180-day exchange period is defined under IRC Section 1031, which states that an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale
In order to qualify as a QOZB, an investor must demonstrate that a property or business generates at least 50 percent of its gross income from the active conduct of a trade or business in a QOZ. A trade or business will satisfy the 50% gross income test if it meets any of the following: Hours Test: at least 50% of hours spent performing services for a QOZB by its employees and independent contractors (and by the employees of independent contractors) are performed within the QOZ, or Pay Test: at least 50% of pay allocated to employees and independent contractors are in exchange for services performed in the QOZ, or Qualitative Test: the QOZB’s positioning in a QOZ is critical to the generation of at least 50% of the gross income of the trade or business.
The 90-Percent Test is applied by taking the average of the percentage of qualified opportunity zone property held by the QOF (1) on the last day of the first six-month period of the taxable year of the QOF and (2) on the last day of the taxable year of the QOF.
Absorption is the rate at which rentable space is leased within a market or submarket over a given period of time. Gross absorption measures total square feet
An independent person, company, or entity that enters into a written agreement with the exchanger to facilitate the transfer of proceeds from the buyer of the relinquished property to the exchanger and from the exchanger to the seller of the replacement property to effect a tax deferred exchange under IRC Section 1031.
An accredited investor, also referred to as a sophisticated investor, is an investor with special status under financial regulations.
Proposed Regulations released in April 2019 dictate that a Qualified Opportunity Zone Business must generate at least 50 percent of its gross income from the active conduct of a trade or business in a Qualified Opportunity Zone. The regulations indicate that ownership and operation of a property used in a trade can be treated as active conduct of a business, but merely entering into a triple net lease at a property is not considered active conduct. Active conduct can be measured by the following: Hours Test - if at least 50 percent of services of a business or trade is performed in the QOZ, the QOZB qualifies. Pay Test - if at least 50 percent of services are performed in QOZ, calculated by the amounts paid by a QOZB to its employees and independent contractors, the QOZB qualifies. Qualitative Test - A qualitative test gauges whether or not the property is responsible and/or critical for generating at least 50 percent of the business’s revenues.
Adjusted gross income (AGI) is a calculation used to determine how much income is taxable on a taxpayer’s tax return. Starting with gross income, which is a sum of all wages, investment income, capital gains, retirement income, among other things, AGI factors in a number of allowable deductions to arrive at the monetary amount a taxpayer will be taxed on. The allowable deductions that can be factored into gross income to arrive at AGI include, but are not limited to: retirement plan contributions, medical expenses, capital losses, alimony payments, and school tuition and student loan interest.
The amount of money an investment generates after any tax liabilities have been paid. The first step in calculating after-tax cash flow is determining taxable income, then applying the appropriate marginal tax rate to produce one’s tax liability. As stated by the IRS, there are several deductions a taxpayer may claim that reduces taxable income, and thus his or her’s tax liability. Common deductions include mortgage interest payments and depreciation. To provide an example, say a property generates $500,000 of Net Operating Income. Now assume that annual depreciation for the property is $400,000, taxable income would be $100,000. If an investor falls into a marginal income tax bracket of 35%, the tax liability would be $35,000. Deducting this number from the pre-tax income of $500,000, after-tax cash flow would equate to $465,000.
Aggregate demand (AD) is the total demand for all services and finished goods at every price level over a specific time period. Over the long-term, AD is the same as GDP (gross domestic product), as they are calculated the same way. The formula for AD is C + I + G + (X - M), where C = consumer spending, I is capital goods or investment from companies, G is government spending, and X - M is known as a country’s balance of trade (exports minus imports).
Aggregate supply is the total amount of goods and services that an economy produces during some period at a given price. Price is important because it determines how much companies are willing to produce at that price. The relationship between price and supply (quantity of output) is visually represented by the aggregate supply curve. The period in which aggregate supply is calculated is often one year. This is because changes in supply will lag changes in demand. There are two types of aggregate supply to consider — short-term and long-term. Short-term supply is impacted most by changes in demand, while long-term supply is most impacted by changes in technology and other changes within an industry.
Alternative investment is an investment in asset classes other than the three traditional asset types (stocks, bonds, and cash). Most alternative investments are held
Amortization is paying off debt over a period of time with a fixed repayment schedule in regular installments. Monthly mortgage payments are often comprised of
Anchor tenant is the tenant that acts as the primary draw to a commercial property. It is usually the largest tenant in a shopping center or retail development. A common example is a grocery store.
An angel investor is a high net worth individual who is one of the first investors in a startup. This stage of investing is well before venture capitalists come in and is one of the riskiest stages to invest in. The amount invested by an angel investor is often only a small percentage of their overall net worth. In exchange for investing, angel investors generally take a sizeable percentage of the company and may set certain conditions on the entrepreneur. Angel investors may sometimes be the only source of capital a startup might receive early on, as banks do not favor risky investments.
The annual percentage yield allows investors to compare investments with different annual percentage rates (APR). It’s a way to do an apples to apples comparison. APY accounts for periodic compounding interest. As interest is added to the account, the next interest payment will be bigger. The longer an investor allows the account to compound interest, the bigger it will be at the end of some predetermined period. It’s important to point out that APY does not take into account any fees. APR does account for fees. This is another difference between APY and APR.
Antitrust laws prevent companies from taking over an industry sector and thus stifling fair trade within that sector. A single company that dominates a sector without competition is called a monopoly. Generally, monopolies are not good for economies, as they reduce choices and increase prices for consumers. Antitrust laws also prevent mergers that will result in less choice and competition. One of the most famous antitrust cases is that of Microsoft vs. The United States. Charges of antitrust were brought against Microsoft because of its Internet Explorer web browser, which was installed on Windows PCs by default. The court ruled that Microsoft constituted unlawful monopolization. Microsoft appealed the case and eventually reached a settlement.
Appraisal is an estimate of a property’s fair market value by an authorized person with applicable knowledge and expertise. Appraisals can be used for taxation
Appreciated property is a property that has increased in value over time. This increase can occur for a number of reasons including increased demand or weakening supply,
Appreciation is the increase in the value of an asset over time, which can be affected by a number of factors such as increased demand, weakening supply, or changes in inflation.
The monetary value of property determined for tax purposes. Assessed values are given by government assessors, and act as the basis for property taxes. Each tax district has a different method for conducting assessments, although all tend to rely upon similar factors such as comparable home sales, replacement value, and any income being generated from the property. Assessed values are typically less than private appraisal valuations in most jurisdictions, as assessed values act as a percentage of fair market value. In Mississippi, for example, the assessed value is just 10% of the determined fair market value for single-family, residential real property.1 While market values may fluctuate substantially, increasing or decreasing every year, assessed values tend to be less volatile. This is commonly due to state legislation limiting how much the assessed value of a property may increase year to year. In Oregon, for example, it is prohibited that the assessed value of land, that has not been improved from the previous year, increase in value more than 3% from the prior year.2
A local government official who determines the assessed value of taxable property in a county or municipality. This valuation is used to determine the tax basis for a property in a given area. After being appointed or elected, assessors are trained in common property appraisal techniques, reaching a degree of certification that varies city to city. In some cases, continuing education or even no certification is required for an assessor to maintain his or her status.
When a person is charged with a crime, a bail hearing is set. The defendant then has three options leading up to the hearing. 1.) Pay nothing and sit in jail while they wait for the hearing. 2.) Pay the bail in full and do not go to jail while waiting for the hearing. A title to a home can be used in lieu of cash to pay for the bond. 3.) Pay for a bail bond and do not go to jail while waiting for the hearing. The defendant will generally pay 10% of the bail bond. The bail bondsman will also charge fees. The more violent the crime, the higher bail will be set. The U.S. and the Philippines are the only two countries that have bail bonds.
The balance of payments (BOP) for a nation consists of three categories: Current Account, Capital Account, and Finance Account. Transactions between nations create debits and credits in these accounts, depending on which direction transactions are moving (into or out of a country). The current account consists of finished goods. The capital account consists of capital transactions. The finance account records payment flows related to changes in ownership of international financial assets and liabilities such as portfolio investment, direct investment, and reserve assets. The balance of payments should equal zero, which means that the current account = capital account + finance account. Although in practice, that rarely happens. An advantage of the BOP is that it allows countries to identify trends, both negative and positive.
A balance sheet is a financial sheet that lists a firm’s assets, liabilities and equity at a point in time. The balance sheet provides a firm and its stakeholders a look at a point in time of what it owns, what it owes, and the difference of the value of its assets and the sum of its liabilities. Used in tandem with financial statements such as the income statement and statement of cash flows which illustrate a firm’s performance over a period of time, a balance sheet illustrates the firm’s standing at the beginning and end of said period.
A balanced budget occurs when revenues are equal to or greater than expenses. When a company spends more than it makes, it incurs a net loss. Too many quarters like that and the company can go out of business. A budget is generally considered balanced only after a year of revenue and expense generation. When revenues exceed expenses, a budget surplus occurs. A budget surplus can provide an excess of cash that can then be invested in future projects or stored away for difficult times.
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.
A bank is a financial institution regulated by a regulatory body. A bank receives deposits and issues loans. Banks can also provide financial services that include wealth management, currency exchange and safe deposit boxes. There are two types of banks: commercial banks and investment banks. Commercial banks primarily manage the funds of their customers in checking and/or savings accounts and by issuing loans to individuals and businesses. Investment banks provide services to corporate clients that include underwriting and merger and acquisition activities.
A bank run is created when customers begin withdrawing their money en masse because they believe the bank will fail (i.e., become insolvent). After customers begin withdrawing their money in a panic, it causes more customers to withdraw money. If enough customers withdraw their money, the bank will default. Basically, the bank runs out of money. The FDIC was established in 1933 as a result of bank runs. Bank runs are not as common in modern times because many customers know that their deposits are insured by the FDIC. This doesn’t mean a bank run can’t occur. Banks don’t keep all of their customer deposits on-site. For security reasons and regulations from the Federal Reserve, only a small percentage of actual deposits are kept in the bank.
Base rent is the minimum monthly rent due pursuant to a lease. Base rent does not account for expense reimbursements or percentage rent, which
A bear market occurs when the stock market falls by 20% from its highs for at least a two month period. As a bear market starts and prices begin tumbling, investors sell into fear, fueling the downturn. The last sustained, large bear market was the Financial Crisis, in which the S&P 500 lost 50% of its value. Bear markets come in two flavors — cyclical and secular. A cyclical bear market lasts for only a few weeks or even months. A secular bear market lasts for years. During each of the two bear markets, there may be sharp rallies, but they do not last. The market reverts back lower and continues its downward trend.
A beneficial interest, typically referred to in manners concerning trusts, is the right to receive benefit from assets held by another party.
Beneficiary is any person who is eligible to receive distributions from a trust, will, or life insurance policy.
A measure of systematic risk given to a security or portfolio, beta measures the volatility of a given financial instrument in comparison to the market as a whole. Often used in financial analysis, beta helps determine an asset’s expected return based off the capital asset pricing model.
A blind pool is a limited partnership that raises funds from investors with no specific investment thesis. Typically managed by a general partner, the blind pool’s goal is broadly defined as growth or income, perhaps with a focus on a specific sector or sectors, but provides the general partner decision making autonomy in the allocation of capital.
Blockchain is a type of record-keeping system. Unlike a centralized database, where one entity is the source of record, a blockchain database is distributed. This structure is called a distributed ledger. Within a distributed ledger, the database is pushed to multiple nodes (i.e., machines) within the network. Certain nodes verify each transaction. These verifying nodes must reach a consensus for the transaction to be committed into the ledger and be redistributed. The consensus of transactions is a key element of blockchains. No one authority is able to take control of a blockchain. Blockchains are also the backbone of cryptocurrencies.
A board of directors is a governing body within a public company. Some private companies and nonprofit organizations also have a board of directors. The board of directors is a type of checks and balances on major decisions within the company. These decisions include the direction of the company, hiring and firing executives, and acquisitions. It’s important that the board of directors is made up of a diverse group of individuals. If all members are older folks with seniority within the company, they may be biased in their decision-making. It isn’t uncommon for a board of directors to have outside members. Recruiting experienced people from the industry, such as previous CEOs, can add beneficial experience to the board.
Brand equity is an intelligible asset. It is the amount of trust and credibility that consumers have in a brand. It takes years to build up brand equity. Companies such as Nike, Amazon, and a number of luxury automakers have built up lots of brand equity. When these companies come out with a new product, instead of creating a completely new marketing campaign, they are able to leverage their existing brand equity. This means a more cost-effective marketing campaign can be created. Companies have to be careful to protect their brand equity. What took years to create can easily be destroyed in just a few days with the wrong communication or actions.
In a June 23, 2016 referendum, the U.K. voted to leave the European Union, making it the first EU country to do so. The event became known as Brexit, short for British exit. David Cameron, the then prime minister, resigned the next day. Theresa May, who replaced Cameron, tried three times to negotiate a deal with the EU, but failed on all accounts. The former mayor of London, Boris Johnson, is now prime minister and a Brexit supporter. As of now, the U.K. remains in the EU, due to multiple extensions. Once the U.K. leaves the EU, and depending on the deal if leaves with, it will no longer be a part of the customs union and single market. Being outside of the EU will lead to increased commerce cost and transit time between the U.K. and EU countries.
Bridge loan is a short-term loan that is used until a person or company secures permanent, longer-term financing or fulfills an existing obligation.
Broker dealer is a person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction.
When a business spends more than it earns, it must use credit or debt to cover the shortfall. When a country spends more than it takes in, it experiences a budget deficit. The country must borrow to make up the shortfall (called a fiscal deficit). A budget deficit isn’t necessarily a bad thing. Countries that are expanding and expect more revenue in the future as a result will often experience budget deficits. The make up for the deficit, the country will issue bonds. This is similar to an asset backed loan. Of course, loans have interest that must be paid and so do bonds. If a country’s budget deficit gets out of control and it has to continually issue bonds, the country’s credit rating may fall, causing interest payments to increase. This can create spiral where the country is not able to take in enough revenue to meet its ever-increasing interest payments.
A bull market is a term used to describe a financial market where the values of a particular group of securities are expected to rise. The term is most widely used when describing the stock market under conditions where an array of securities appreciate in value over an extended period of time, whether that be months or years. Bull markets are driven by investor optimism and confidence that the price of an asset today will be less than the price of the asset in the future.
Business cycle is a term used to describe the cycle of economic activity that an economy experiences over time. Business cycles are characterized by expansion and contraction with regard to the output of goods and services in the described economy. There are six stages of a business cycle: expansion, peak, recession, depression, trough, and recovery. The National Bureau of Economic Research (NBER) measures and studies business cycles and defines the start and end dates of business cycles in the United States.
A business model outlines how a business plans to generate a profit. It encompasses the methods for creating revenue, identifies the target market and how to reach them, expenses, type of people the company should hire, and more. The two main components of a business model are pricing and cost. The gap between pricing and cost is profit. The business model is a roadmap that shows how to put the business together and keep it going. From the business model, various financial projections can be made. This allows startups to attract investors and talent. Without a business model, founders will have a difficult time communicating how their company plans to turn a profit. Value Proposition And Competitive Advantage Some other important parts of the business model are the value proposition and competitive advantage. The value proposition is a description of the products or services being offered and why they appeal to the target market. A competitive advantage is what separates the company or its products apart from the competition. Companies with a competitive advantage can create a similar product to that of competitors but at a lower price or create a higher quality product. Either way, the company’s product appeals more to customers than that of competitor products. Business Models Are Dynamic Business models are not meant to be static. They must be periodically revised. As the market or technology changes, the business model needs to be updated to reflect shifts or advances, which the company should be able to take advantage of. Otherwise, competitors will seize on changes in the market and outpace the company.
A business plan allows a company to create a written projection of how it will succeed. Because the plan is written out, others involved in the business can understand where the company is going and what is needed to get it there. Additionally, the plan is used for attracting investors, since all investors will want to review a detailed analysis of how the company will become profitable. The business plan includes several important components — market size, marketing plan, costs, budget, customer profile, competitors, and timeframe to profitability. From the business plan, additional analysis can be performed, making the plan more accurate. Without a business plan, founders will have a difficult time describing their vision to others in detail, attracting investor money, or even getting a loan.
A C-corp is a legal entity separate from its owners and shareholders. For this reason, owners and shareholders are not liable for the C-corp. C-corps create a double taxation situation because the corporation is taxed on its income, and owners/shareholders are taxed on their income at the personal level. C-corps must hold at least one annual meeting. These annual meetings must be recorded for transparency (for investors). Percentage ownership within the company must also be disclosed. Bylaws must be kept at the company’s location. The corporation must file annual reports and related documents so investors can fully evaluate the performance of the company.
Capital is defined as a type of financial asset that includes funds held in a deposits account or a physical factor production, e.g. manufacturing equipment and facilities and buildings used to produce and store goods. To be classified as capital, assets must serve as an ongoing source of service to the business used to generate wealth. Combined with labor, capital is combined with individuals who exchange their time and skills for money to create value. “Capital” and “money” are commonly interchanged, but the two terms are distinct. Capital is deployed to crate growth and expand a company’s capacity to provide its service or develop its product, while money is a means purchasing and developing a company’s specific source of capital.
Capital budgeting or investment appraisal, as it is sometimes called, is budgeting for large investment projects. These projects include building a new plant, a new product, buying new machinery, or even another company. A capital expenditure (CAPEX) is not an expense. However, CAPEX can be depreciated over several years. Investments in CAPEX generally take several years before they begin turning a profit. Analysts will determine at what point the investment is expected to generate a profit, and the minimum profit expected by the company, which is called a hurdle rate. When comparing two projects, the discounted cash flow method is used as part of the analysis. Comparing each project’s NPV and internal rate of return, analysts can make a determination about which project the company should decide on.
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
Capital markets direct money from investors looking for opportunities to companies seeking funding. Companies can seek two forms of capital — equity or debt. Investors also come in two types — retail and institutional. As well, there are two types of capital markets — primary and secondary. The primary market is where new securities are issued and sold. The secondary market is where existing securities are sold. The most common capital markets are stock exchanges and the bond market. In its most basic form, a capital market is a venue for trading financial instruments.
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.
