assets for a beneficiary.

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Trust, Real Estate

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

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Underwriting

The process of evaluating the future performance of a property. Similar to an insurance underwriter, in the context of commercial real estate,

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Unrelated Business Income Tax (UBIT)

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.

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Unsystematic Risk

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.

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UPREIT

An Umbrella Partnership Real Estate Investment Trust (UPREIT) is a partnership formed between the owner of appreciated real estate and a

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Useable Square Footage

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

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Vacancy Allowance

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

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Vacancy Rate

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.

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Valuation, Cost Approach

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.

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Valuation, Income Approach (Direct Capitalization)

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:

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Valuation, Sales Comparison

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.

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Value Add 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

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Volatility

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.

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Warranty Deed

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

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Yield

The return on an investment or the amount of profit, stated as a percentage of the amount invested. Also known as the rate of return. Yields can be depicted in a variety of ways including levered and unlevered and before tax and after tax. 

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