A method of deferring capital gains taxes on the sale or disposition of an asset held for business or investment purposes by exchanging the asset,
A method of deferring capital gains taxes on property that is lost involuntary to condemnation, theft, or casualty, and a gain is realized from the insurance or condemnation proceeds. Although similar in scope to a 1031 exchange, the steps to transacting a 1033 exchange vary significantly. See Disasters and 1031 Exchanges (Part 2) for a list of these differences.
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their
The same tax deferral benefits are achieved as with a 1031 exchange. Capital gains taxes are deferred until such time as the exchanger sells
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their
Also known as a bondable lease, the most extreme form of NNN Lease, in which the tenant is responsible for all property related risks.
The rate at which rentable space is leased within a market or submarket over a given period of time. Gross absorption measures total square feet
An independent person, company, or entity that enters into a written agreement with the exchanger to facilitate the transfer of proceeds
A tax on the assessed value of real or personal property. Translated from Latin to mean “according to value”, ad-valorem taxes are based upon the monetary value of the asset or good. Common ad-valorem taxes seen in practice are property taxes, sales taxes, and taxes on import goods. Ad-valorem taxes can be transactional or assessed yearly.
To provide an example, an 8% sales tax is based on the monetary value of the good being purchased, and is transactional based, as it only applies when a good is being bought or sold. Likewise, a 7% property tax in Travis County is based on the monetary value of the land as determined by a government assessor, however, is paid annually.
An adjustable rate mortgage, or ARM for short, is a mortgage loan which does not have a fixed interest rate throughout its term. With an adjustable rate mortgage (ARM) the interest rate is subject to periodic adjustment. The rate adjustment may be based on any time period (daily, monthly, quarterly, semi-annually, annually, etc.) and the adjusted rate is typically expressed as a spread or margin over a defined index rate. Typical index rates include LIBOR, Prime Rate, and the 30-Day US Treasury rate.
The original purchase price of an asset plus its acquisition costs plus any capital improvements less the cumulative depreciation deductions
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.
An investment in asset classes other than the three traditional asset types (stocks, bonds, and cash). Most alternative investments are held
Defined as a desirable or useful feature of a building or place, amenities look to provide comfort and convenience for tenants occupying the property. Amenities encompass additions that are in excess of the basic needs of an individual, and usually include features such as pools, workout facilities, and internet.
Paying off debt over a period of time with a fixed repayment schedule in regular installments. Monthly mortgage payments are often comprised of
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 estimate of a property’s fair market value by an authorized person with applicable knowledge and expertise. Appraisals can be used for taxation
A property that has increased in value over time. This increase can occur for a number of reasons including increased demand or weakening supply,
Increase in the value of an asset over time, which can be affected by a number of factors such as increased demand, weakening supply,
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.
A group of investments that behave similarly in the market, and are subject to the same regulations. Today, the three main asset classes recognized are equities, bonds, and cash equivalents. Although real estate and commodities are included by some professionals as well, these investments typically fall in the alternative investment category.
Investments within an asset class are associated based on their underlying fundamentals. For example, fixed income investments are grouped because of their similar financial structure, and equities are grouped together because of what they represent and how they are traded. Because the fundamentals of each class differs, each represents a different risk and return profile. By allocating across different asset classes, investors may be able to achieve a degree of diversification in their portfolio. Diversification, however, does not guarantee profits or protect against losses.
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.
Typically used when discussing a special purpose entity. A bankruptcy remote entity is a separate legal entity whose bankruptcy or insolvency
The minimum monthly rent due pursuant to a lease. Base rent does not account for expense reimbursements or percentage rent, which
In the context of commercial real estate, an asset’s basis is the original purchase price or cost of investment property plus any out-of-pocket
The basis point is a common unit of measurement used in the field of finance. One basis point is equal to 1/100th of 1% (0.01%). Basis points are used primarily for noting changes in interest rates, yields, and equity indexes, and are used by analysts to minimize confusion when discussing percent changes in financial instruments.
Typically referred to in manners concerning trusts, a beneficial interest is the right to receive benefit from assets held by another party.
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.
Although not specifically defined (or even mentioned) in IRC Section 1031, the term “boot” is commonly used and refers to the fair market value of cash,
A short-term loan that is used until a person or company secures permanent, longer-term financing or fulfills an existing obligation.
A person or firm in the business of buying and selling securities, operating as both a broker and a dealer, depending on the transaction.
Built-to-suit is a way of leasing commercial property whereas the developer/owner has constructed a building to the specifications of a particular tenant or type of tenant. This type of property is popular among tenants because of its ability to offer efficient layouts, reduce operating costs associated with the property, or create a building design that may be more favorable in the public eye.