There are two meanings for capitalization as it relates to accounting and finance. In accounting, capitalization refers to a method by which a firm expenses the costs associated with the acquisition of an asset over the useful life of the asset rather than at the time it is acquired. In finance, capitalization is a measure of a firm’s book value (the sum of its stock, long-term debt, and retained earnings) or its market value (the product of the number of outstanding shares and the stock price).
Cash flow is the net amount of cash moving in and out of a business, usually measured during a specified, limited period of time.
Cash reserves, in the context of commercial real estate, is cash and cash equivalents held in short term accounts used to cover things such as
Cash-on-cash return is the ratio of annual before-tax cash flow from an investment to the total amount of cash invested, represented as a percentage.
Small, relatively permanent statistical subdivisions of a county or equivalent entity that are updated by local participants prior to each decennial census as part of the Census Bureau's Participant Statistical Areas Program. The primary purpose of census tracts is to provide a stable set of geographic units for the presentation of statistical data.
A central bank regulates the money supply, interest rates, and available credit of a nation or several nations (such as with the European Central Bank). In the United States, the central bank is called the FED. Its chairman is Jerome Powell. The FED is able to control the money supply by buying or selling treasury bonds. It regulates the amount of deposits that commercial banks must have. The FED sets interest rates as well and acts as a lender of last resort. In times of financial distress, the FED engages in activities to ensure liquidity across financial markets. These activities can include involvement in the REPO market, bond market, and even purchasing certain ETFs, as was the case in the 2020 financial crisis.
A certificate of deposit (CD) is a savings certificate issued by a financial institution that has a fixed maturity date and interest rate that restricts the certificate holder’s access to funds from the time of issuance to the specified maturity date. CDs are tools that financial institutions and banks use to generate deposit growth and are typically issued electronically. Financial institutions typically charge a fee if an investor wishes to obtain access to funds prior to the maturity date.
Certificate of Occupancy is a document issued by a local government agency, certifying that a building meets certain requirements and codes that indicate its fitness to house tenants. These requirements differ across building types, as well as cities and states, and are usually required to be met by new developments.
A certified public accountant (CPA) is a designation bestowed upon an individual by the American Institute of Certified Public Accountants (AICPA) when that individual satisfies the educational requirements and passes the CPA exam. In order to be deemed a CPA, an individual must obtain a bachelor’s degree in business administration, finance or accounting, have no fewer than two years of public accounting experience, complete 150 hours of education, and pass a certification examination.
A chamber of commerce is a group of business members that periodically meet to discuss business-related topics. The chamber of commerce often lobbies the local government to form business-favorable regulations and policies. Most cities and states have a chamber of commerce. Although nations and regions within a nation may have a chamber of commerce as well. The chamber of commerce meetings are a great time for local business owners to meet each other and local government members as well.
Chapter 11 bankruptcy is a reorganization of a business’s debts and is not an asset liquidation like a Chapter 7 bankruptcy is. Chapter 11 is the most complex and costly form of bankruptcy. A court decides how a company’s debts will be restructured, although the business or individual has the first chance to propose a reorganization plan. Most companies remain open and operational during Chapter 11. If the case involves fraud, dishonesty, or gross incompetence, the court will appoint a trustee to run the business. All business decisions must then go through the court.
A checking account is a liquid type of account individuals and businesses use to deposit and withdraw funds at a financial institution or bank. Consumers and businesses can access funds held in checking accounts via checks, automated teller machines and electronic debits. Banks allow unlimited withdrawals and deposits on checking accounts. Checking accounts typically do not offer high interest rates because of the high level of liquidity it offers to customers. Funds held in a checking account at a chartered banking institution regulated are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,0000 per individual depositor
Closing costs are expenses over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction.
A 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.
Collision insurance is automobile insurance. It covers collisions that are under your control. Collision insurance shouldn’t be confused with comprehensive insurance, which covers acts of God, such as weather-related events or a deer jumping in front of your car. Collision insurance is extra coverage on top of basic insurance coverage. Collision insurance covers the following incidents: Your car is the only one involved in an accident, collision with another car, collision with an obstacle in the road, and pothole damage. Collision insurance does not cover theft, hail, flood, fire, vandalism, natural disaster, or being struck by an animal.
A commercial bank is where most everyone does their local banking. This is in contrast to an investment bank. Commercial banks offer a range of financial products, including loans, mortgages, checking, savings, CDs, retirement products, credit cards, and more. These banks make their money from lending. When you open a deposit account such as a saving, checking, or CD, you are basically lending the bank money. As a lender, you expect to be paid interest, which the bank does. Although it is a very small amount. The bank uses your funds as loans to its customers. Because the bank lends at a higher rate than the interest it pays on deposit products, it is able to generate a profit.
Commercial Mortgage-Backed Securities are securities collateralized by loans secured by commercial property. A CMBS loan is a first-mortgage secured by commercial real estate which is
Commercial real estate is real estate intended to generate income or profit for the owner of the property. Generally includes all categories of non-residential real estate
Common areas are the areas of a building that are available for the nonexclusive use of all its tenants, such as lobbies, corridors, and parking lots.
Common area maintenance charges are the contribution or fee paid collectively by individual tenants for the maintenance and upkeep of the non-exclusive areas of the premises.
Common stock allows the holder of the stock a percentage share of ownership within a company. Owning shares gives the owner voting power to elect members to the board of directors and vote on other company matters. However, without a significant holding of common stock within a company, the owner’s vote may not have much sway. Owners of common stock are the last to receive any assets in the event of bankruptcy (liquidation). Debts are first in line, which includes bond and preferred shareholders. If anything is left over, which it usually isn’t, common stock shareholders may receive some compensation. On the positive side, common stock generally outperforms debt instruments such as bonds.
Promotes economic revitalization in distressed communities throughout the United States by providing financial assistance and information to community development financial institutions (CDFI).
Comparative advantage is a term that describes a firm’s ability to produce a good or service at a lower cost than its competition. A comparative advantage in terms of production enables the firm to sell its good or service at a lower price and a higher margin than its competition. Comparative advantages cannot be explained without understanding opportunity costs, which are measured as the potential benefit an individual misses out on when choosing one course of action over another. On an individual basis, a college degree provides an individual a comparative advantage over not having a college degree, as that credential provides the individual the ability to convince employers that he or she is capable of providing tangible value to a firm.
A competitive advantage is what separates a firm from its competitors in the marketplace and makes it attractive to its customers. There are two types of competitive advantages — comparative and differential. A comparative advantage is mainly a price difference. While any firm can lower its prices, not all can do so without greatly decreasing profits. Firms that have a comparative advantage are able to produce products more efficiently than their competitors. This results in a lower cost of production, often due to the use of technology. Such firms are able to maintain a higher profit margin than that of their competitors. Because profit margins are higher, these firms have higher returns as well. A comparative advantage can also be the result of the firm’s location. For example, a firm operating in China is able to take advantage of lower labor costs. A comparative advantage doesn’t mean that a firm creates a better product. Instead, it means a firm creates the same product at a better value (i.e., lower price). A differential advantage means a firm's products are viewed as higher quality and more unique compared to its competitors. These firms often have a strong brand. They have superior products and can charge premium prices. Apple is a great example of a company that has a differential advantage. It has a well-recognized brand, creates high-quality products, and charges premium prices.
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
Condemnation is the seizure of property by a public authority for a public purpose. Condemnation typically occurs when a taxpayer owns property in a place
A landowner voluntarily agrees to sell or donate certain rights associated with his or her property – often the right to subdivide or develop – and
Constructive receipt is direct access to tax-deferred like-kind exchange funds or other property by an exchanger completing a tax-deferred like-kind exchange.
The consumer price index (CPI) is a measure of inflation in the U.S. It is based on a basket of goods that are consumed daily by consumers. These goods are compared to their prices from the previous year. Prices of goods in the basket are recorded and weighted by each good’s importance. These prices are then compared to the goods’ average prices from a base year. This comparison results in a percentage increase or decrease, which is the amount that the CPI has gone up or down. A large increase in a short period signifies inflation while a large drop signifies deflation. CPI is also used for adjustments to pensions, Medicare, and the cost of living.
A measure of the change in the value of consumer goods and services, such as food, medical care, and recreation. CPI is used to gauge inflationary and deflationary periods, providing an economic indicator as to the effectiveness of current monetary policy. The index is calculated and published by the U.S. Bureau of Labor Statistics each month.
A contract between a seller and a buyer of real property in which the seller provides financing to the buyer to purchase the property.
A controller’s position is just under the CFO of a company. The controller is involved in daily accounting, such as preparing reports, budgeting, hiring/firing people in the accounting department, and ensuring compliance. The CFO is part of the executive team, overseas financial strategy, and is often speaking on earnings calls (if the company is public). In a smaller company, the controller and CFO may be the same position. The controller ultimately handles putting together the financial information that the CFO and other top management use for company strategy.
Core competencies allow an individual or business to stand out from the crowd. Some might call this the company’s secret ingredient or edge. Developing core competencies can take time. Sometimes, through years of trying different things, a company discovers what it is best at. For example, it is able to produce a product at a higher quality and more efficiently than its competitors. Its operational efficiency is a core competency. Core competencies are made up of several components, including people, physical assets, patents, brand equity, and capital.
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.
Corporate culture guides how employees interact and behave with each other and customers. Corporate culture is implied rather than handed out in a pamphlet to new hires. Employees learn the culture by watching other employees. Some aspects of the culture may be explicit such as dress code. When talking to potential new hires, management may express some of the culture such as the company is laid back and people dress in everyday clothes. An aligned culture helps guide teams and is often more successful than a company in disarray, where employees act however they want. Such disarray breaks down communication, leading inefficiencies across the company.
Corporate social responsibility (CSR) is a business model that helps companies be good citizens. Just like individuals want to keep their neighborhood clean, safe, and be good neighbors, CSR applies the same principles to corporations. A company that is dumping waste into rivers or billowing smoke into the atmosphere is not practicing CSR. Companies that take measures to keep the environment clean, ensure women have equal pay, and participates in local community fundraisers are practicing CSR. CSR is generally a practice of large organizations. For smaller firms, CSR is often too costly. Also, larger corporations have more impact on the environment, society, and their community. CSR is a method for balancing that impact.
A cosigner is a term used to identify an additional source of repayment on a loan. A cosigner can aid a borrower by increasing the amount of principal for which he or she is eligible. A borrower may need a cosigner if he or she has a low income or minimal credit history.
They say first impressions are everything. This is especially true when applying for a job. A cover letter is your chance to make a great first impression. The cover letter is a summary of you and includes parts of your resume. It’s meant as a conversational piece to show off your best attributes and why you’re the best candidate.
Credit bureaus collect and analyze information related to a consumer's creditworthiness, which includes loans, open/closed accounts, past due payments, work history, public records, and more. There are three main credit bureaus in the United States — Equifax, Experian, and TransUnion, which are all private companies. While these agencies are not government-owned, they are regulated by The Fair Credit Reporting Act, which was passed in 1970. The Act ensures that consumers have accurate credit report information and are able to access their credit reports. Lenders utilize the information from credit bureaus to make decisions about extending credit to consumers. Their decisions are often coupled with FICO scores. The better an individual’s credit and FICO score, the more likely they are to receive new credit and lower interest rates.
A credit card is an item issued by a financial services company that provides a consumer a personal, unsecured line of credit to make purchases from merchants that accept credit cards. Consumers will have limits on their lines of credit based on their credit score and annual salaries and wages. Credit cards feature higher annual percentage rates (APRs) than other lines of credit because of the lack of collateral associated with the line of credit. Whereas a financial institution may repossess a delinquent borrower’s home or vehicle if repayment stops, a financial institution will have a harder time obtaining recourse on the unsecured personal line of credit.
A credit history is a record of a person’s payments to creditors. This record is called a credit report. A credit report contains the credit profile of a person. This profile includes the number of open and closed accounts, how long accounts have been open, how much is owed on each account, delinquent payment history, and inquiries for new credit. Additionally, bankruptcies, judgments, and collections are included in a credit report. A FICO score is also an important component of a person’s credit. It sums up someone’s creditworthiness in one score. The higher a person’s FICO or credit score, the more access to credit they will have, and the lower their loan interest rates will be. Credit scores are dynamic and can be improved.
A credit limit is the maximum amount of credit that a financial institution extends to an individual or business. Credit might come in the form of a credit card or line of credit. The amount of credit extended depends on an individual’s creditworthiness. Creditworthiness is a factor of credit history and debt to income ratio, among many other things. For people with no credit history or those who have poor credit, they can have difficulty when trying to get new credit. Also, interest will generally be higher for such people until they establish or improve their credit. Those with great payment histories, good income, and a low debt to income ratios receive the most credit along with favorable interest rates.
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.
A credit report provides a breakdown of an individual’s credit history and is a measure of that individual’s creditworthiness in the future. Credit bureaus compile credit reports by compiling financial information about an individual’s previous history of repayment and current levels of debt, among other factors. A credit report is a tool that lenders use to assess the risks associated with issuing debt to an individual.
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.
A credit score is an index that quantifies an individual consumer’s history of creditworthiness and his or her probability of repaying future debts. A credit score ranges from 300 to 850; the higher the score, the more trustworthy a lender considers a consumer. FICO is the most commonly accepted method of credit score. A credit score is a key component of a lender’s decision to extend a line of credit to an individual. Individuals with credit scores below 640 are considered subprime borrowers, while borrowers with credit scores above 700 are considered creditworthy.
Credit tenant is a tenant with the size and financial strength worthy enough of being rated as investment grade by one of the three major credit agencies: Fitch, Moody’s,
The act of using multiple properties to secure one or more loans. Common in situations where a borrower lacks the capital to purchase a property, a cross-collateralized loan allows the borrower to use the untapped equity in another property to secure the loan on another property. This type of loan reduces the lender’s risk by securing their position in multiple properties. For example, say John wants to buy Property A for $2 million. He currently has $200,000 in cash, and needs to borrow $1.8 million to close. The lender, however, will not lend past an 80% loan-to-value, leaving John $200,000 short on his down payment. Given that the lender will accept additional property in the place of the down payment, John looks to use a property he already owns, Property B, as further collateral. Property B has a $400,000 loan in-place, with John’s equity representing about $600,000. Together, the market value of these properties is $3 million. The combined debt is $2.2 million, representing a loan-to-value of 73.33%. John’s debt level is then below the 80% threshold, making the lender more inclined to fulfill his loan request. The Lender now has claim to both properties in the event of default.
Crowdfunding is a form of financing that utilizes small amounts of capital from a large number of people to fund a new venture or project. Originally brought forward as a way for organizations and entrepreneurs to secure general funding and donations from the public, regulatory changes passed in the JOBS Act have allowed for equity crowdfunding to emerge so that investors could gain a return on their crowdfunding investment.
Crude oil, which is a fossil fuel, is a natural resource found within the Earth. It is composed of hydrocarbon deposits and other organic materials. Crude oil must be drilled from the Earth and refined and processed to create petroleum products such as gasoline, diesel, kerosene, and asphalt. Drilling, refinement/processing, and the creation of particular products are what the crude oil industry is built around. Crude oil isn’t being created as it is a nonrenewable resource. Once it is gone, there will be no more. This means crude oil is a limited resource. It is getting increasingly difficult for the industry to find new deposits of crude oil and bring them to the surface.
Cyclical unemployment is driven by the business/economic cycle. When an economy goes into recession, businesses lay off employees, increasing unemployment. During expansionary periods, businesses hire people to meet demand, decreasing the unemployment level. As an example, a resort experiences high demand when people are employed, since they have discretionary income. But once the economy begins softening and people start getting laid off, consumers save and avoid unnecessary expenses, such as spending at resorts. This decreases demand at the resort, which cuts its expenses by laying off people, driving up unemployment in the process. Other factors that affect employment are seasonal, structural, frictional, and institutional.
The de minimis tax rule is a calculation on discount bonds to determine if profits are taxed as capital gains or ordinary income. The bond must meet a certain price threshold for the rule to be applied. If the discount is less than a quarter-point of the par value from the time of purchase until the maturity of the bond, it is too small to be a market discount for tax purposes. De minimis is a Latin term that means "about minimal things." The de minimis tax rule is generally applicable during an environment of rising interest rates, which causes bond prices to fall, thus creating a discount to par value.
A debenture is an unsecured debt issued by a company or government to raise capital. Because there is no collateral backing the debt, the debentures can be riskier than secured debt. Debentures are valued based on the creditworthiness of the issuer. Debentures, just like bonds, pay interest at set intervals and have a maturity date. The maturity date is often more than 10 years. Some debentures, called convertible debentures, can be converted into equity after a certain period of time. For the flexibility of converting debt to equity, convertible debentures pay a lower interest rate than non-convertible debentures.
Debt is an amount of money owed by a borrower to a lender. It is used by individuals and corporations to make large purchases that they otherwise would be incapable of making given current cash holdings. A debt agreement provides terms that include the amount borrowed and the date at which principal and interest need to be repaid.
Debt consolidation takes existing debts and groups them into one loan. A new loan must be obtained in order to consolidate the existing debts. Debt consolidation only works if the new loan’s interest rate is lower than the average interest rate of the older loans. Because less of each payment is going toward interest, the consolidated loan can be paid off quicker. However, debt consolidation only works if the borrower does not spend the extra money on more consumer goods, thus increasing their overall debt and effectively, nullifying the benefits of debt consolidation.
A method of raising capital through borrowing. Although commonly associated with lending from a bank, debt financing includes selling debt instruments to individual and institutional investors, often seen in practice by corporations through the use of bonds. The cost of debt is the price of interest payments to either the lender or bondholder.
Debt service is the cash that is required for a particular time period to cover the repayment of interest and principal on a debt.
In the context of commercial real estate, a measure of the cash flow available to pay current debt obligations. It is calculated as the annual
Deed in lieu of foreclosure is a deed instrument in which the mortgagor (borrower) conveys all interest in a real property to the lender to satisfy a loan that is in default and avoid
A deed of trust, like a mortgage, is a security instrument used to finance real estate. A deed of trust transfers legal title in real property to a trustee,
A deferment is a period in which the borrower does not have to make interest or principal payments on a loan. There are no penalties for these missed payments. Deferments are generally agreed to upfront and written into the loan contract. Interest still accrues on the loan during the deferment. Student loans often have a deferment period while the student is in school and for a few months after graduation. Once the deferment period ends, the borrower will begin making regular payments. The borrower does not have to make any lump sum payments as a result of the deferment. Bond issuers can also receive deferments, which allow them to call the bond before maturity.
Deficit spending is a term that describes the conditions under which a government’s expenditures exceed its revenues in a particular fiscal period. Deficit spending increases a government’s debt balance, and is typically financed by the issuance of government bonds. Many economists believe deficit spending to be a fiscal policy tool that can stimulate economic growth.
Deflation is a term used to describe a scenario in which the price for goods and services declines, or when the inflation rate falls below 0 percent. Experts believe deflation can be caused by a number of factors, but the two predominant causes of deflation are a decline in aggregate demand and increased productivity. Declining aggregate demand will drive the price for goods and services lower as suppliers seek to offer their goods or services at a price that will incentivize consumers to buy. Increasing productivity can also cause deflation. Companies that become more efficient by minimizing production costs have the option to pass on savings to consumers with lower prices than competitors who may not yet have been able to drive the cost of production down.
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
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
Demand is an economic principle that describer’s a consumer’s inclination to consume a particular good or service at a particular price. In theory, a price of a good is determined by the intersection of the supply and demand curves by gauging the consumer market’s appetite to consume a good or service at a price offered by suppliers. There are two types of demand: elastic and inelastic. A good or service with elastic demand experiences a sharp decrease in quantity demanded when the price of that good rises. A good or service with inelastic demand does not experience a sharp decrease in quantity demanded when the price of that good rises. Examples of elastic goods are toys or candy, while water and medicine are examples of inelastic goods.
The demand curve is plotted on a graph with the y-axis representing price and the x-axis representing quantity. The curve goes from the top left to the bottom right. The demand curve does not move when only price and quantity are changing. For example, when prices rise, quantity drops, resulting in less demand. Additionally, the demand curve remains static. As prices decrease, quantity increases, resulting in more demand. The demand curve also remains static in this case. Factors that can move the demand curve include changes in wages, an increase in the population, or a change in consumer preferences. If wages drop, consumers cannot purchase as much. In this case, the demand curve shifts to the left. The same happens if consumer preferences change, and there is less demand for a specific product. The curve will shift right with a population increase or an increase in wages.
A demand schedule allows for efficient price discovery of a product or service. It plots a curve with the Y-axis representing price and the X-axis representing quantity. A table can also be used to display this data. To understand how this works, let’s say ABC sells widgetX for $5 and widgetY for $6.50. The company is currently generating a profit. With strong demand, ABC decides to increase its prices from $5 to $7 and $6.50 to $10. It finds that customers buy far fewer products at those prices, which decreases the company’s profits. Prices need to come down, so ABC changes them from $7 to $6 and $10 to $8. With the adjusted prices, demand comes back, and so do profits. At this point, supply and demand are equal. This is called the equilibrium price. Now ABC has data that represents what happens at different price points.
Depreciation recapture is the USA Internal Revenue Service (IRS) procedure for collecting income tax on a gain realized by a taxpayer when the taxpayer disposes of an asset
Direct marketing consists of advertising directly to the individual. Rather than going through traditional, broad marketing channels such as TV, the Internet, or radio, direct marketers send ads to consumers using mail, email, or texts. The ad message is often customized for the consumer, including mentioning them by name. Direct marketers are able to do this by purchasing a list of potential customers or doing lots of research to find customers. To entice the consumer, direct marketers may include a discount coupon. The ad message will also contain some call to action in an attempt to close the sale. Direct marketers are able to gauge the effectiveness of campaigns since they know who each mailer was sent to and if there was a response or not.
Disability insurance provides income to workers who become disabled and are not able to perform their work duties. The insurance is often a percentage of a worker’s income rather than the full amount. Some companies may offer disability insurance to their employees at a significant discount. Disability insurance can also be purchased by individuals, usually at a higher cost. There are two types of disability insurance — short-term and long-term. Short-term insurance is for coverage between three to six months. Long-term insurance is for coverage greater than six months. The exact coverage period and cost will vary by the insurance company.
Discount rate is the interest rate used to determine the present value of future cash flows in discounted cash flow analysis.
Disposable income is the amount of personal income an individual has after taxes. Economists often use disposable income to figure out consumer spending and saving rates. For example, someone with a $100,000 income in the 24% tax bracket has disposable income of $100,000 - $24,000 = $76,000. Disposable income is often confused with discretionary income. Discretionary income is calculated based on disposable income. Discretionary income is net of living expenses. Using the above example, $76,000 minus $25,000 in living expenses leaves $51,000 in discretionary income. The government uses a slightly different formula to calculate disposable income for wage garnishment purposes. It subtracts health insurance premiums and involuntary retirement plan contributions from gross income.
Low-income community census tracts are the basis for determining eligibility in Qualified Opportunity Zones.
A dividend represents the distribution of a reward, usually in the form of cash, to a firm’s shareholders paid in exchange for the shareholder’s investment in the company’s equity. A dividend is managed by a company’s board of directors and typically paid from a company’s net profits regularly on a monthly, quarterly or annual basis.
Double net lease is a lease agreement in which the tenant is responsible for their pro-rata share of both property taxes and premiums for insuring the building,
Down payment is a payment used in the context of purchasing an expensive good or service, whereby the payment is the initial upfront portion of the total amount due
A DST Sponsor is a person or entity that creates a Delaware Statutory Trust (DST) to hold real property asset(s) and arranges for the issuance of
An investigation or audit of a potential investment to confirm all material facts regarding a transaction. For example, when analyzing a potential property
The early majority is the third and largest group of a population to adopt new-to-market goods, such as new technologies. This group makes up about 34% of the population. After watching the first two groups, "innovators" and "early adopters", use the new product, the cautious early majority jumps in. They need time to get used to a new product before making the commitment to purchase it. The early majority is a less affluent and technologically savvy group than "innovators" and "early adopters". While they are not the first to adopt something new, they are ahead of the average person.
Earnest money is a payment made to a seller indicating a buyer’s willingness to enter into an arrangement. Typically, buyers provide earnest money to acknowledge that they are serious about a potential purchase, or that their intent to transact is “in good faith.” For the seller, earnest gives assurance that the buyer won’t backout of negotiations without valid cause. Earnest money does not obligate a buyer to transact, however, as issues with the property may be found later while being appraised or inspected.
Economic equilibrium occurs when supply and demand in a market are equal. In other words, the amount of supply is equal to the amount of demand, creating a fair price for products within that market. Equilibrium can become unequal if a business begins running low on products. In this case, supply decreases while demand remains constant. Unless the business raises its prices, supply will continue to decrease, and the business will run out of products to sell, which is ultimately a revenue loss. When there is too much supply to absorb demand, sales will slow down, inventory will become obsolete, and the business will once again begin losing revenue. To remedy the situation, prices can be lowered, creating more demand, and eventually bringing supply and demand back into equilibrium.
Economic growth is a term used to describe an increase in the production of economic goods and services over time. It is measured by an increase in the market value of goods and services produced as a result of changes in the productive capacity of capital goods, labor force, technology, and human capital.
Economic life is the period an entity expects to be able to use an asset, assuming a normal amount of usage and maintenance. Different from physical life, economic life is used to determine how long a capital investment, or investment in real estate, will be useful towards the operations of a business. Economic life doesn’t just refer to a predetermined amount of time, and can be applied to other forms of measurement such as mileage. For example, one may refer to an automobiles economic life as 200,000 miles, instead of 15 years.
Economic profit divides profit into two categories: accounting and economic. Accounting profit is a financial profit. Taking the revenue minus explicit cost, you get the accounting profit. Explicit costs are raw materials and labor. Economic cost is the opportunity cost of going with one decision over others. Economic cost looks at what the company had to forego by choosing the path it did. As an example, a person decides to invest $150,000 in starting a company. It earns $200,000 in its first year. The accounting profit is $50,000. On the other hand, the same person could have got a job as an employee making $110,000. $110,000-$50,000 = $60,000, resulting in a loss of $10,000 ($50,000-$60,000 = -$10,000). The lost $10,000 is the economic profit.
Economies of scale are competitive cost advantages that firms enjoy when they achieve efficiency in production. The higher the production and the larger the business, the wider the fixed and variable costs can be spread.
Elasticity is a concept used to measure the sensitivity of one variable to change in another variable. Typically used to gauge consumer demand for a good or service, elasticity can be measured by the change in aggregate quantity demanded following a change in price or quality.
Economically distressed communities designated by government for aid—but this aid is intended primarily to lift the communities out of poverty by stimulating business enterprise and creating jobs.
Enterprise resource planning (ERP) is the process used by firms to manage various portions of their business to promote efficiencies across business lines. ERP systems are used to manage all levels of a firm’s operations, from distribution and supply chain management to treasury management and payroll processing. Enterprise resource planning allow firms to integrate all information onto a single platform and promote the sharing of information across various departments. ERP is particularly valuable for corporations that operate across diverse geographies across a country or the globe.
The Environmental Protection Agency (EPA) is a government agency whose mission is to protect human and environmental health. It creates laws and regulations to protect the health of individuals and the environment. When any of its laws are violated, the EPA has the power to impose fines and sanctions. The EPA is involved in a number of environmentally friendly programs. Some of these include — 1.) The prevention, control, and response to oil spills 2.) Controlling air pollution and forecasting air pollution levels 3.) Encouraging the manufacturing of more fuel-efficient vehicles.
Environmental Site Assessment is a report prepared for a real estate holding that identifies potential or existing environmental contaminations liabilities.
Equity is the value of an asset less the value of all liabilities on that asset. For example, if an investor owned a property with a market value of
A method of raising capital through the sale of ownership interests in an enterprise or other business entity. Equity financing can range in size from seed money for a start-up to an IPO for a multinational corporation. This type of financing isn’t limited to business endeavours, however, and can include raising capital for a real estate acquisition or other asset that may churn a profit. Equity ownership includes, but is not limited to, common stock, convertible preferred stock, and ownership interests in a Delaware Statutory Trust.
Equity investments are one or more shares in the ownership of a business or corporation that are purchased by investors. In contrast to debt investments, equity investments
Equity load is 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
An ERP system is a large software system used within enterprises. ERP stands for enterprise resource planning. An ERP allows systems within different units of a company to talk to each other. Rather than having isolated systems within each department, an ERP adds a central store of record, allowing the various company units to pass information to each other. For example, accounting may gather information in real-time from sales, marketing, and procurement, allowing it to generate various reports and forecasts for upper management. ERP systems can be costly to install and maintain. Often expensive consultants are used for these tasks, as it takes a specialized skill set. These costs can put ERPs out of range for smaller businesses.
Escrow agent is an entity that has fiduciary responsibilities in the transfer of property from one party to another. The escrow agent acts as a custodian of
Escrow funds are capital held by a neutral entity in an account for the benefit of the parties of a financial arrangement whereby the funds are distributed only after certain
The process of arranging the transfer of one’s wealth and assets after his or her death. Estate planning helps govern how these assets will be managed and distributed, while looking to minimize estate taxes to preserve wealth. Real estate, personal property, stock and other securities, life insurance, and debt are a few of the assets that are considered to be part of an individual’s estate.
Per the IRS, an estate tax is a tax on the transfer of property upon death. An estate tax considers the fair market value of all the property within one’s estate, and not what the assets were originally purchased for. The total of these items is known as the Gross Estate, and can include cash, securities, ownership interests in either a business or real estate, annuities, among other asset classes. As of 2019, a filing is only required for estates with a gross assets and prior taxable gifts above $11,400,000. Once the Gross Estate has been determined, one may be able to take deductions to determine the actual taxable amount of the estate. These include mortgages, estate administration expenses, and property that is given to eligible charities. Note, that property passed to a living spouse may be transferred tax free.
For Exchange Accommodator Titleholder see Accommodator.
Exchange period, under IRC Section 1031, is when an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale
Exchange proceeds are cash proceeds from a transfer of relinquished property held in a qualified escrow account set up by a qualified intermediary whereby the funds
Exchanger is the taxpayer or owner of the property or properties being exchanged during a tax deferred exchange (aka 1031 exchange or like-kind exchange).
Excise tax is an indirect tax charged to a producer of a good such as oil or tobacco that is ultimately passed onto a consumer via a higher price. There are two types of excise taxes: ad valorem and specific excise tax. Ad valorem means “according to value” in Latin. An ad valorem excise tax is levied on a product or service based on its value. Tax regulators impose ad valorem excise taxes on products and services via a fixed percentage of the price for that good or service.
Exclusive right living is a formal agreement between a seller and a real estate agent, under which the real estate agent has the sole right to sell a specified property.
Exclusive-agency listing is an agreement established between the seller and one real estate agent, where the seller reserves the right to sell the property on his or her own,
A planned approach to liquidating one’s position in an asset, investment, or venture in hopes of minimizing loss or maximizing gain. Exit strategies may be executed when an investment has stopped being profitable, or has met its objective. Other factors that may contribute to an exit include a change in market conditions or legal reasons.
Expected return is the amount an investor would anticipate receiving on an investment that has various known or expected rates of return.
Expense stops, as stated in a commercial lease, mark the extent of operating expenses and taxes a landlord will be responsible for on a tenant-filled property. All expenses past this threshold will be held liable by the active tenant.
Externality is an economic term that describes a third-party factor that has a positive or negative impact on an individual or firm where the third party factor has no direct control over the creation of a cost or benefit. The impact that positive net migration to a particular market in the United States has on property values is an example of a positive externality. The impact of an uptick in crime in a particular neighborhood has on the value of homes in that area is an example of a negative externality.
The Federal Deposit Insurance Corporation is an independent federal agency tasked with insuring customer deposits at US banks and thrifts. Created in 1933, the FDIC seeks to maintain public confidence and stability throughout financial crises by promoting sound banking practices.
The federal budget is an itemization of the various expenses the U.S. government must pay to keep the country running on an annual basis. The budget begins on Oct. 1 and ends on Sept. 30 of the following year. Government expenditures that the budget must cover include employee salaries, military, infrastructure maintenance, subsidies, and more. Government spending is divided into two categories: Mandatory and discretionary. Mandatory spending is designated by law and includes entitlement programs such as Medicare and social security, which consume 37% of the federal budget. Estimates for the budget are created by the Office of Management and Budget. Discretionary spending requires the approval of individuals appropriation bills.
The interest rate at which banks lend reserve balances to each other on an overnight basis. Depository institutions are required by law to maintain a certain percentage of their customer’s money in reserves, causing banks to lend money back and forth to maintain an acceptable level of cash on hand. Banks will try to stay as close to the minimum reserve limit as possible, as excess reserves earn a rate of return of zero and can lose value over time due to inflation.
The Federal Reserve System is the central bank of the United States. As the regulator of the nation’s financial systems, the Federal Reserve monitors the country’s monetary policy, regulates and seeks to institute policies that maintain the stability of the economy. The Federal Reserve is comprised of the Board of Governors and 12 Federal Reserve Banks in cities around the United States.
An FHA loan is a Federal Housing Administration loan issued by an FHA-approved lender (generally a bank) and is insured by the FHA. FHA loans are issued to low-to-moderate income borrowers. These borrowers are unlikely to get approved by a bank. To help the borrower get a home loan, the FHA steps to reduce some of the bank's risk. The bank ultimately determines if the borrower is qualified for the loan. Down payments on an FHA loan are smaller than those for a conventional mortgage. Borrower credit scores are also lower than those found on conventional mortgages.
Unlike a commodity currency, fiat money is not backed by any physical asset such as gold or silver. Instead, it relies on the faith people have in the currency and the government behind it. The U.S. dollar is a fiat currency and is considered the least risky currency of all the other fiat currencies. The U.S. dollar has become a global safe haven because of the U.S. government’s stability. It is backed by the "full faith and credit" of the U.S. government. A fiat currency provides a country’s central bank with more control over the money supply — credit supply, liquidity, interest rates, and money velocity. Because central banks can print money, unless there are checks and balances, the situation can get out of control, leading to hyperinflation, as was the case in Zimbabwe and the Weimar Republic of Germany.
FICO is short for Fair Isaac Corporation, the company that created the FICO score. FICO scores are used by lenders to determine an individual's creditworthiness. The score ranges from 350-800, with a higher score being better. The higher an individual’s score, the better rate they will get on a loan, and the more credit they can receive. A FICO score is made up of five components: payment history, the current level of indebtedness, types of credit used, length of credit history, and new credit accounts. Individuals with scores above 650 generally receive good interest rates. Those with scores below 620 will struggle to get loans and good rates on those loans.
Finance is a term that describes the study and system of money, investments and various other financial instruments. Generally, finance is broken into three categories: public finance, corporate finance and personal finance.
A finance charge is a fee that a lender earns in exchange for the issuance or extension of a line of credit. A finance charge can take the form of an origination fee on a loan or interest payments associated with the amortization of a loan. A finance charge is often a function of a borrower’s creditworthiness. Thus, the higher a borrower’s creditworthiness, the lower a finance charge may be. Finance charges provide lenders an incentive to provide funds to consumers and businesses. Without the, lenders would receive no compensation for providing liquidity to individuals and businesses.
Financial accounting is the accounting activity performed from business operations. It includes recording, reporting, and summarizing the transactions of a business at specific times and across periods of time. Specifically, financial accounting requires the preparation of the income statement, cash flow statement, and balance sheet. Financial accounting follows the accrual basis accounting system rather than the “cash basis.” In the U.S., financial accounting follows the Generally Accepted Accounting Principles (GAAP). Internationally, it follows International Financial Reporting Standards (IFRS). GAAP and IFRS are compatible, which allows financial accounting between companies in different countries to be compared.
A financial advisor is someone who provides financial advice and guidance to individuals. Financial advisors can provide advice on a broad range of financial topics, including retirement, insurance, investing, and various money matters. Financial advisors must have a valid Series 65 license. Many also carry the Certified Financial Planner (CFP) designation. While financial advisors are not purely portfolio managers, they can help create a portfolio based on a client’s risk tolerance and goals. Financial advisors may also execute orders in the portfolio to keep it aligned with the client’s financial objectives.
Financial institutions are entities such as banks, insurance companies, brokerages, and even auto dealers and the United States Postal Service. Financial institutions engage in the business of financial and monetary transactions. Banks make money by earning more interest loans than the interest paid on deposits. Brokerages make money through investor trading commissions. Financial institutions are an important component of the economy. Given the importance of their role, they are heavily regulated by the government. Risk and other metrics critical to the proper functioning of these institutions are closely monitoring through these regulations. Part of their importance is because businesses and consumers depend on financial institutions for loans and other financial transactions.