Build-to-suit properties are common in retail and industrial property types, but may exist in any type of real estate such as office space. Given that a building is designed specifically for the tenant, leases are typically longer-term, and tenants may be less inclined to vacate the property.
For corporations and business entities, assets that have a useful life longer than one year and are not held for sale in the ordinary course of business.
In the context of commercial real estate, funds used by a company to acquire or upgrade physical assets that cannot be expensed as
In the context of commercial real estate, capital reserves are funds designated for long term capital investment projects or
Capital stack is a term used to describe the composition of total capital invested in a project. Listed from most risky to least risky, capital stacks in real estate are usually comprised of common equity, preferred equity, mezzanine debt, and senior debt. Usually, the riskier positions in the capital stack tend to earn higher expected returns due to the increased risk taken on.
The initial rate of return an investment property is expected to generate. The Capitalization Rate is determined by dividing the
Cash flow is the net amount of cash moving in and out of a business, usually measured during a specified, limited period of time.
In the context of commercial real estate, cash and cash equivalents held in short term accounts used to cover things such as
A cash sweep is commonly activated in scenarios where a borrower fails to meet certain financial requirements or loan covenants as laid out in the loan terms. These may include failure to meet a minimum debt service coverage ratio, leverage ratio, or debt to equity ratio.
Ratio of annual before-tax cash flow from an investment to the total amount of cash invested, represented as a percentage.
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.
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.
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
The areas of a building that are available for the nonexclusive use of all its tenants, such as lobbies, corridors, and parking lots.
The contribution or fee paid collectively by individual tenants for the maintenance and upkeep of the non-exclusive areas of the premises.
In the context of real estate transactions, properties similar to the one being sold or appraised used to determine the fair market value of the property.
Simply put, compound interest is “interest-on-interest”, or the ability of a financial instrument to generate earnings on its earnings.
A benefit given by a buyer, seller, landlord or tenant in order to help facilitate a real estate transaction. Concessions can be given in both residential and commercial real estate, and are often predetermined during the negotiation period. Concessions are often included in closing costs, but come in various forms: covering moving expenses and repair costs, rent reduction, or even cash back to the buyer.
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
Direct access to tax-deferred like-kind exchange funds or other property by an exchanger completing a tax-deferred like-kind exchange.
A measure of the change in the value of consumer goods and services, such as food, medical care, and recreation. CPI is used to gauge inflationary and deflationary periods, providing an economic indicator as to the effectiveness of current monetary policy. The index is calculated and published by the U.S. Bureau of Labor Statistics each month.
A contract between a seller and a buyer of real property in which the seller provides financing to the buyer to purchase the property.
Core properties exhibit the lowest risk and lowest potential returns amongst the four major commercial real estate risk profiles, and represent
Core-plus properties are generally similar to core properties, but have a slightly higher degree of risk and potential for slightly higher returns than core properties.
A measure of a person or entity’s ability to meet certain financial requirements or obligations. Credit ratings are based on credit history, current financial position, and ability to generate future income, and look to predict the likeliness of the debtor defaulting. Common rated debt instruments include government bonds, municipal bonds, corporate debt, and collateralized securities.
The risk of loss resulting from a borrowers inability to repay its loan obligations. When a borrower is given funds from a lender, there is always risk that the borrower may not be able to meet its obligatory principal and interest payments. Although impossible to quantify, managing credit risk may reduce risk of loss. Common methods of managing credit risk on loans include assessing a consumer’s credit history, ability to repay, and access to capital. A lender may also look at loan conditions and the collateral securing the loan, to ensure that the risk of loss is compensated for.
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,
A method of financing real estate where the landlord borrows money to purchase the property and pledges the rent to be received from the tenant
Crowdfunding is a form of financing that utilizes small amounts of capital from a large number of people to fund a new venture or project. Originally brought forward as a way for organizations and entrepreneurs to secure general funding and donations from the public, regulatory changes passed in the JOBS Act have allowed for equity crowdfunding to emerge so that investors could gain a return on their crowdfunding investment.
Any space or suite which is physically vacant or “dark”, but for which the tenant is still contractually obligated to pay rent. Dark space typically results from a tenant ceasing operations at an unprofitable location, in hopes of saving cash on employee wages and other operating expenses. The ability of a tenant to allow its space to go “dark” is governed by any go dark provisions and/or continuous operations clauses in its leases. Dark space may be subject to recapture rights by the landlord.
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.
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
A deed instrument in which the mortgagor (borrower) conveys all interest in a real property to the lender to satisfy a loan that is in default and avoid
A deed of trust, like a mortgage, is a security instrument used to finance real estate. A deed of trust transfers legal title in real property to a trustee,
In a tax-deferred exchange, the deferred gain is the amount of gain that escapes current taxation and is deferred until a later date.
A separate legal entity created as a trust under Delaware state laws. Despite the name, neither the property nor the investor need to be located
In a Delaware Statutory Trust (DST), the Delaware trustee maintains a physical address in the state of Delaware in order to prevent the DST from
In our context, depreciation refers to the allocation of an asset’s cost over the timeframe of its “useful life”, or duration for which it will be useful
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
The interest rate used to determine the present value of future cash flows in discounted cash flow analysis.
For example, an investor has estimated that a project they are investing in will generate a FCF of $50,000 over the next 5 years with a cost of capital of 9%. Taking into account the time value of money, the investor determines that the present value of the investment is approximately $195,000. If the initial cost of the project is $200,000, the NPV would be about -$5,000, showing a poor investment opportunity.
Diversification is an investment strategy that seeks to mitigate downside by allocating proceeds across a variety of assets or products. The goal of diversification is to build a portfolio of investments across unrelated markets, so a downturn in one particular market may not drastically affect the returns of the portfolio as whole. Diversification looks to create a smoothing effect, allowing the negative performance of some investments be counteracted by the positive performance of an unrelated asset. Diversification is only a strategy, however, and does not guarantee returns and does not protect against losses.
An example of employing a diversification technique would be owning a portfolio of single family homes, corporate equities, and treasury bonds. Although some inherit systematic risk may still exist, an investor would not be fully exposed to the same non-systematic risk across the entire portfolio.
A lease agreement in which the tenant is responsible for their pro-rata share of both property taxes and premiums for insuring the building,
A payment used in the context of purchasing an expensive good or service, whereby the payment is the initial upfront portion of the total amount due
DST Interests represent equity ownership in a large property by multiple investors through an investment structure known as a
A DST Sponsor is a person or entity that creates a Delaware Statutory Trust (DST) to hold real property asset(s) and arranges for the issuance of
An investigation or audit of a potential investment to confirm all material facts regarding a transaction. For example, when analyzing a potential property
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.
A non-possessory right that allows the holder to occupy or use real property that he or she may not actually own. Easement rights are limited in nature, and are restricted to whatever is “convenient or necessary” to satisfy the purposes of the easement. There are two main types of easements that are common in real property: easements appurtenant and easements in gross.
Effective Gross Income (EGI) is income generated by a property including base rent and miscellaneous income, less vacancy and collection losses.
Net rental income received by landlord from a lease after deducting the value of concessions and costs incurred to secure the lease such as
The right to exit a property or the act of going out of or leaving a place. From a real estate standpoint, egress and ingress may be important components of site feasibility. Properties typically have entry and exit points along public streets, however that is not always the case. In situations of a landlocked or difficult to access property, access easements may be necessary in order to provide reasonable access to and from the property. Note that easements rights to enter and exit a property may be separate from legal ownership of the property itself.
Any limitation on the ownership of real property. Similar to a lien, an encumbrance can restrict both the free use and the transferability of the property until removed. Encumbrances include leases and mortgages, but are not always financially related. Encumbrances are non-possessory, holding no interest in the title of real property.
A report prepared for a real estate holding that identifies potential or existing environmental contaminations liabilities.
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.
Ownership interest in a business entity, from the concept of equity as ownership. For example, if an investor owned a 10% interest in
One or more shares in the ownership of a business or corporation that are purchased by investors. In contrast to debt investments, equity investments
An entity that has fiduciary responsibilities in the transfer of property from one party to another. The escrow agent acts as a custodian of
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.
Used when completing a reverse exchange, an Exchange Accommodation Titleholder (EAT) is an unrelated party who holds legal title to either
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale
In a tax deferred exchange (aka 1031 exchange or like-kind exchange), the taxpayer or owner of the property or properties being exchanged
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.
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.
The amount an investor would anticipate receiving on an investment that has various known or expected rates of return.
As stated in a commercial lease, an expense stop marks the extent of operating expenses and taxes a landlord will be responsible for on a tenant-filled property. All expenses past this threshold will be held liable by the active tenant.
The Federal National Mortgage Association (abbreviated as FNMA and commonly referred to as “Fannie Mae”) is a publicly traded
The interest rate at which banks lend reserve balances to each other on an overnight basis. Depository institutions are required by law to maintain a certain percentage of their customer’s money in reserves, causing banks to lend money back and forth to maintain an acceptable level of cash on hand. Banks will try to stay as close to the minimum reserve limit as possible, as excess reserves earn a rate of return of zero and can lose value over time due to inflation.