Financial leverage is the use of borrowed funds to acquire an investment. In the context of commercial real estate, this typically involves the use of a mortgage
A financial plan is a roadmap for an individual to achieve specific financial goals. It is a long-term plan. Financial planning is the process of creating, updating, and following this roadmap. A financial plan can be created by the individual or with a financial planner. Creating a financial plan involves an analysis of your current financial state. Adding up all of your assets and deducting all your liabilities equals your net worth. A financial plan will often ensure you have enough money for retirement and other needs years from now. For many, it should also increase their net worth. Some elements of a financial plan include retirement, tax strategies, risk management, investment strategies, and estate planning.
Financial statements are a uniform set of financial documents that are periodically released throughout the year and provide a view of a company’s financial performance. There are three financial statements. The balance sheet provides a snapshot of assets, liabilities, and equity. The income statement shows a specific period of revenue and income generation. The cash flow statement is also based on a particular timeframe and shows changes in the cash account. Public companies must follow GAAP (Generally Accepted Accounting Principles) standards, which allows investors to assess the investment viability of a stock. Financial statements also include explanatory notes or footnotes. These go into further details about operations, acquisitions, inventory method, owner’s equity, and other more.
Fiscal policy is a tool used by governments to influence economic conditions via spending and tax policy. Fiscal policies are implemented to influence demand for goods or services, employment, inflation or economic expansion. A government can implement fiscal policy in the form of lower tax rates in order to influence higher levels of consumer spending. It could also promote economic expansion by building infrastructure such as public transportation or highways that will allow individuals and businesses higher levels of connectivity and ability to expand productivity.
A fiscal year is a period of time that a firm or government uses for its accounting and preparation of financial statements. Though it is similar to a calendar year in that it is 12 months, the Internal Revenue Service (IRS) provides firms the choice to pay tax liabilities on a calendar year basis or fiscal year basis. The Internal Revenue Service dictates that a fiscal year consists of twelve consecutive months ending on the last day of any month with the exception of December. Thus, a firm can report its financial statements to various regulators and shareholders as of the fiscal year ending February 28.
A fixed cost is one that does not fluctuate as a function of an individual’s or firm’s level of activity or usage. An example of a fixed cost is debt service. A borrower that obtains financing at a fixed interest rate is liable to pay a regular debt service on a monthly or annual schedule until the principal and interest on the loan reach zero. A fixed cost is a critical input in a firm’s break-even analysis, which is used to determine pricing and production for the firm’s inputs and products.
A fixed income investment is usually a bond. It is a financial instrument that pays consistent cash flows on the invested principal. These cash flows are known in advance. At maturity, the bond’s principal is paid back to the investor and cash flows cease. Fixed income is not as volatile as equities (i.e., stocks). Preservation of capital is one of the main reasons people invest in fixed income, especially retirees. However, because cash flows are fixed, investor income can be eroded by increasing inflation. Also, there is a risk the bond can be called before maturity, discontinuing its cash flows.
A fixture is something that is permanently attached to real property. Examples include items such as HVAC systems, ceiling lights, awnings, window shades,
Refers to a tax system that utilizes the same marginal tax rate across individual taxpayers or businesses. Opposite of the progressive tax structure, this method ensures that higher income earning entities don’t pay a proportionately higher amount of taxes.
If an investor holds its interest in the QOF for 10 years or more, for purposes of determining the gain or loss the investor recognizes from the sale or exchange of such QOF interest, the investor may elect for the basis of such QOF interest to be equal to its fair market value on the date such QOF interest is sold or exchanged.
A forbearance is a temporary postponement of mortgage payments in hopes of avoiding foreclosure. Foreclosure costs fall onto the lender, making foreclosure an undesirable outcome. Borrowers must demonstrate the need for forbearance. The need might be due to an illness or job loss. The need for forbearance must be demonstrated because loan terms will change. A borrower with a steady job who has always made their mortgage payments is likely to receive a forbearance. Whereas, A borrower with a spotty job history who has missed some mortgage payments may have a more difficult time receiving a forbearance. Any skipped payments may be moved to the back of the loan or lumped into one payment at the end of the forbearance. The lender and borrower will discuss the new loan terms. Some lenders may allow borrowers to pay only interest during forbearance while others may allow partial interest payments. The remaining interest may result in negative amortization, which means payments for some period were less than the interest over the same period. Fannie Mae and Freddie Mac offered forbearance to homeowners because of COVID. Late fees are not incurred due to missed payments during a forbearance. Additionally, nothing negative is reported to credit bureaus. Unlike bank lenders, loan servicers are different since they do not own the loans. They only collect payments from borrowers. This means loan services may be less willing to provide any forbearance, as they are not taking on the same risks as bank lenders.
Foreign aid is money given to one country (i.e., government) by another, often as military or economic aid. Aid can come in the form of a gift, grant, or loan. Aid can also come from religious organizations, nongovernment organizations (NGOs), and foundations. In 2017, the United States ($34.7B) was the largest giver of foreign aid, followed by Germany ($24B).
A foreign direct investment (FDI) is an investment by a company in one country into a business located in another country. This is different from simply purchasing the stock of a foreign business. The investor instead establishes business relationships with the foreign company or buys assets of the company. There are three types of FDI investments: 1.) vertical — investment in the same type of business or industry, 2.) horizontal — investment in a related but different type of business or industry, 3.) conglomerate — an altogether different type of business.
Foreign Investment in Real Property Tax Act (FIRPTA) is a United States tax law that imposes a tax on foreign persons disposing of United States real property interests. To ensure tax collection from
One of the several tax forms distributed by IRS, Form 1099 is used in the United States to report various types of income other than wages, salaries, and tips. The form is primarily used to report payments to independent contractors, income from rental properties, and income from interest and dividends.
Form 8824 is a form to be filled out with an exchanger’s tax return in order to report the completion of a 1031 like-kind exchange to the IRS.
Percentage ownership over real property. A common structure for assets that require significant pooling of capital, fractional ownership allows the costs and profits of a particular investment be split amongst the owners of title. Percent ownership is typically determined by the amount contributed to the entity’s overall capitalization. There are two primary options one can take when considering 1031 eligible fractional ownership in investment property: Delaware Statutory Trusts (DSTs) and Tenant-In-Common investments (TICs). These structures allow smaller investors to enter into larger, investment-grade properties that were originally restricted to institutional investors, such as banks and insurance companies.
Freddie Mac is the more commonly known alias of the Federal Home Loan Mortgage Corporation (FHLMC) which is a publicly traded
A free market is an economic system categorized by the free exchange of goods and services absent of government intervention. In a free market, the laws of supply and demand dictate the flow of capital and individual decision making. While no free markets exist in actuality, economists have widely concluded that a higher level of economic freedom in a particular market is highly correlated with economic well being in that region.
In a community with shared resources, such as a town, there are some people who use what they pay for and others who overuse resources. Others pay nothing and still use resources. Those who use more than they’ve paid for are called free riders.
Free trade is a policy that seeks to allow buyers and sellers from economies around the world to trade freely without incurring government tariffs, quotas or subsidies. Free trade is synonymous with “laissez-faire trade” which seeks to eliminate discrimination against imports and exports and allow markets to find equilibrium organically in the absence of government policies. Free trade allows the expansion of an economy’s offering of services and products by allowing the best producer the opportunity to penetrate a market regardless of its national denomination. This allows an economy to expand its product offerings, knowledge, skills and promotes specialization and the division of labor.
A fund is a pool of money that is allocated for a specific investment strategy or purpose. Individuals and businesses can allocate money into a fund for various purposes, whether that be for college savings, emergencies or trusts. With regard to corporate-level investment strategies, fund types can include mutual funds, exchange-traded funds (ETFs) or hedge funds. Different types of funds have different investment theses which attract investors with risk profiles that align strongly with a fund’s strategy.
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
Game theory is a theoretical framework for understanding and trying to take advantage of social situations. Using game theory, actors that are competing against one another can use game theory to determine an optimal outcome. Game theory works best when actors understand what the other is likely to do. Without knowledge of the other actors, game theory can’t be applied effectively. Game theory also works for pricing competition and product releases, where the various outcomes can be laid out in a matrix format. Game theory was formally created by mathematicians John von Neumann and John Nash, and economist Oskar Morgenstern.
A general partnership consists of two or more people sharing the ownership of a business (i.e., a jointly-owned business). The individuals are responsible for all business expenses and liabilities. Meaning, they can be held personally liable for the business. Each partner is able to share in the business’ profits as well. Taxes do not flow through a general partnership, which means that each partner is responsible for his/her personal tax liability and that of the general partnership. A general partnership costs less to form than a corporation.
Gentrification is a process that transforms a neighborhood from low value to high value. Home prices rise as a neighborhood becomes more gentrified. Overall, the neighborhood improves but not without negative side effects. Those residents who were in the neighborhood before gentrification began are often pushed out by rising home prices, rents, and an overall increase in living expenses. As more people with higher-paying jobs move into the neighborhood, the cost of living goes up. New businesses move in as well and traffic often increases. The speed of gentrification can be fast but it depends on the area.
Goodwill is an intangible asset typically measured or recorded when one company purchases another. Goodwill is calculated by the difference between the purchase price of the company and the sum of its fair market values of assets and liabilities. Goodwill = P – (A + L)
Grant means to transfer an interest in real property by deed or other legal instrument.
Grantee is one to whom the grant is made. The recipient who will be taking title, as named in the legal document used to transfer the real estate.
A grantor is the person or entity making the grant. For example, if Alice sells her property to Bob, then Alice would be the Grantor.
A gross lease is a lease in which the tenant pays a flat sum for rent out of which the landlord must pay all expenses such as taxes, insurance, maintenance, utilities, etc.
Gross margin is a method that investors can use to determine a company’s operating efficiency. Gross margin is the profit that a company keeps from every dollar of revenue. Gross margin is represented as a percentage. The formula for it is: Gross Margin = Net Sales − COGS Where net sales are the same as revenue and COGS is the cost of goods sold. Basically, gross margin is the profit remaining after removing direct costs (COGS). Direct costs are those costs that are directly related to creating the product. Salaries and administrative overhead are not direct costs. When investors use gross margin, they want to compare gross margin across companies to determine which companies are performing the best. Gross margin should only be compared against similar companies or those within the same industry. Each industry has an average gross margin. Investors can compare a company to the industry’s average as a baseline (i.e., is the company doing better or worse than the industry average). Then they can compare to the top-performing companies within the industry. These comparisons provide investors with great insight into the company’s operating efficiency and where it stands against its top competitors. As an example, assume a company makes $500,000 per year on one product line. It spends $200,000 on supplies and $100,000 on labor to create its products. That’s a total COGS of $300,000. The gross margin for this product line is $500,000 - $300,000 = $200,000 then $200,000/$500,000 = 40%. The company’s gross margin is 40%. If the industry average gross margin is 35%, the company is performing better than half of its peers. Note that gross margin does not equal profits. Selling/general/administrative costs and taxes still need to be deducted from gross margin to find the profit value.
Gross rent is rent charged to occupy a premise without any additional rent for operating or other expenses.
An investment property valuation method which is the ratio of a property’s price to its gross revenue.
Ground lease is a lease of the land only, on which the tenant usually owns a building or is required to build as specified in the lease.
A growth rate is used to determine the future growth of a company or economy. Although it can also be used to calculate historical growth. To calculate the growth rate, use the following formula: [(end value) - (beg. value)] / (beg. value) all times 100. For example, if ABC started the quarter with $5MM and ended with $6MM, its quarterly growth rate would be (6-5)/5 x 100 = 20%. Typically, growth rates are expressed as an annualized value. The growth rate is just one forecasting tool used amongst many. Companies don’t rely on growth only. Instead, they create a broader picture of growth. However, the growth rate is very important as it signifies if the company’s growth efforts are working or not.
Hard money loan is a type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by
A hedge is an investment used to reduce an individual or entity’s risk of exposure to adverse price movements. It is an insurance policy that protects an investor against the downside risk associated with an investment in a particular security. A car manufacturer may hedge its exposure to fluctuations in the price of steel by purchasing a futures contract that will allow it to purchase steel at a fixed price over a specific period of time. This is attractive to the car manufacturer because it is able to project a stable budget over this period of time and reduce its exposure to a spike in the price of steel, which would result in a spike in its cost of production of a vehicle.
A hedge fund is an alternative investment vehicle in which an entity pools together resources in pursuit of alpha, the difference between an active investor’s returns and the market’s returns over a given period of time. Available only to accredited investors because of the lower level of regulation and oversight that other investment vehicles face, hedge funds typically charge a “Two and Twenty” fee structure, which is a two percent charge for the management of assets and a 20 percent charge for profits on the active management of its clients’ assets.
A holding company owns other companies and allows them to perform daily operations with independence. The holding company owns the assets of each company and can step in as needed to make management decisions. Holding companies maintain control through majority voting stock within each company. Each business may only be partially owned by the holding company. When it is 100% owned, the business is a "wholly-owned subsidiary." Because each business within the holding company is allowed to run its daily operations, management is responsible for that business’s performance.
Holding period is the real or expected period of time which an investment is attributable to a particular investor.
Holding title refers to the legal structure in which title to real property is owned. In the sale of real property, the title must be transferred from the seller to the buyer
Homeowners Association is an organization within a living community that creates and enforces a set of rules for the properties within its jurisdiction. Residents that own property within an HOA’s area of authority automatically become members and are subject to HOA fees. Property types that are often apart of associations include subdivisions, planned communities, or condominiums.
Homeowners insurance covers losses and damage to a resident’s home. Coverage includes external and internal losses but will vary depending on the insurance policy. When getting a mortgage, most lenders will require that the resident has homeowner’s insurance. The insurance payment is bundled into the escrow account for the mortgage company and paid with the monthly mortgage payment.
Human capital is an intangible measure of the quality of a firm’s employees. The level of a firm’s human capital can be gauged by the level of education, experience and skills of its employees. Though it cannot be measured on a balance sheet or various other financial statements, human capital is critical to a firm’s success. Higher quality human capital will translate to increased productivity and profitability. Firm’s can grow human capital by compensating employee’s fairly and/or offering attractive benefits to workers in exchange for exceptional performance.
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
An inclusion event occurs when a QOF investor chooses to recognize some or all deferred gains. An inclusion event will occur on the earlier of the occurrence of the event or December 31, 2026, per the Proposed Regulations.
The income effect is a consumer’s change in spending based on the change in their salary/income and prices of goods. If a consumer’s salary decreases, their spending will decrease. In addition to spending less, the consumer may look for inferior or substitute goods at a lower price. Overall, the net effect is less spending. Also, if a consumer’s salary remains the same but the cost of goods they frequently buy increases, the consumer will look for cheaper alternatives, thus decreasing their overall spending. The opposite effect holds, as well. When a consumer’s salary increases and prices remain the same, they will spend/buy more goods.
An income statement is one of the key financial statements that firms use to quantify the quality of its performance and operations over a stated period of time. Also known as the profit and loss (P&L) statement, the income statement is primarily concerned with a firm’s revenues and expenses during a fiscal period. An income statement provides a snapshot of a firm’s profitability in a particular fiscal period.
Independent trustee is a trustee who is not related to the beneficiary of the trust and does not stand to inherit any property under the trust.
An index fund is a type of mutual fund or exchange traded fund (ETF) that is constructed to mimic the components of a market index, such as the S&P 500. Index funds are used to achieve broad market exposure, in an effort to reduce risk specific to a particular industry or stock. Index funds allow investors to capture the performance of the stock market in aggregate, instead having to go through the research and guesswork of investing in an individual stocks or industries. Due to the fact that index fund investments require less effort on behalf of its manager, fees are typically less than more actively managed funds. While index fund expense ratios sit around 0.05% to 0.07%, actively managed funds typically see fees within the 1% to 3% range.*
An index fund is a mutual fund that mirrors a specific index, such as the S&P 500. In this case, the S&P 500 is called the index funds benchmark. Rather than buying every stock in the S&P 500, an investor can simply purchase an S&P 500 index fund, since index funds contain a similar composition of stocks found in the benchmark index. Because index funds are passive investments, the investor only needs to buy the fund. They don’t have to worry about managing any of the investments within the fund to match the benchmark. The passive nature of index funds also means their expense ratios are fairly low. Index funds are available to individual brokerage accounts and many retirement accounts.
An initial public offering (IPO) is the process that a private company participates in to offer shares of its firm to the public via a stock issuance. An initial public offering provides a firm access to public capital it previously did not enjoy as a private venture. The process of going public allows private investors and company founders the opportunity to realize gains on their initial investment in the firm.
Insurance is a form of a contract or policy in which an individual or corporate entity exchanges payments for financial protection or reimbursement against losses from the insurer.
An insurance premium is the cost of insurance paid by the insured to an insurance company. The insurance company uses premiums to cover any insurance claims. A certain amount of premiums are also invested to earn additional income for the insurance company. How much an insurance company can keep liquid is state-regulated. Insurance premiums are used with a wide variety of insurance, including health, auto, home, and life. Insurance premiums can be paid in installments, such as monthly, semi-annually, or annually. As long as the customer continues to pay their premiums, they’ll have coverage. Coverage generally starts with the first premium payment and continues as long as there are no lapses in payment.
Intangible personal property is something of individual value that cannot be touched or held.
In order to qualify as a QOZB, a firm must deploy a substantial portion of its intangible property in the active conduct of a trade in a QOZ, defined as at least 40 percent.
Interest can be expressed in three common ways. Two are related — simple and compound. Simple interest is a rate charged on the principle of the loan. It is calculated as simple = principle x rate x periods. The other is compound interest, which calculates interest on the principle and accumulated interest. It is calculated as compound = simple x [(1 + rate)^ time - 1]. Both can be calculated on loans or savings accounts. Compound interest is used more than simple interest. The third form of interest is the ownership an investor can take in a company. An investor can buy a certain number of shares in a company in exchange for a percentage of ownership equal to the number of purchased shares.
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.