The most absolute type of ownership of land. The owner has complete rights over the property, and may possess, use, and dispose of the land as he or she desires. Contrary to a leasehold ownership, an owner of a fee simple interest in a property has taken title, and owns both the land and any improvements that exist on the land indefinitely. Expect for a few unique situations, no one can legally take ownership of land from someone with pre-existing fee simple ownership.
The use of borrowed funds to acquire an investment. In the context of commercial real estate, this typically involves the use of a mortgage
First loss position is an investment’s or security’s position that will suffer the first economic loss if the underlying assets lose value or are foreclosed upon.
A type of loan where the interest rate is predetermined, and does not fluctuate during the term of the loan. Fixed rate loans allow borrowers to accurately calculate future financial obligations, in the form of both principal and interest payments.
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.
Legal process by which the mortgage holder attempts to recover the balance of a loan from a borrower who has defaulted by forcing the sale
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.
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.
The Federal Home Loan Mortgage Corporation (FHLMC), more commonly known as “Freddie Mac” is a publicly traded
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
General market factors refers to the overall conditions within a defined market that affect all properties within that market.
A go dark provision is clause often used in retail leases which governs whether or not a tenant may vacate a space, while continuing to pay rent, prior to lease maturity. Opposite of a continuous operating covenant, go dark provisions allow a tenant to cease business operations when they turn unprofitable. Landlords often dislike this type of provision, as they can lead to rolling vacancies and gradually shrinking traffic in a retail center.
One to whom the grant is made. The recipient who will be taking title, as named in the legal document used to transfer the real estate.
A grantor is the person or entity making the grant. For example, if Alice sells her property to Bob, then Alice would be the Grantor.
Gross absorption measures total square feet absorbed or leased without regard for vacated space during the same period,
A lease in which the tenant pays a flat sum for rent out of which the landlord must pay all expenses such as taxes, insurance, maintenance, utilities, etc.
Gross rent is rent charged to occupy a premise without any additional rent for operating or other expenses.
An investment property valuation method which is the ratio of a property’s price to its gross revenue.
The total square footage of a building including all rentable spaces as well as all “non-rentable” space including common areas,
A lease of the land only, on which the tenant usually owns a building or is required to build as specified in the lease.
A hard asset is a type of asset with underlying intrinsic value that can be used to produce or purchase other goods or services. Hard assets typically include commodities such as oil, natural gas, gold, silver, and diamonds, as well as other tangible assets such as farmland and commercial real estate.
Also called “brick and mortar expenses,” hard costs are any costs involved in the physical construction of a project. Included in hard costs are
A type of asset-based loan financing through which a borrower receives funds secured by real property. Hard money loans are typically issued by
A health ration, also known as an occupancy cost ratio, it the relationship between a retailer’s sales and total occupancy costs.
Properties held for investment purposes can be any property or asset that are acquired and held for income production (rental or leasing activities) or
Membership fees that must be paid by an owner of property within a homeowner association’s jurisdiction. HOA fees are collected to pay for maintenance and improvements of properties owned by the association, including common areas or necessary features such as roofing or elevators. HOA fees are very common in condominium developments, but can exist in neighborhoods of single family homes.
The real or expected period of time which an investment is attributable to a particular investor.
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.
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
A trustee who is not related to the beneficiary of the trust and does not stand to inherit any property under the trust.
A real estate development site that exists within a mostly built out market. Usually located within an urban area, infill locations look to fill the few vacant lots that exist between other developments in the area. Infill locations are characterized by having a high level of demand, due to increased property values in desirable locations, with high barriers to entry.
The rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
While not a precisely defined term, an institutional-grade, or institutional-quality property generally refers to a property of sufficient size and stature to
The maximum dollar amount an insurance policy will cover in the event that an insured asset is deemed lost. In real estate, this can include the improvements on the land, as well as the physical property that existed on the property, such as machinery and other equipment. Insurable value is can be a function of the full replacement cost of the property, reproduction cost, or depreciated value. Insurable value is typically less than the market value, as it excludes the value of land.
Interest expense deduction is defined as a borrowing expense that a taxpayer can claim to reduce their taxable income. There are many types of interest that can be tax-deductible such as mortgage interest, student loan interest, investment property loan, interest on some business loans.
For example, if an investor has a 30% marginal tax rate and has $10,000 in tax deductible income, they would save $3,000 in taxes. Effectively that $10,000 loan only cost $7,000.
The 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
A loan in which, for a set period of time, the borrower pays only interest on the principal balance, with the principal balance remaining unchanged.
An entity that acts as the middleman between two parties in a financial transaction.