Interest rate risk is the risk that an investment's value will change due to a change in the level of interest rates. These changes usually have an inverse effect on
An interest rate swap is a forward contract between lender and borrower that trades one stream of future debt service payments with another based on a change in the interest rate on a specified principal amount. This change in interest rate is typically done as an exchange of a floating rate for a fixed rate, or vice versa, in order to reduce the risk of fluctuating short-term interest rates, or potentially pay lower interest payments.
Intermediary is an entity that acts as the middleman between two parties in a financial transaction.
The International Monetary Fund (IMF) was created after World War II to promote global economic growth, along with financial stability, encouragement of international trade, and the reduction of poverty. Countries that want to participate in the IMF’s mission need to be a member. There are currently 188 countries that are members of the IMF. To help mitigate a financial crisis, the IMF makes loans to countries that are experiencing financial difficulty. The IMF also monitors national and global economies. It makes global economic forecasts as well, which are made available in its publication called the World Economic Outlook.
The International Monetary Fund was created in 1945 as part of the Bretton Woods agreement with the mission of promoting global economic growth, financial statement, international trade and reducing poverty across the globe. The IMF currently consists of 189 member countries, each of which have a proportionate number of seats on the executive board by order of the nation’s financial importance. The IMF's mission is “to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”
Interpersonal skills are behavioral techniques that an individual employs to properly interact with others. In a professional setting, interpersonal skills are considered an individual’s ability to work well in groups with others. Interpersonal skills generally are defined by the person’s knowledge of social expectations. More simply, they are a measure of a person’s ability to communicate effectively with others and adapt as circumstances change.
Intrapreneur is similar to an entrepreneur except that they work within the confines of a larger company. The intrapreneur has access to the company’s resources and doesn’t have to take the same outsized risks that an entrepreneur does. Companies that want to drive innovation will sometimes allow one person or even a group to work with autonomy as if they are their own company within a company. In this way, they are similar to an entrepreneur. The company is hoping that the unrestricted creativity and lack of influence from the larger company will provide the right environment for the next big thing.
Intrinsic value can have different interpretations for different people. This difference of opinion creates an opportunity for investors. One group of investors might decide that a company’s stock is worth $30 because the CEO was recently put in jail. And so the stock drops from $50 to $30, as those investors sell their shares. However, another group of investors believes the CEO being jailed has little effect on the company, as its financials are still very sound. They believe the stock is still worth $50 and begin buying shares in hopes that the price will increase back to $50. The above is a type of fundamental quantitative but a subjective one. Discounted cash flow (DCF) is a type of quantitative fundamental analysis that provides a numeric value for a company. However, it doesn’t factor in events such as the CEO going to jail or new competitors entering the market.
Investment banking is an institutional-level banking activity provided to large companies, governments, and other entities. It is separate from commercial banking through regulations, although both may be and often are part of the same bank. Investing banking is not open to retail customers, as it does not take in deposits. Instead, it helps with mergers and acquisitions, the raising of capital, taking companies public (i.e., underwriting), and reorganizations. For these activities, investment banks command high fees. There are two sides to investment banking — buy and sell. The buy side buys securities for mutual funds, pension funds, and more for money management purposes. The sell side creates and promotes securities to the buy side.
An investment portfolio is a collection of investments that can include stocks, bonds, commodities, and alternatives, among other types of asset classes. Investment portfolios can be held and managed by an individual, or held and managed by a hired financial professional for a fee, based upon the wants and needs of a particular investor. Investment portfolios are built based upon one’s financial goals and risk tolerance. Catering towards diversification and the management of unsystematic risk in a single investment, building a portfolio of investments across various asset classes may help an investor achieve a desired level of risk-adjusted return.
Investment property is a broad term for a real estate property that has been purchased with the intention of earning a return on the investment, either through
The Jumpstart Our Business Startups (JOBS) Act was signed into legislation in 2012 by President Barack Obama. It provides companies with less than $1 billion in revenue more access to capital markets. The JOBS Act does this by requiring less regulation or registration with the SEC. The JOBS Act is known for opening up crowd-funding, which has become popular with real estate syndication platforms. The Act allows non-accredited investors to invest in companies that would have previously been restricted to accredited investors. Through the JOBS Act, smaller companies can raise funds from a wider pool of investors (i.e., crowd-funding).
Joint tenancy is ownership of real estate by two or more individuals with the right of survivorship. A right of survivorship means that
A joint venture is an arrangement between two or more entity pool resources to accomplish a particular task in a business setting. Entities in the joint venture enjoy profits and are responsible for losses, but the entity is separate from other personal or business interests. Joint ventures are commonly formed when two businesses want to partner to enter an unfamiliar market. In real estate, a REIT specializing in multifamily development may for a joint venture with an office developer for the purpose of obtaining exposure to the office real estate market.
A jumbo loan is a type of mortgage that exceeds the loan limitations set by Fannie Mae and Freddie Mac. Thus, unlike a conventional loan, these type of mortgages can’t be purchased or securitized by these two entities.
Keynesian economics is a school of thought pioneered by British economist John Maynard Keynes during the 1930s. During the Great Depression, Keynes said the government should participate more in the economy by spending and lowering taxes. The idea was that the government would be able to offset some of the economic collapse from the Great Depression. Keynes also said the opposite should occur when the economy is booming. The government should step back by reducing its spending, raising interest rates, and increasing taxes. Fiscal and monetary policy, involving the federal government and FED, are the primary tools advocated by Keynes to better manage boom/bust cycles of the economy.
The law of demand is a lynch pin of economic theory that states a consumer will demand a lower quantity of a good or service at a higher price. Economists illustrate this law of demand along the market demand curve, which represents the sum of quantity demanded by consumers across a market for a particular good. A change in the price of a given good will result in a movement along the demand curve, but will not increase or decrease demand.
The law of supply is a microeconomic theory that states that, all other factors held equal, as the price of a good increase, the quantity of the good supplied will increase. Put simply, firms will choose to supply more of a good or service as they watch the price of said good or supply increase.
A legal document outlining the terms under which one party agrees to rent property from another party.
Lease Co. is a legal entity established to operate as a master tenant under a Delaware Statutory Trust (DST) ownership structure.
Lease termination fee is a payment made by the tenant or resident to the landlord in order to legally end a lease early and not be held liable for the remaining time.
A leasehold improvement is any change made to a leased property to meet the needs of the tenant. These improvements include changes to interior walls and ceilings, electrical and plumbing, and flooring, and can either be taken on by the landlord to increase the competitiveness of the space, or by the tenant themselves. In the event that the tenant undertakes the improvements, ownership of the improvements will typically revert back to the landlord once the lease has terminated, unless the tenant can remove the improvements without damaging the property.
Legal tender is the national currency of a nation. It prohibits the use of any other currency. Legal tender must be accepted by creditors as payment for debt. Only government institutions such as the U.S. Treasury in the United States and the Royal Canadian Mint in Canada can issue legal tender. Specifically, in the United States, Federal Reserve notes and coins are legal tender and marked as such. Some currencies, such as the U.S. Dollar and Euro, can be used as legal tender in other countries.
A letter of credit is a letter from a bank or other financial institution which guarantees an investor’s payments to a third party. If the investor does not make its payments pursuant to its agreement with the third party, the party issuing the letter of credit will be required to make the payment of fund any shortfall. For example, imagine Company ABC is interested in purchasing 1,000 widgets from Supplier XYZ for $1 million. Given Company ABC’s weak credit rating, Supplier XYZ is worried that Company ABC will not be able to pay in full within 60 days. In order to ensure Supplier XYZ that it will make good on it payment, Company ABC gets a letter of credit from the bank stating that it will pay any outstanding liability within the set time period, with the bank acting as insurance in the event that it can’t meet its financial obligations.
Liability car insurance is a type of auto insurance that covers people or property harmed by a driver. Liability insurance does not cover the driver. Rather than being sued by someone who the driver causes harm to, liability insurance is meant to provide financial protection for the driver. Some states require liability insurance to drive. In states that are no-fault insurance, drivers must purchase personal injury protection (PIP). PIP protects the driver and their passengers. In no-fault states, drivers are required first to file a claim with their insurance company, even if they are not at fault in an accident. There are two components of liability insurance — bodily injury and property damage. Bodily injury covers those that are injured when the driver is at-fault. This includes immediate and ongoing medical expenses, funeral costs, and any legal fees resulting from a lawsuit. Property damage covers damage to property outside of bodily injury. This includes the other driver’s car, buildings, and other non-human property involved in the accident. Liability insurance does have limits. Limits are configurable by the policyholder. The higher the limit, the more the policy will cost. One determining factor when choosing a policy limit is the amount of assets that a person wants to protect. If someone has $1 million in assets and chooses a $100,000 liability policy, they are leaving the remaining $900,000 of the assets potentially exposed to a lawsuit from injury or property damage. Regardless of the limit chosen, any expenses over the limit must be covered by the at-fault driver. Three Types Of Coverage Liability insurance limits are broken down into three types: Bodily injury — limit on expenses related to the injury of each person other than the driver. For example, each individual may be covered up to $50,000. Property damage — limit on expenses related to property damage. As an example, all property involved may be covered up to $25,000. Bodily injury per accident — this is the total that the insurance company will pay for all individuals involved. Using the above $50,000 per individual, the maximum per accident might be $200,000. However, if there are five people injured and each requires $50,000 in medical expenses, the at-fault driver is responsible for the remaining $50,000.
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.
Life insurance is a contract between an insurance company and a policyholder. The insurance company agrees to provide a death benefit to the policyholder’s named beneficiaries in exchange for a regular payment of a premium.
A method of deferring capital gains taxes on the sale or disposition of an asset held for business or investment purposes by exchanging the asset,
Limited liability allows investors to purchase shares in a partnership or limited liability company and limit their liability to only the amount invested. If the company fails and owes millions of dollars to creditors, investors are protected. Creditors cannot come after the investors. If shareholders did not have this protection, they would be more unwilling to invest in companies. Owners of a business can have liability exposure. Owners who start a business may personally guarantee loans made by the business. If the business fails, these owners are liable for paying back the loan. In this scenario, any shareholders remain protected and only lose their investment.
Limited liability company is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
Two or more investors who pool their money to develop or purchase income-producing properties. In a limited partnership, each limited partner's
Line of credit is a credit arrangement in which a financial institution agrees to lend money to a borrower up to a specified limit. The borrower can draw down on the
Liquidation is the process of converting assets in to cash or cash equivalents. Liquidation can occur when a firm goes bankrupt and thus needs to extract cash from its assets with readily marketable value to satisfy the demands of creditors and investors, or when an investor decides to give up his or her position in a security in exchange for the cash value of that security at a given point in time.
In real estate, list price is the initial sale price of the property that is suggested to the market. Evaluated by a real estate agent or other real estate professional, a list price is typically determined based off a comparative market analysis. This includes taking the sale price of comparable properties in the surrounding area, and making adjustments for any differing attributes. On larger scale investment properties, one may be able to utilize the appraised value of the property to determine an acceptable list price.
The loan to cost ratio is the ratio of the loan balance to the total cost of the project the loan is financing, expressed by the formula loan balance divided by total cost.
The ratio of a loan to the value of an asset as determined by the formula of loan balance divided by the market value of the asset securing the loan.
Local tenant, also known as a “mom-and-pop", is a small scale company with a narrow footprint typically limited to a single market.
Created in 1986 and made permanent in 1993, is an indirect federal subsidy used to finance the construction and rehabilitation of low-income affordable rental housing.
A low-income community census tract has an individual poverty rate of at least 20% and median family income up to 80% percent of the area median [Section 45D(e)].
A margin is a term used to describe money borrowed from a brokerage to purchase securities. Investors who “buy on margin” via their brokerage borrow money from the brokerage to purchase securities. Margin is calculated as the difference between the value of securities purchased and held in the investor’s account and the dollar amount of funds lent by the broker to facilitate the purchase.
Marginal utility is a subjective concept. It deals with the additional, incremental amount of use someone is getting from a product or service. Trying to quantify an incremental use of a product is nearly impossible. The general idea behind marginal utility is that a person will continue using/consuming a product or service if the additional unit of utility provides additional gain above the product’s or service's additional unit of cost. In other words, the marginal utility is greater than the marginal cost. People will not buy or use a product or service if its marginal utility is less than its marginal cost.
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.
Market analysis is the process of studying certain characteristics and trends of a market to determine its strengths, weaknesses, opportunities and threats.
Market capitalization places a total dollar value on a company based on its outstanding shares. The market cap formula is simple — total outstanding shares multiplied by the current stock price. Market cap allows a company to be compared to competitors within its industry. Investors also use market cap as a measure of risk — a lower market cap can signify more risk. Market cap is divided into three categories: Small cap — $300 million to $2 billion Mid cap — $2 billion and $10 billion Large cap — Over $10 billion Large cap companies are considered a low-risk staple of an investment portfolio.
A market failure is created when there is a mismatch between supply and demand. For example, there might not be enough supply to meet demand and vice versa. This mismatch is generally created by external events that are outside of efficient market operations. Some trigger points might be monopolies, government policies, market information breakdowns, and supply chain breakdowns (impairment of input mobility). An example of a market failure is a rise in minimum wages, which increases operational costs for businesses. Due to this increase, businesses hire fewer people, creating an artificial supply shortage. However, there are still plenty of laborers seeking jobs. There is now a mismatch between supply and demand.
A marketing strategy defines how a company will reach potential consumers and hopefully turn them into customers. The market strategy integrates various market components together in a cohesive manner. This includes branding, messaging, product packaging, advertising, and the marketing plan. The marketing plan is different from the marketing strategy. The marketing strategy is a vision of how the company will present itself to potential and existing customers. The market plan contains details on how to execute that vision. For example, what ads should the company run, and when should specific marketing campaigns begin. The lifespan of the marketing strategy may last across several market plans, as the marketing vision continually evolves with its customers.
A Master of Business Administration (MBA) is a graduate-level college degree. Most MBA programs require some type of entrance exam to enter. MBA programs are generally two years long. An MBA prepares students to analyze the performance of a business and make suggestions on how to improve it. Many MBA programs specialize in certain areas such as supply chain management, finance, marketing, entrepreneurship, and more. Some programs offer an abroad immersive experience that exposures students to business operations in other countries. Besides full-time programs, there are also part-time programs and executive MBAs, which target those already established in their careers.
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.
The mean is the average of two or more numbers. There are two ways to calculate the mean. Each method is used for different reasons. One way to calculate the mean is called the arithmetic average and the other is the geometric average. The arithmetic average is the simpler calculation. It only requires adding the numbers and dividing the total count of numbers. For example, if you want to find the mean of 3, 5, and 9, you add them to get 17 and divide by 3 (total numbers) to get 5.667. The geometric mean involves multiplying the numbers and taking the nth root. Using the same three numbers from above, we get 135 after multiplying. Now we take the cube root (i.e., nth root) of 135 to get 5.13. In finance, the geometric mean is used more often since it keeps the dependency from one value to the next. The arithmetic mean treats each number as an independent value.
The median is the middle number in a group of sorted numbers. The numbers can be sorted either way — ascending or descending. Sorting won’t change the median value. The median is a more descriptive representation of a set of numbers than the average. Especially with outliers, which create skew and can distort the mean, the median can be more useful. When there is an odd set of numbers, the median is the middle number. When an even set of numbers is used, we have two middle numbers. In this case, the two middle numbers are added together and divided by two to get the median.
Medicaid is a government-sponsored insurance program that works to assist low-income families and individuals in costs associated with medical care (e.g. doctor visits, hospital stays, long-term medical, custodial care costs). Primarily funded by the federal government, Medicaid operates at the state level and is available only to individuals and families that meet certain criteria that include legal and permanent residency in the United States and low-income generation.
A merger is an agreement in which two companies combine into one. Companies typically merge to create synergies, expand capabilities, reduce production costs, expand into new segments and ultimately create and/or enhance shareholder value. Whereas acquisitions are not considered voluntary, mergers are considered voluntary and require agreement on both sides. The five types of mergers are conglomerate, congeneric, market extension, horizontal and vertical.
Microeconomics is the study of the way individuals and firms allocate scarce resources in the pursuit of productivity. It is the study of economic tendencies and the ways individuals and firms price and produce goods and services in response to shifts in demand, regime and/or production capacities. Considered a more settled science than macroeconomics, microeconomics seeks to explain what will happen to supply and demand for a product or products in a particular market when certain conditions change with regard to the pricing and/or supply of a good or service.
Building or project that provides more than one use (e.g., a loft or apartment project with retail, an apartment building with office space,
An economic moat is a term used to describe a distinct competitive advantage that a firm has over its competitors that allows it to maintain market share and profitability over an extended period of time. Firms that enjoy economic moats are typically scaled and have significant free cash flows that allow them to minimize operating expenses relative to competitors. Strong patents, brands and licenses are items that allow firms to control and minimize operating expenses, protect market share and make duplication by competitors extremely difficult. Pharmaceutical companies with patents on specific drugs are able to charge premium prices for the products, while suppliers such as Wal-Mart are able to undercut retail competitors by offering the lowest prices on the market because of immense free cash flows and vertically integrated supply chains.
Modern portfolio theory is based on the thought that one may be able to maximize expected return, given a level of market risk, by constructing a portfolio of assets based upon an “efficient frontier”. Modern Portfolio Theory is an extension of diversification, and is the idea that owning assets across various asset classes exposes you to less risk than owning just one. MPT argues that an investment’s risk and return profile should not be viewed in isolation, but looked at in aggregate with the portfolio as a whole.
A modified gross lease is a rental agreement where the tenant pays base rent at the lease’s inception, but in subsequent years, also pays a proportional share, or
Monetary policy is the method by which central banks and other financial regulators govern the supply of money and interest rates in an economy to promote stable prices and low unemployment. Monetary policy can either be classified as expansionary or contractionary, depending on the regulator’s objectives. Central banks and regulators seek to use tools such as control of money supply and interest rates to influence output, employment and prices.
Money laundering is the process of making funds generated from illegal or illicit activities appear to be legitimately sourced. For example, revenues generated from drug trafficking need to be properly laundered to avoid the attention of authorities. Criminal organizations will seek to deposit these funds into financial institutions, but can only do so if they can convince the bank that the funds are the product of legal operations. Money laundering in itself is also a crime.
The money market trades in short-term debt instruments. It includes two types of participants — commercial and retail. Commercial participants (or wholesale participants) such as financial institutions, buy short-term debt for its liquidity and returns. Retail investors don’t buy debt directly but instead buy money market funds. These funds often have higher rates than savings accounts but are still very liquid, which makes them attractive to investors. Retail investors can also open a money market account, which is similar to a savings account but also with higher rates while still maintaining liquidity, although they do have certain restrictions.
A money order is a certified backed by cash and issued by a government or banking institution. They can be purchased at a number of locations for a small fee. A money order is cash on delivery. Some government agencies require particular types of payments that are backed by cash (i.e., cashier’s check and money order). Money orders must be paid with a debit card or cash. Personal checks and credit cards are not valid forms of payment since they are not backed by guaranteed cash and can be canceled after the money order has been purchased.
Monopolistic competition sits between perfect competition and monopoly. There are many competitors and entry into and exit out of the market is easy (no barriers). Products created by firms are similar but through marketing, firms are able to differentiate their products. Because perfect information doesn’t exist in this market, firms are able to earn a profit in the short run. In the long run, the story is different. Like perfect competition, companies break even over the long run. If one company experiences profit above its competition, more companies will enter the market and drive down prices. If companies begin experiencing losses, competitors will leave the market driving losses back to break even.
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.
A mortgage broker is a type middleman that connects mortgage borrowers with mortgage lenders. Tasked with helping qualify borrowers for a loan, whether it be for a purchase mortgage of refinance, mortgage brokers help borrowers shop interest rates with potential lenders, determine appropriate loan amounts and loan-to-value ratios, and help execute the application process. Similar to a real estate broker on the buy-side, mortgage brokers are compensated by the lender through an origination fee.
A multi-tenant property is a property that has two or more tenants. Compared to single tenant properties, multi-tenant properties can be more management intensive and may have less predictable cash flow.
A multinational corporation (MNC) is a company that has a presence in its home country and at least one other country. In the case of large MNCs, its assets, factories, and various facilities are spread across the globe. Being so globally distributed, the company can more efficiently conduct business in multiple countries, allowing it to serve not only those countries but surrounding regions. For investors, MNCs offer diversification. Should one country experience political unrest or more restrictive regulations/laws, the MNC is able to shift assets and operations to other more favorable areas. A single company operating within an adverse country will have more difficulty under such conditions.
A municipal bond is a debt issued by a government authority, whether that be federal, state, local, or a municipality. Municipal bonds are considered low risk, which means they also pay low interest. These low-interest payments are advantageous to the issuing authority, as it reduces their cost of debt, compared to corporate bonds. The issuing authority uses its bonds to pay for capital expenditures. Non-capital expenditures (i.e., expenses) are paid for with revenue from taxes. Most municipal bonds are exempt from federal taxes and some are exempt from state taxes. Because of these exemptions, high-income investors buy municipal bonds for their taxable accounts rather than retirement accounts. Municipal bonds are callable, which means the issuing authority can pay off the bond early, decreasing its overall yield.
Net asset value, or NAV, is defined as the total value of an entity’s assets less the total value of its liabilities. NAV is typically used to determine the share price of a pooled investment fund, based off how many shares are currently outstanding at a given time. In practice, NAV is used by funds registered with Securities and Exchange Commission, such as a mutual fund or real estate investment trust. In reality, however, any business or financial product that records its assets and liabilities can have a net asset value. For example, say a REIT holds $15 million worth of real estate in its portfolio, and has a 10,000 shares outstanding. Given that the REIT is 50% leveraged, it would be assumed to hold $7.5 million in debt. NAV would then be calculated as so: ($15 million - $7.5 million) / 100,000 shares outstanding = $75 NAV
Net worth is a gauge of financial health typically defined as the difference between an individual’s or a business’s assets and liabilities. It is a measure that seeks to quantify the value of an entity’s owned assets, and the abilities of these assets to satisfy all outstanding liabilities. Ultimately, it provides insight into an entity’s financial position at a given point in time.
Designed to increase the flow of capital to businesses and low-income communities by providing a modest tax incentive to private investors.
An investor who does not meet the special requirements for an accredited investor under the Securities & Exchange Commission’s Rule 501 of
In order to qualify as an investment in a QOZ, capital obtained by the sale of assets to provide liquidity for investment in a QOZ do not have to be like-kind assets. For example, an investor can sell stocks or precious metals and still reap the benefits of QOZ investment if he or she invests in a business or real property in a QOZ.
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.
A nonprofit organization (NPO) does not pay taxes on earnings or donations used to run the business. The IRS grants NPOs a tax exemption status because they provide a social benefit. Those who make donations to an NPO, whether that be from individuals or other businesses, are able to take tax deductions on the donations. NPOs are also called 501(c)(3) organizations, after the section of the tax code that grants them tax-exempt status. To qualify as an NPO, a business must serve the public. This can be through a service or the sale of products (or both). Financial information about the company must be made public. This allows donors to make informed decisions about whether to contribute money to the organization’s cause or not.
Nonqualified financial property’’ is defined in §1397C(e) as: debt, stock, partnership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annuities and other similar property.
Nonresident aliens are non-citizens of the U.S. They are exempt from a Green Card. Teachers, students, foreign nationals (for tax purposes), and those seeking medical services are common nonresident aliens. Nonresident aliens pay taxes on a trade or business related to the U.S. Resident aliens (qualified persons under the substantial presence test) are those who have been in the U.S. for 31 days or resided in the U.S. for more than 183 days within a 3 year period.
Oligopoly is a setting in which a small number of individuals or firms restrict outputs and/or restrict prices to derive market returns. There is no exact upper limit on the number of individuals or firms involved in an oligopoly market structure, but the actions of one firm must have significant consequences on others in order for an oligopoly to exist. Instances of oligopoly over the course of history include steel manufacturers, oil companies and wireless carriers. In each of these environments, high costs of entry allow for a select group of producers to dominate a market and obtain significant power in the pricing and production of goods and services.
The Organization of the Petroleum Exporting Countries (OPEC) consists of 14 of the world’s oil-exporting nations. Founded in 1960, the organization was created to coordinate distribution of one of the world’s most valuable resources and avoid massive price fluctuations that would negatively impact national and global economies. The organization is a cartel. Created in Baghdad in 1960, founding member nations were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Since its inception, the organization has added nine additional members: Libya, the United Arab Emirates, Algeria, Nigeria, Ecuador, Gabon, Angola, Congo and Equatorial Guinea.
Operating expenses are the actual costs associated with operating a property including maintenance, repairs, management, utilities, property taxes and insurance.
Operations management is a monitoring activity with the goal of increasing operational efficiency. This means cutting out waste while maximizing revenues. As a company creates finished products from materials and labor, operational management monitors this entire process for any inefficiencies. Once inefficiencies are identified, operational managers suggest methods for eliminating them. Some examples of company activities that operational management is concerned with include plant/factory maintenance, input procurement, inventory and raw materials shipping, inventory control, quality assurance, and equipment maintenance. As you might imagine, an operations manager must understand all facets of the business, along with local and global trends as they relate to the business.
Opportunistic properties exhibit the greatest risk but highest potential returns within the four major commercial real estate risk profiles
An Opportunity Zone is an economically-distressed community (see also “low-income communities”) where new investments, under certain conditions, may be eligible for preferential tax treatment.
Although there are similarities between the Opportunity Zone Program and the New Markets Tax Credit program, a crucial difference will be in underwriting the potential financial success of the low-income community businesses in which an Opportunity Fund invests.
Ordinary income is the income earned from providing services or the sale of goods. Ordinary income is composed mainly of wages, salaries, commissions and
Organizational structure allows companies to effectively communicate between internal groups and carry out activities necessary to the company’s profitability. An organization can be arranged as centralized or decentralized. In a centralized organization, information flows from the top (management) down (employees who carry out tasks). In a decentralized organization, such as a startup, information flows in many directions. There isn’t a wrong or right answer in choosing a centralized vs. decentralized structure. Younger companies may choose a decentralized structure as it allows them to move more quickly. Generally, as companies mature, they move to a centralized structure. Having an organizational structure in place is necessary for the efficient operation of a company. Otherwise, communication can devolve into chaos, and ultimately lead to the company’s demise.
A fee charged by a lender for processing your loan application. Similar to a broker’s commission, an origination fee is the Lender’s way of getting paid for its services. Origination fees range from 0.5% to 1.00%, and are often negotiated with the terms of the loan. In situations where a borrower desires a lower origination fee, the lender may demand an increase in the interest rate. Origination fees usually represent a higher percentage of smaller loans, as the lender is looking to make their time spent worthwhile.
Outsourcing is a practice of a firm hiring third-party labor to replace services previously performed in-house. Firms typically use outsourcing to significantly reduce labor costs by enlisting the help of an outside organization that has the capacity to perform the service or production of a good at a materially lower cost. Outsourcing can also help a business to focus more directly on its core operations.
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.
Payroll taxes come out of an employee’s check. Employees do not have to worry about paying this tax directly since it is withheld by the employer. The employer then pays the tax to the IRS for Federal income, Medicare, and Social Security. Employees can see how much is paid to each category on their check stub. Self-employed individuals still pay payroll taxes in the form of self-employment tax. Unemployment insurance is also funded by the employer and can be considered part of payroll taxes. When an employee is terminated, they can use the amount of paid unemployment insurance until they find a new job.
Per capita GDP is measured by dividing an economy’s gross domestic product by that economy’s average population in a given year. Per capita GDP is used as a measure of the standard of living in an economy by adjusting for the size of the economy’s population. As developing nations grow, their per capita GDP will converge with the per capita GDP of developed nations.
Percentage lease is 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
Percentage rent is rent due in lieu of, or in addition to base rent that is paid to landlords based on tenant sales. A percentage rent clause is nearly exclusive to
Perfect competition is a non-existent market state in which companies sell the same product for the same price and make just enough money to remain in business. All products are sold because there is an exact match in demand for them. Because buyers have perfect information about the products being sold, product and service prices always reflect the current market price. In the real world, competition is not perfect. In most cases, firms do not produce the exact same product or price it the same as competitors. They are always looking for some small differences to make their product stand apart. This creates differences in prices and demand, leading to imperfect competition. However, such markets are generally liquid and highly competitive, which is about as close to perfect competition as the real world gets.
Personal finance involves learning about how to manage your money efficiently and plan for your financial future. Saving for retirement, paying off debt, saving for a house down payment, buying the right amount of insurance, and more all encompass personal finance. There’s an entire industry of services that also offer personal financial assistance. Specifically, financial advisors help people to accomplish their financial goals. Because people have unique financial situations and goals, financial advisors are still needed. However, an individual can certainly learn to manage their own money and financial future by reading online articles and books on personal finance.
A type of property which, in its most general definition, can include any asset other than real estate. The distinguishing factor between personal
For purposes of Qualified Opportunity Zone Program, if the taxpayer has not sold the qualified investment by December 31, 2026, the inclusion of the deferred gain may result in phantom gain at that time.
12/31/26. At this date, the deferred capital gain must be recognized. All or part of the deferred gain is includible in taxable income when the taxpayer sells the investment in the Qualified Opportunity Fund or on December 31, 2026, whichever occurs first.
A ponzi scheme is a type of investment scam. It is named after Charles Ponzi, who initiated the first ponzi scheme in the 1920s. A ponzi scheme works by having investors invest in what appears to be a legitimate investment opportunity. The scammer promises high returns. As investor money comes in, the scammer uses the investors’ own money to pay for the returns. Because investors are receiving regular payments, they don’t question the legitimacy of the operation. Behind the scenes, the scammer is pocketing/stealing most of the money. Once new investors stop coming into the scheme, the scammer can no longer pay returns to existing investors. At that point, the entire scheme collapses. Most scammers will try to disappear when they see that new investors are not available and they are running out of money to pay returns. Sometimes authorities find out about the ponzi scheme before it collapses. In many cases, though, investors lose out.
A positive correlation represents the relationship between two investments that move together. When one investment is moving up, we can expect the other positively correlated investment to be doing the same. One is not leading the other. They simply have common dependencies that drive their move. Correlation is a numeric value between -1 and 1. -1 means negative correction. These are investments that move opposite each other. 1 represents positively correlated investments. 0 represents investments that move independently of each other. Having a portfolio of zero correlated investments provides diversification. As some investments are moving down, others are flat or moving up.
Companies issue two types of stock - common and preferred. Common stock is what you commonly see quoted on stock exchanges and financial news websites. It is the one most people invest in. Preferred stock is similar to a bond in its behavior, and unlike common stock, does not have voting rights. However, it does pay dividends to its owners before common stock pays and will pay any dividends in arrears.
Present value is expected value, as of the date of valuation, resulting from discounting future amounts.
Price discrimination occurs when a seller charges different prices to different customers for the same product. The seller is trying to get the highest price possible for the product. Price discrimination may occur on an individual customer basis, where each customer is charged a different price. It can also happen when groups of customers are charged different prices. Groups are based on certain characteristics such as international or domestic, educated or uneducated, employed or unemployed, wealthy or poor. There is no limit to the types of groups a company may define for its customers. There are three degrees of price discrimination. The first is when a seller tries to get the highest price from each customer. The second is when a discount is offered for bulk purchases. The third is when groups of customers are charged different prices for the same product. Sellers split customers into groups because group profits are higher than when customers are looked at as one homogenous population. How long the seller is able to keep up price discrimination will depend on the elasticities of the groups or sub-markets (also called market segments). Profits in an inelastic sub-market should not change since those consumers are willing to pay a higher price. This is likely due to the lack of alternatives in the sub-market. It is just the opposite for consumers in an elastic market. Due to alternatives, consumers will find substitutes when prices rise, reducing the seller’s profits in that market. Those companies that are a monopoly are able to more effectively employ price discrimination. Also, it is important that a seller’s sub-markets do not overlap. Otherwise, customers within one group would be able to sell products at a higher price to other groups (who were charged more for the same product).
The primary market is where securities are created and listed for the first time by companies, governments, and other entities looking to obtain debt or equity financing. Securities issued the primary market have never been traded before, and are typically sold by underwriting groups such as investment banks or other securities dealer, depending on the size and scope of the transaction. For example, while corporate IPOs may be underwritten in the primary market by Credit Suisse, small private placements may be underwritten by an independent broker-dealer. Once a security is purchased on the primary market, any further trades will be done through the secondary market.
The interest rate banks charge their most creditworthy customers, or customers with the least risk of defaulting. In other words, the minimum rate a bank would be willing accept on an outstanding debt. Prime rates directly affect other lending rates, as the prime rate serves as a basis for determining interest rates for mortgages, business loans, and personal loans.
Private equity is a type of alternative investment class that involves deploying capital into investments or businesses that are not listed on a public exchange. In practice, private equity is used to invest in private companies, to initiate buyouts or bolster its financial statements, or to invest in privately held assets, such as real estate. Due to the fact that private equity requires placing substantial amounts of cash for long periods of time, investors are usually institutionally backed or have achieved some degree of accreditation. For investors in operating companies, these long hold periods are due to the considerable amount of time it takes to turnaround a distressed business, or to achieve a liquidity event such as an initial public offering or sale to a public company. In real estate, longer hold periods can be attributed to value-add initiatives, predetermined lock-up periods, as well as the overall illiquidity of real estate investments.
Private placement is an offering of securities that is not registered with the Securities and Exchange Commission (SEC) and which are sold not through a
Private placement memorandum is an offering document for a private placement that contains relevant disclosures so that an investor may make an informed investment decision.
Pro Forma is a forward-looking cash flow projection based on a set of assumptions. Pro forma financial statements depict future financial results if the underlying assumptions hold true.
Pro rata is a term that means each person gets their proportionate share of distributions. Pro rata is Latin for "in proportion." As an example, if three people own an investment that pays quarterly distributions, they are all paid based on the amount each has invested. If person A owns 20%, B owns 50%, and C owns 30%, and the next distribution is $1,000, A will receive $200, B $500, and C $300. Pro rata should not be confused with pro forma, which is used with financial statements that are based on assumptions.
The Producer Price Index (PPI) is released monthly by the Bureau of Labor Statistics (BLS) and tracks changes to the price of end-user products. Unlike the Consumer Price Index (CPI), which tracks cost from the consumer’s view, PPI tracks cost changes from the producer’s view. It represents the average movement in selling prices from domestic production over time. PPI uses three areas of production classification — crude (raw product), intermediate (manufactured good but not finished), and finished (what the end-user sees and pays for). The BLS tracks nearly 10,000 individual products and product groups, covering sectors such as construction, manufacturing, mining, and agriculture.
Productivity is a measure of production efficiency. Based on the number of labor hours needed to create a product, efficiency can be determined. Productivity efficiency is expressed as output per unit of input. In other words, the amount of product created based on the amount of labor needed. If a company’s productivity is low, it may invest more in technology to bring its productivity up to a competitive level. Companies use productivity measures to gauge their efficiency, especially against competitors. Productivity can also be used to calculate the efficiency of GDP. As well, productivity can be measured across both sectors and industries.
Profit margin shows how efficiently a company generates profit for every one dollar of sales. Profit margin is expressed as a percentage. It is calculated by dividing net profit by sales or revenue. For example, a company that has $500,000 in sales and $100,000 in net profits has a profit margin of 100,000 / 500,000 = 20%. Profit margin allows for comparing the efficiency of profit generation between companies within the same industry. Trying to use profit margin to compare companies within different industries will be fairly useless since profit margin does not account for industry differences.
A tax structure in which the tax rate increases as the amount of taxable income increases. “Progressive” due to the nature of the tax rate progressing from low to high, the net effect is that higher-earning individuals are taxed more heavily than lower-earning ones. In this structure, a taxpayer’s average tax rate is less than the person’s marginal tax rate. For example, say Sarah reports $50,000 of taxable income on her tax return. Assuming she is filing as an individual, Sarah’s marginal federal income tax bracket will be 22%. Due to federal income tax being progressive in nature, however, Sarah will calculate her tax liability as so:
A promissory note is a financial instrument in which the issuer contractually agrees to pay a sum of money to a payee, either at a determinable time or at the demand of the payee. Similar to a note payable, promissory notes usually include the amount of principal that should be paid at maturity, any applicable interest rate, terms of repayment, and the date of maturity. Provisions regarding issuer default are usually included as well. Although often issued by a financial institution, promissory notes offer businesses and individuals the opportunity to obtain financing from an entity that is not a bank. Any person or persons willing to provide financing under the agreed upon terms may become a lender under a promissory note.
Property condition report provides an analysis of a building or facility to help establish a buyer's risk due to the physical condition of the facility. The analysis includes architectural, structural, mechanical and electrical systems and elements.
Property management is the supervision and oversight of residential and commercial real estate. Aiming to ensure that the property being managed meets a certain operational standard, property management looks to drive income growth while preserving the value of the property. Although some real estate owner-operators deploy their own property management division to oversee their assets, property management is often done through third party companies that specialize in a particular asset class. For example, Asset Campus Housing has specialized in student housing property management since 1986.
Property rights give property owners the right to do with their property what they chose. Property can be land, a car, a house, a pet, or a phone. Property can be transferred to another owner, sold, or rented out for a profit. It can also be inherited. Property can be private or public. It can be owned by an individual, business, group, or government.
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.
Industrial property type is one of the four main asset classes of commercial property, which is typically used for the purpose of production, manufacturing, or distribution.
Multifamily property types are typically considered apartment buildings that can accommodate more than one family. Condominiums can sometimes be covered in this property type as well.
Offices are commercial properties that are primarily used to maintain professional or business offices. Encompassing term that may include
Senior living property is housing that is catered to seniors, typically over the age of 55. Contrary to standard multifamily properties, senior living communities usually include specialized amenities or services. Senior living covers a wide range of property types that include active-adult communities, assisted living, and memory care facilities.
A prospectus is a formal document submitted to the Securities Exchange Commission (SEC) by a company that wishes to market a debt or equity offering to the market. Companies that wish to conduct a stock or bond sale on the market thus must file a prospectus to be submitted to the SEC that provides complete details of the investment offering. Prospectuses typically include a brief summary of the firm’s background and financial performance, number of shares being offered, types of securities being offered and names of banks and/or financial institutions underwriting the offering.
Protectionism is a policy when a government seeks to restrict international trade for the purpose of protecting its nation’s businesses and jobs from being undercut by foreign competitors. Critics argue that protectionism hurts a nation in the long run by decelerating economic growth and pricing inflation, while proponents of protectionism say it creates jobs by forcing firms and individuals to seek innovative technologies that streamline productive efficiencies and capacities.
A public good is a product that an individual can consume without reducing the availability of the public good to others. Public goods are defined by economists as non-excludable, meaning that the supply of public goods does not decrease in the event people use or consume them. Examples of public goods include law enforcement, freeways, public parks, and public transportation. Public goods are often financed by the public.
The Purchasing Managers’ Index is a number that describes the economic health of the manufacturing and service sectors. PMI values range from 0 to 100. A value below 50 indicates a contraction, while above 50 indicates expansion. Taken over multiple periods, PMI can represent a trend for the two sectors. PMI is released each month. It provides insights into the economic health of the surveyed countries. In addition to the manufacturing and services sectors, information about sub-indices such as GDP, inflation, exports, capacity utilization, employment and inventories can also be obtained. PMI is considered a leading economic indicator.
Step 1: An investor with a recently realized capital gains elects to invest this gain into the Qualified Opportunity Fund (QOF), taking stock or a partnership interest in return. By so doing, the investor gets to defer capital gain income.
A qualified client is an investor that is exempt from the provision of the Investment Advisers Act of 1940. This act prohibits private investment funds from charging performance-based fees. A "qualified client" meets at least one of the following parameters:
Dividends come in two different types for tax purposes — ordinary and qualified. Qualified dividends are taxed at a lower rate than ordinary dividends. Ordinary dividends are taxed at the higher regular state and federal income tax rates. Qualified dividends are taxed at 0%, 15%, or 20%, depending on your tax bracket. This difference between qualified and ordinary dividends can mean big savings at tax time. Qualified dividends must meet special requirements set by the IRS.
To become a Qualified Opportunity Fund, an eligible taxpayer self-certifies. As of now, no approval or action by the IRS is required.
A trade or business (i) in which substantially all of the tangible property owned or leased by the entity is Opportunity Zone Business Property, and (ii) which (a) derives at least 50% of its gross income from the active conduct of a trade or business, (b) uses a substantial portion of any intangible property in such trade or business, and (c) has less than 5% of its assets invested in non-qualified financial property. Notwithstanding the preceding, a trade or business will not qualify as an Opportunity Zone Business if it is engaged in owning or operating any private or commercial golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other facility used for gambling, or any store the principal business of which is the sale of alcoholic beverages for consumption off premises.
Tangible property used in a trade or business of a Qualified Opportunity Fund if such property (i) was acquired by purchase after December 31, 2017, (ii) the original use of such property in the Qualified Opportunity Zone commences with the Qualified Opportunity Fund or the Qualified Opportunity Fund substantially improves the property, and (iii) substantially all of the use of such property was in a Qualified Opportunity Zone during substantially all of the Qualified Opportunity Fund holding period for the property.
An investment vehicle that is set up as either a partnership or corporation for investing at least 90% of its assets in eligible property (see “Opportunity Zone Property”) that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment (an unlimited amount) from the sale or exchange of any property (whether or not the asset sold was located in or related to a low-income community).
Qualified Opportunity Zone Property also includes certain interests in a partnership, with requirements substantially identical to those applicable to Opportunity Zone Stock but which would apply when the business is organized as a partnership rather than a corporation.
Is property that is (i) qualified opportunity zone stock, (ii) qualified opportunity zone partnership interest, or (iii) qualified opportunity zone business property.
Stock of any domestic corporation (i) acquired by the Opportunity Fund after December 31, 2017, at original issuance solely in exchange for cash, and (ii) which, at the time such stock is issued and during substantially all of the Opportunity Fund’s holding period, is a Qualified Opportunity Zone Business (“QOZB”).
A quitclaim deed is a legal document that may be used to sell or transfer interests in real property. A quitclaim deed transfers whatever interest the seller or transferor actually holds in a property with no representations or warranties made to clear (unencumbered) title or the exact rights held by the grantor (seller).
The rate of change is a measure of the speed at which a variable changes over time. With regard to a stock’s price, the rate of change can be calculated by dividing the current price of a stock by its value at a previous period in time, subtracting one and multiplying by 100. For example, say the price of Stock A was $100 in January and dropped to $75 by March. The rate of change for Stock A’s price in this 3-month time period would be -25%.
Rate of return is the profit or loss on an investment over a specified period of time expressed as proportion of the investment amount.
Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water.
A licensed intermediary between buyers and sellers of real estate, typically working for commission. A real estate broker typically has completed
Real estate equity is the difference between the current fair market value of a property and the amount of debt owed against the property.
Real estate investment is real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence or personal use.
Real Estate Investment Trust is a trust or company that owns, finances, or invests in real estate and/or real estate-related assets. REITs provide individuals the ability to invest in
An investor who evaluates the real estate market and purchases property with the intention of building wealth.
Realized gain is the amount of gain that the investor made from the sale of an asset. It is calculated as the net sales price received (sales price of the asset less any
A lease provision that grants a landlord the right to terminate a current lease, and take back possession to specific space or tenant suite. To take effect, there is typically a negotiated triggering event that has to occur. This includes a tenant “going dark” or failing to meet its percentage rent terms. Although common in commercial real estate leases, recapture clauses can be included in any contract in which an asset is exchanged. For example, say Sarah owns XYZ Retail Center. The space is currently leased to Yummy Grocery, with a stated rent of 2% of its sales for a minimum of $2,000. Meaning, Yummy Grocery has to have sales of $100,000 to meet its rent obligation. The next month, Yummy Grocery only does $80,000 in sales. Because Sarah negotiated a recapture clause in the lease, she may be able to terminate the lease and take back the space from Yummy and potentially replace it with a different tenant.
A recession is a macroeconomic term that represents a significant and extended period of declining or stagnant economic performance in a region or country in the world. Investors, businesses, public entities and governments all track various indicators that can predict or signal the onset of a recession.
A term used to describe real estate assets that are tied to lifestyle trends, as opposed to economic cycles. These assets are less subject to downturns, and are subject to forces of the underlying market demographic. Recession-resistant real estate typically falls under three main asset classes: student housing, self-storage, and senior living.
Recognized gain is the taxable portion of realized gains arising from the sale of an asset or assets. Recognized gains are typically less than realized gains due to
Recourse is a type of loan that allows the lender to recover against the personal assets of a party in the event of default by the borrower to the extent of the
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.
Related parties transaction is a business deal or arrangement between two parties who are joined by a personal or other relationship prior to the deal.
Generally speaking, related party issues are technical and we recommend consulting with your CPA or tax attorney to understand how the “related party” rules may impact your specific situation.
A rent payment arrangement is a temporary arrangement for someone to rent a property. The agreement is a contract that lists the terms for renting the property. This includes the monthly amount of rent, the due date for payments each month, deposit, late fees, use of the property, renter expectations, end of agreement expectations, parking, etc. A rental agreement is a legal contract but is different from a lease. A lease is a fixed term for renting a property. There are also high penalties for breaking the lease (i.e., vacating the property before the lease term ends).
A retail investor is any individual who purchases and sells securities for his or her own investment portfolio. Similar to institutional investors, retail investors have the ability to engage in stock and bond markets, mutual funds, exchange traded funds, and other alternative investments, conducting trades through brokerage firms or saving accounts. Note, however, that a retail investor may need to meet a certain level of accreditation to participate in some investments, such as private equity, hedge funds, and certain private placements.
Retained earnings are earnings reinvested into a company to pay down debt or help it grow. A company may use its retained earnings to grow by investing in various capital projects that show a high probability of success. When a company’s stock price increases, its EPS (earnings per share) also increase. For investors, this is a sign that the company is making efficient use of its retained earnings. If EPS is not increasing, it may be a sign that the company isn’t making the most use of its retained earnings. In that case, investors will expect a dividend, given the lack of appreciation in the stock price. A company with a static or declining stock price that does not pay dividends may find it difficult to attract investors.
Return on equity (ROE) is a percentage-based performance metric designed to determine how well a company is putting the equity investments it has gained to work in order to increase company value. In other words, it reveals if management is providing a good return on equity. It is measured by dividing net income by total company equity, and is best used when compared to the ROE of other firms within the same industry. ROE is calculated by dividing annual net income by shareholder equity: ROE = (annual) Net Income / Shareholder’s Equity Net income is found on the income statement, while equity is found on the balance sheet. Since equity is assets minus debt, ROE shows how well a company is able to turn assets into profits. Another way to look at ROE is how many dollars of profit are you getting back for each dollar of equity put into the company.
Return on investment measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is
A 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
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.
Risk adjusted returns is the measure of the return on an investment relative to the expected risk of that investment, over a specific period.
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.
Introduced in 2012, Rule 144A reduces the amount of time a qualified institutional buyer must hold privately placed securities from 2 years to six months for a company that reports to the SEC or a year for a company that does not. The introduction of this rule has substantially enhanced liquidity in the market for private placement securities. The modification was introduced to acknowledge that sophisticated institutional buyers do not need the same protections an individual investor requires on the open market.
An S corporation is a type of corporation with less than 100 shareholders that files corporate taxes and allows a firm to pass business income, losses, deductions and credits to the firm’s shareholders. S corporations do not pay taxes at the federal level, which is particularly beneficial to a business recently established that seeks to grow. An S corporation allows a firm to characterize distributions as salary or dividends, thus allowing the S corporation to reduce its tax liability.
Safe harbor is a statutory or regulatory provision that provides protection from a penalty or liability. In the context of a 1031 exchange, safe harbor refers to any one of
A sale-leaseback is an agreement where the seller of real estate leases back the same property from the buyer the seller sold it to. Once a seller has given title to the buyer, the seller immediately enters into a lease agreement with the new owner, making rent payments to occupy the property. Sale-leaseback provisions are often used in situations where a company needs to access capital tied up in an asset such as real estate, but still needs to use the property in order to operate.
A sales tax is a tax imposed by a government on the sale of a good or service. A traditional sales tax is charged to the end user of the good or service at the point of sale, at which point the retailer will pass funds generated from the sales tax on to the appropriate government entity. Different jurisdictions, counties and municipalities across the United States charge different sales taxes.
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.
Sampling error is a statistical metric that occurs when an analyst does not select a sample representative of the population it was chosen from. When calculations are performed on the sample, they will not coincide with results from a sample that is representative of the population. This problem can be fixed by choosing a larger sample from the population. Sampling error isn’t necessarily a bad thing and is usually present in most samples. There is generally some amount of sampling error since the sample is always only a small part of the population. The smaller the sampling error, the more representative of the population the sample will be.
A savings account is an interest-bearing deposit account. It is an instrument used by individuals and businesses to deposit funds at a bank or financial institution in exchange for a moderate interest rate. Whereas checking accounts offer depositors unlimited deposits and withdrawals and a lower interest rate, savings accounts offer depositors a limited number of withdrawals and a more favorable interest rate.
Savings bonds are issued by the federal government and can be purchased by the public. Savings bonds are considered one of the safest forms of investment since they are backed by the federal government, which has virtually zero chance of defaulting. Because savings bonds are considered very safe, they also pay a low interest-rate. However, people still buy them for savings. Savings bonds are issued as debt to the government. The interest rate of savings bonds is determined by the market. Like any debt, the government pays interest on savings bonds to the holders of those bonds (i.e., debt). Just like a person with great credit has a high credit score, the savings bonds have one of the highest credit ratings.
Scarcity is a basic economic problem that describes the limited means of producers and suppliers to satisfy unlimited wants of consumers. The concept of scarcity grapples with the fact that every resource has a finite supply, whether that be time, money, water, wood or land. The study of economics is thus ultimately the study of how individuals and entities react to the scarce supplies and allocate resources to combat this limit to generate profit.
Previously owned equity interests in a 1031 exchange-qualified Delaware Statutory Trust (DST) whose properties have at least twelve (12) months
A second mortgage is a subordinate mortgage taken on by a borrower while a first mortgage is still in place. In situations where a homeowner has built up equity in his or her property by paying down a first lien mortgage, or property appreciation as occurred, one may want to borrow against this new equity to fund projects or other expenditures. Due to the fact the second mortgages only receive payment when the first mortgage has been paid off, they typically hold higher interest rates. There are two main types of second mortgages that exist: a home equity loan and a line of credit. A home equity loan is where a borrower receives a upfront lump sum from the lender, and makes interest and principal over the mortgages term, similar to a conventional loan. A line of credit is where the lender allots a predetermined amount of money for the borrower to draw from, with the borrower able to borrow and repay the line of credit as often as they wish. Note that in a line of credit type loan, the borrower is not required to take any funds from the borrower.
Seller financing is a loan provided by the seller of a property or business to the purchaser of that property or business.
Debt that takes priority over other unsecured, “junior” debt. Senior debt sits at the bottom of the capital stack, and offers the lowest risk with the lowest return.
The sharpe ratio is a measure of investment return against risk. The higher this ratio, the less risk one is taking for return. The sharpe ratio formula is (return - risk free rate) / [standard deviation]. We want to know the risk-adjusted return, which the following gives us: return - risk free rate. Volatility, or risk, is found from the standard deviation. The larger our return (numerator) and the smaller the risk (denominator), the larger our sharpe ratio will be. As risk increases without an equal or greater increase in return, the sharpe ratio will drop, signifying we are taking on more risk for each unit of return. When comparing sharpe ratios across investments, it’s important to compare similar investments.
Simple interest is a method of calculating interest generated on a loan’s principal. It is calculated by multiplying the daily interest rate by the principal and the number of days between payments. Types of loans that apply simple interest are auto loans and short-term personal loans. Consumers who pay loans early or on time on a monthly basis benefit from simple interest structure because principal balance shrinks faster under this method of interest calculation.
Social responsibility is a theory that argues that businesses are obligated to function in a manner that benefits the broader society, whether that be a local community, region or country. Social responsibility ultimately calls for businesses and individuals to perform their duties to act in the best interests of society and the environment. The theory asserts that businesses can achieve profitability and act in a socially responsible manner simultaneously.
The Social Security Act is a law introduced in 1935 designed to transfer wealth from the working population to older, retired people. The Social Security system is funded via a payroll tax. The Social Security Act was introduced by President Franklin D. Roosevelt during the Great Depression in 1935. The government began collecting the tax from workers in 1937 and making payments in 1940.
The Social Security tax, or Old-Age, Survivors, and Disability Insurance (OASDI) Program, which is the official name of social security, is a payroll tax levied against employees and employers. When you look at your next paycheck, you’ll see a deduction for FICA. FICA stands for (FICA) Federal Insurance Contributions Act, which is the fund that Social Security taxes are paid into. Self-employed people also pay into Social Security through self-employment taxes, which are mandated by the Self-Employed Contributions Act (SECA). The 2020 Social Security tax rate is set at 12.4% and is paid 50/50 between employees and employers. Self-employed people must pay the entire 12.4% Social Security tax.
The solvency of a company demonstrates if the company’s ability to pay its long-term debts. Companies that cannot pay their long-term debts are insolvent. Basically, a company that owes more than it is worth is insolvent. If a company does not have enough cash on hand or from cash flows to meet its long-term obligations, it will likely default on its long-term debts without some outside assistance. If no assistance is provided, the company will have to file for bankruptcy. The solvency ratio can be used to determine how likely a company is to pay its debts. The ratio = [(net after-tax profit) + depreciation] / (short & long-term liabilities). The ratio is expressed as a percentage. The solvency ratio should only be compared to companies within the same industry.
Special purpose entity is a legal entity established by the sponsor or borrowing entity whose operations are limited to the acquisition and financing of specific assets.
A spin off is the sale of an existing business from a larger business (parent company). The spin off may no longer align with the larger business’s strategy or it may be losing money. Shareholders of the parent company may receive dividends from the spin off. Shareholders may also have the ability to exchange parent company stock for the stock within the spin off at a discount. Spin offs can perform differently in the marketplace compared to that of the parent company. Usually, the spin off will perform poorly during a weak market and very good in a stronger market. This performance will be reflected in the spin off’s stock price, which can exhibit volatile behavior.
Stagflation is a term used to describe a period of slowing economic growth in which prices are increasing at a rate higher than the growth of the economy. Stagflation was widely recognized during a period in the 1970’s in which the U.S. economy experienced rapid inflation and high levels of unemployment. Previously, stagflation was widely considered by economists to be impossible, because macroeconomic theory long believed that unemployment and inflation were inversely correlated. There are many theories that have spawned since the mid-20th century that seek to identify the root cause of stagflation.
Standard of living is a measure of wealth, material goods and necessities available to various socioeconomic classes in a given area at a fixed point in time. Measurements of standard of living can be used to compare geographic areas at a fixed point in time or economic conditions in a single geographic location at various points in time.
Stated rent is the rent amount paid by the occupant to the landlord as specified in the lease. Stated rent does not account for any concessions or landlord costs
Statistical significance tries to verify that variables related to an outcome are relevant to that outcome. For example, a finance engineer wants to know if a set of stocks will drop within the next 120 days. His model consists of several variables, such as earnings, technical indicators, and news events. Certain news events show a high correlation with stock price movement. The news event variable is, therefore, statistically significant. Any variable that is statistically significant has a high percentage (i.e., close to one). 95% and 99% are commonly used to show statistical significance. When analyzing a population, most data analysts will use a sample size. From there, they can determine statistical significance. However, it is important that the sample accurately represents the larger population. Otherwise, any statistical significance findings may be incorrect.
A stock is a security that represents a shareholder’s proportionate ownership in the assets and earnings of the issuing corporation. Stocks are primarily bought and sold on exchanges. In exchange for cash, stockholders obtain a piece of a corporation and a claim to that firm’s assets and earnings.
The stock market is a general term used to describe various markets and exchanges on which individual and institutional investors buy, sell and issue share of publicly-traded companies. Also referred to as a stock exchange, the stock market is an environment where investors can interact and transact in a secure and regulated environment that exists to ensure investors have access to liquidity and a fair price to buy or sell securities. The stock market is also a source of capital-raising for private companies seeking to offer shares of their company to the public for the first time in the form of an initial public offering (IPO).
Stock splits might be seen as marketing techniques. When the price of a stock rises to high, it can become unattractive to investors. A lower price stock allows investors to hold a large number of shares. With a high priced stock, investors may be able to hold only a few shares. When a company splits its stock, it creates more shares at a lower price. However, the value of those shares is the same. For example, a $500 stock that splits 1-2 means the price will drop to $250, and each shareholder will have two shares at $250 instead of one at $500. Stocks can also do reverse splits. A $50 stock that splits 2-1 means that for every two shares, investors get one at $100.
Qualified Opportunity Zone Business Property (“QOZBP”) is substantially improved for this purpose if during any 30-month period following acquisition of such property there are additions to basis that equal the adjusted basis as of the beginning of such 30-month period.
A sunk cost is money spent on a project that has not provided the desired outcome. For example, a pharmaceutical company spends $25 million in R&D on drug #1. The outcome is not what the company was hoping for. The drug does not cure a particular disease and has negative side effects. The $25 million is already spent and there is no chance of recouping that investment. The company can spend $10 million more pursuing drug #1 or put the money towards a higher probability outcome for drug #2. The fact that $25 million has already been spent should not factor into the decision. If the company decides to continue with drug #1, in hopes of recouping some of its loss, it will have engaged in what economists call loss aversion.
A supply chain is a network that a firm builds to perform the production of a good or service. This network includes individuals, entities, information and other resources that are pooled together to efficiently conduct the production of a good or service. Companies monitor their supply chains ultimately to reduce variable costs and expenses at various points throughout the production of a good or service. More mature companies with high levels of working capital can choose to vertically integrate supply chains, which involves the ownership of all levels of the supply chain network involved in the production of a good or service.
Supply is the amount of a good or service that is available to consumers. The price a consumer will pay for a good determines how much of the good’s supply is sold. In this way, consumers are able to influence prices through their demand. As consumers buy up the supply of a product without decreasing their demand, the price increases. At some point, price becomes too high, and demand falls. Equilibrium occurs when supply and demand are equal. From the above example, as the price falls, demand increases. Eventually, the market determines the right price, and fluctuation between supply and demand slows. This is where the market begins to meet equilibrium.
Swaps are most used with interest rates. When two companies with loans have different views on where interest rates are going, they may decide to swap their rates with each other. The swap is often executed by using derivatives contracts. Swaps can be used on commodities, currencies, and debt-equity structures.
The uncertainty caused by macroeconomic factors that affect all risky assets. Also known as “market risk”, systematic risk underlies the performance of most asset classes that trade publicly or privately. One can not diversify against systematic risk, as it includes events such as inflation, changes in interest rates, recessionary periods, and even war. These type of forces tend to affect the market as a whole, and typical portfolio diversification strategies may not be as effective.
Tangible personal property is everything other than real estate that is used in a business or rental property.
Tax basis, in the context of commercial real estate, is the original purchase price or cost of an investment property plus any out-of-pocket
A congressional revenue act originally introduced in Congress as the Tax Cuts and Jobs Act (TCJA). Public law no. 115-97 ("the Act") amended the Internal Revenue Code of 1986 based on tax reform advocated by congressional Republicans and the Trump administration.
Tax deductions help to reduce taxes owed at the end of the year for individuals and companies. Deductions can come in the form of expenses incurred throughout the year or as itemized deductions. If an individual adds up all of their eligible deductions for the year and they don’t equal the standard deduction, the person can elect to take the higher standard deduction. Some examples of (itemized) deductions include healthcare, mortgage interest, property taxes, and home office and related job expenses. Up to $3,000 in losses on investments can also be used to reduce tax liability. Investment losses from the previous year can be carried forward into the current year for up to $3,000 in total investment losses.
Tax deferred is an instance where investment earnings such as interest, dividends, or capital gains accumulate tax-free until the payment of taxes related to the
A tax liability is the total amount of taxes owed by an individual taxpayer, corporation, or other organization. Payable to federal, state and local taxing authorities, tax liabilities are derived from income earned, capital gains on the sale of an asset, or other events that are considered taxable by the Internal Revenue Service (IRS). Tax liabilities are not determined just from the income from a given year, and may include back taxes (taxes payable from a previous year), or other write offs that actually reduce taxable income, such as loss carryforwards. An individual’s tax liability, or tax rebate, is calculated using an IRS 1040 Form, while corporations use an IRS Form 1120.
A governmental claim on real property when a taxpayer fails to make property tax payments or has outstanding income taxes. While federal and state governments have the ability to assess liens over unpaid income taxes, local governments may assess liens over unpaid local income taxes and property taxes. Tax liens give taxing authorities priority over other creditors that may have claim to the property when liquidated. In addition to affecting a taxpayer’s credit, a tax lien may affect the marketability of real property. While the lien is in-place, a taxpayer may not be able sell or refinance the property until the lien is satisfied. The two most basic ways to satisfy a tax lien is through the repayment of outstanding taxes or dismissal through bankruptcy court.
As laid out by the IRS, this policy allows an investor to use current realized losses to offset future taxable capital gains. Different from a NOL Carry Forward, this type of tax benefit can only offset gains made on the sale of assets, thus reducing your tax liability on this account in future years.
Tax loss harvesting is a tax-saving investment strategy. By selling a losing position, the investor can offset gains, reducing their total tax bill. Tax loss harvesting is usually most effective against short-term gains, which are taxed at ordinary income tax rates. The strategy is best executed near the end of the year when the investor is more likely to know how much gain and loss they will have. From this, they can determine more accurately which stocks to close out at a loss, offsetting winners in the process. While short-term gains can have the most tax impact, tax loss harvesting can also be used with long-term gains.
The Tax Reform Act of 1986 was signed into legislation by President Ronald Regan. It was meant to simplify the tax code and stimulate the economy. The law lowered the maximum rate on ordinary income (earned income) from 50% to 28% while raising it on long-term capital gains (unearned income) from 11% to 15%.
Tax-Optimized Real Estate® is a proprietary investment process that seeks to maximize an individual investor's long-term after-tax cash flow and total returns on commercial real estate within their risk tolerance and unique tax situation.
Taxable income is calculated as total revenue less total expenses and applicable deductions and exemptions that are allowed in that tax year.
Technical skills are specialized skills that are practical. They can be physical and mental labor or non-physical, such as working at a computer all day. Physical and mental labor may come in the form of an offshore diver who caps underwater oil well leaks. Contrast this to an auto worker on an assembly line who does simple, repetitive tasks. Technical skills are often not repetitive or simple.
Tenant is a person or entity who rents real estate from another though a lease. A tenant also may be referred to as a lessee.
Tenant improvement allowance is a leasing incentive offered by a landlord in order to entice tenants to lease space. The tenant improvement allowance is the dollar amount, typically
Tenant improvements are the customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that
Any syndicated investment created through a Tenant-In-Common (TIC) structure. Under a Tenant-In-Common structure, each investor
Tenant-in-common properties are any property purchased by multiple investors via a Tenant-In-Common structure. See Tenant-In-Common Investments.
The individual or company that packages and markets Tenant-In-Common (TIC) properties. The sponsor is in charge of a variety of different
The Dow Jones Industrial Average (DJIA) is an index that tracks 30 publicly-owned companies that trade on the NYSE and NASDAQ. The Dow Jones Industrial Average is one of the oldest indices in the world and is generally accepted as a gauge for the momentum or lack thereof in financial markets. Named after Charles Dow, the DJIA is designed to function as a proxy for the US economy and includes firms such as ExxonMobil, Goldman Sachs and General Electric.
The Environmental Protection Agency (EPA) is an agency of the United States government established in December 1970 by United States President Richard Nixon. The agency was created to promote and protect human and environmental health by creating standards and laws that support this mission. The agency was created in response to public concern with regard to the health of the natural environment and humans. The EPA regulates manufacturing, processing, distribution and use of chemicals and pollutants and enforces its standards via fines, sanctions and other various methods of penalty to actors who violate its terms.
Title company is a company that examines and insures title claims for real estate purposes. The title company verifies legal title to a property through a review of
Title 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.
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
A title loan is a loan that requires an asset be used as collateral to secure the loan, such as a car or real estate property. Different from other conventional loans and mortgages an individual may apply for, title loans often do not take into account the credit rating of applicant, since repayment is guaranteed by the transfer of the asset’s title to the lender. In addition, title loans often have looser application requirements, and can be approved quickly, and in smaller denominations than other loan types.
Countries are constantly importing and exporting goods. But when more is imported than exported, a trade deficit occurs. Trade deficits aren’t bad and can occur for a number of reasons. Countries may import more than they export because the economy is growing so quickly. Also, wealthy individuals in the country may be buying luxury items from other nations. When a country can’t produce enough for its residents, either because of its fast growth or lack of resources, it imports what’s needed from other nations. This kind of import/export imbalance leads to a trade deficit. After a while, imports and exports come back into alignment. A result of trade deficits is an outflow of domestic currency.
Traded REITs are a type of security that invests in real estate properties and mortgages, and trades like stock on major exchanges. Like any REIT, traded REITs must pay out at least 90 percent of the company’s taxable income each year in the form of shareholder dividends. Unlike non-traded REITs, however, traded REITs are very liquid and relatively easy to value, a tribute to it’s existence on a major exchange.
A 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.
A trust fund is created by a grantor and managed by a trustee. The trust fund is a separate entity from the grantor. The trustee is a neutral third-party who manages the trust, including distributing any assets to the beneficiary. The trust can contain almost any asset, including a business, land, stocks, and cash. The trust agreement, created by the grantor, establishes what happens to assets within the trust. The agreement is carried out by the trustee. Trusts are complex and costly to set up and are usually done with the help of an attorney.
An irrevocable trust is 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 the trust.
Land trust is a fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or
Living trust is an arrangement created during a person’s life, in which the trustee holds legal title to assets for a beneficiary.
Trust, Real Estate is real property owned through a trust rather than by an individual. In this context, the exact legal form of ownership may take a variety of forms
A fully renovated property that is ready to be inhabited once purchased. Turnkey properties are often acquired from companies that focus on this type of property, restoring older properties to be bought by potential investors. These restorations can range from plumbing repairs to repainting. Often times, these same companies may offer on-going property management services to buyers, further reducing the time and effort of for the prospective buyer. As the name suggests, all the buyer has to do is “turn the key.” Although a common term used for investment properties, a turnkey property can be used to describe residential properties as well. Similar in scope to commercial, residential turnkey properties have been renovated, and are capable for move-in by homeowners.
An underwriter is an individual or party that measures or quantifies another party’s level of risk in investment or business engagement in exchange for a fee. Underwriting is a service required across many different industries and sectors, from mortgage issuances to insurance policies to initial public offerings. In the case of a mortgage issuance, an underwriter is tasked with measuring the level of risk a financial institution assumes in agreeing to lend money to a borrower, based on the borrower’s creditworthiness and current ability to repay his or her debts.
Underwriting is the process of evaluating the future performance of a property. Similar to an insurance underwriter, in the context of commercial real estate,
Unearned income is generally from passive sources of income and those other than employment (i.e., wages or self-employment). It is called passive income because the recipient of the income doesn’t have to be materially involved in the income source. Some examples of unearned income include interest from savings, bonds, and CDs. Appreciation and dividends from stocks, inheritance, royalties are also forms of unearned income. Unearned income is taxed differently than earned income. It is not subject to payroll taxes or employment taxes such as Social Security and Medicare. Additionally, long-term capital gains (a form of unearned income) is taxed at a lower rate than ordinary income.
The unemployment rate is a measure of the population in the labor force that is without a job as a percentage of the labor force as a whole. Considered a lagging indicator, the unemployment rate will rise or fall in response to improvements or deteriorations in economic conditions. When the economic outlook turns bleak, unemployment may rise. When an economy is growing at a steady rate as a result of consumer and business confidence, the unemployment rate will tend to fall.
Formed in 1945, the United Nations is an international organization aimed at promoting political and economic cooperation among its members. The UN was formed following World War II as a vehicle aimed to ease international tensions, foster human rights and minimize risk of international conflict.
As stated in the U.S. Internal Revenue Code, any income derived from a business activity that is not related to the tax-exempt purpose of the organization is subject to taxation. An exempt organization must file a Form 990-T if unrelated business income exceeds $1,000.
An unsecured loan is one that does not require collateral. Rather than being backed by a physical asset, the loan is only backed by the borrower’s creditworthiness. Because banks are taking on higher risks with an unsecured loan, they charge higher interest rates. These higher interest rates help to offset some of the loan losses that the bank will inevitably experience. To receive the best-unsecured loan interest rates, borrowers must have a high credit score. Those with lower credit scores can still receive an unsecured loan but may need a cosigner, who will be responsible for the loan if the primary borrower is unable to make payments. Examples of unsecured loans include credit cards, student loans, and personal loans.
Useable square footage is the space that is actually occupied by a tenant, typically equal to the size of the tenant’s suite, without deductions for columns or other
Vacancy rate is the percentage of all available units or space in a rental property that are vacant compared to the total supply of units or space at a particular time.
Valuation involves various methods for determining the value of a company and the price of its stock. Valuing a company is called fundamental analysis. Taking into account the company’s assets, profits, sales growth, and other related metrics, one can determine a value for a company. Dividing earnings by the average outstanding common shares of stock provides earnings per share (EPS), which can determine if a stock is over or undervalued, compared to competitors within its industry. Knowing that a company’s stock is overvalued can mean it is an investment to avoid, while one that is undervalued is may be a good investment.
Cost approach valuation is a real estate valuation method that bases a property’s market value off the cost it would take to build an equivalent structure. The cost approach takes into account the cost of land plus the cost of construction, less depreciation. Similar to its counterparts, the cost approach may have other forces that prove it inaccurate. For example, if vacant land is not available to compare against, the professional valuing the property will have to derive an estimate, making the end value less accurate.
Sales comparison valuation is a real estate appraisal method that estimates a property’s value by comparing it against other properties with similar attributes that have been sold recently. This approach considers all of the individual features of a property, adjusting the value to reflect a sum of all the property’s features. A sales comparison approach may be used to evaluate both commercial and residential property.
A value-added tax (VAT) is a consumption tax on a product as a firm adds value to it at each stage of a supply chain between the initial point of production and the sale to that consumer. It is measured as the difference between the cost of the product to the consumer and any costs of production that were untaxed. A value-added tax is imposed on the gross margin at various points of manufacture and distribution and is assessed at each stage. It is thus a tax on a consumer’s consumption instead of their income.
A variable cost is an expense that fluctuates in proportion to a firm’s level of production. An example of a variable cost is a utility expense, which fluctuates on a monthly or annual basis depending on the amount of electricity and/or water a firm needs in the production of its goods or services. Variable costs differ from fixed costs, which do not change based on the production of a good or service. An example of a fixed cost is rent, which is a contractual amount to be paid on a regular schedule over a defined period of time.
Venture capital is capital that startup companies with long-term growth potential receive from investors. Investors provide venture capital to firm’s with unproven records of success because of the future possibility of sometimes rapid growth. Venture capital differs from private equity primarily in that venture capital is funding or financing provided to a firm for the first time, whereas private equity provides a more established firm an equity infusion.
Vertical integration occurs when a firm acquires all facets of a supply chain in the pursuit of cost reduction and efficiency. There are two forms of integration: forward and backward integration. A firm in the business of distribution seeks forward integration by reducing transportation costs, etc., while a firm seeking backward integration is typically in manufacturing and reduces its costs in the process of combining inputs to create value in a finished product.
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.
A W-2 form is a document that an employer provides to its employee used to file taxes with the IRS on an annual basis. Employers are required to send W-2 forms to all employees to whom they pay salaries or wages before January 31 each year, providing the employee enough time to file his or her taxes prior to tax day in April.
Warranty deed is a document that may be used to legally transfer property. A warranty deed states that the owner can legally transfer the property and that no other
A withholding tax is a tax held by employers from employee paychecks. The tax is then paid to the government (federal and state). Employees are responsible for calculating their withholding tax. Calculating the withholding tax is sometimes as simple as the employee counting their dependents. Other times, it can be more complex. If an individual calculates too much withholding tax, they will likely get a refund for that tax year. This is effectively lending the government an interest-free loan. If the withholdings are too low, an individual may incur an underpayment penalty. For those whose income doesn’t come from an employer (i.e., self-employed), they must pay quarterly taxes.
Working capital is the difference between a firm’s current assets (e.g. cash, accounts receivable, inventory) and current liabilities (accounts payable, other liabilities due within one year). Working capital measures a company’s liquidity and efficiency in its operations. Firms with high levels of working capital are in an advantageous position to invest in current operations or expand the capacity of future operations via capital expenditure.