A broad term for a real estate property that has been purchased with the intention of earning a return on the investment, either through
Ownership of real estate by two or more individuals with the right of survivorship. A right of survivorship means that
A legal document outlining the terms under which one party agrees to rent property from another party.
A payment made by the tenant or resident to the landlord in order to legally end a lease early and not be held liable for the remaining time.
Claim or right to enjoy the exclusive possession and use of an asset or property for a stated definite period, as created by a written lease.
Fees paid to real estate agents in connection with leasing space at a property. Leasing commissions may be due to a “tenant rep” which is an
A lien is a right to possess property belonging to another person, given that an underlying obligation is not met. In finance, a lien often serves as a guarantee that a borrower will fulfill his or her responsibility of repaying a loan.
A method of deferring capital gains taxes on the sale or disposition of an asset held for business or investment purposes by exchanging the asset,
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
A credit arrangement in which a financial institution agrees to lend money to a borrower up to a specified limit. The borrower can draw down on the
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.
The multiplier to a tenant's useable space that accounts for the tenant's proportionate share of the common area
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.
Also known as a “mom-and-pop", a local tenant is a small scale company with a narrow footprint typically limited to a single market.
Typically used in accounting practice, mark-to-market refers to the measure given to asset and liability accounts that are in accordance with current market values. Having the ability to increase or decrease over time, this method looks to give a current, accurate depiction of an individual’s or business’s financial standing. To provide an easy, relatable example, stocks in the S&P 500 are marked-to-market everyday. Values are determined based on investor demand, and fluctuate based on how much the market values a particular piece of equity. Mark-to-market valuations may be more difficult in non-public markets and illiquid assets as much less real-time data exists.
Although the mark-to-market model may provide an effective representation as to the current value of a company or asset, this measure may not prove as effective in times of uncertainty. When the market is shifting, and buyers continuously leave and enter the market, pricing becomes volatile and the mark-to-market method may prove inefficient and inaccurate.
A market adjustment is a change in market parameters or conditions brought about in response to one or more market signals (including price changes from shifts in
The process of studying certain characteristics and trends of a market to determine its strengths, weaknesses, opportunities and threats.
Master lease rate is the current rental rate that a space would likely command in the open market, indicated by current rents paid for comparable space within a given market.
The most probable price that a property would command in a competitive and open market under fair sale conditions. Market value also refers to
The primary lease that controls other sub-leases and may cover more property than all sub-leases combined.
Tenant which is party to direct lease with the property owner which subsequently sub-leases all or a portion of the property to other occupants.
Building or project that provides more than one use (e.g., a loft or apartment project with retail, an apartment building with office space,
A modified gross lease is a rental agreement where the tenant pays base rent at the lease’s inception, but in subsequent years, also pays a proportional share, or
Short-term tenancy terms in which a tenant rents from a landlord month to month. Although increasing vacancy and turnover risk, month-to-month tenancy offers several advantages to landlords that include the chance to negotiate lease terms more often, providing the opportunity to raise rent, while also providing the ability to get rid of troublesome tenants. Often times long-term leases convert to month-to-month tenancies at the end of the original lease term, if another lease has not been signed. This type of tenancy is most commonly found in residential leases, but can include commercial leases as well.
A legal instrument that pledges the rights of ownership of an asset or property to a lender as security for a loan.
Property that has two or more tenants. Compared to single tenant properties, multi-tenant properties can be more management intensive and may have
National tenant refers to a tenant that has a national footprint with locations throughout the US. The term is most frequently used in the context of retail properties.
The amount of occupied space at the end of a period less the amount of space occupied at the beginning of the same period.
Total revenue minus total expenses. It represents the amount of money remaining after all operating expenses, interest, taxes and preferred stock
A calculation used to analyze real estate investments that generate income. Net operating income equals all revenue generated from the property less
Net present value (NPV) represents the amount by which the expected cash flows of an investment exceeds the initial amount invested.
Net square footage is the usable or “rentable” area of a specified space (e.g. a suite, floor, or an entire building). This measurement generally excludes non-rentable areas
An investor who does not meet the special requirements for an accredited investor under the Securities & Exchange Commission’s Rule 501 of
Non-Traded REITs are a type of security that invests in real estate properties and mortgages, but is not listed on an exchange and is not publicly traded. Like any REIT, non-traded REITs distribute at least 90 percent of the company’s taxable income to shareholders in the form of dividends, however, non-traded REITs are very illiquid and usually constitute a minimum holding period per investment. Non-traded REITs are difficult to value as well, lacking an organized exchange for valuing purposes.
The total amount of property-related expenses paid by a tenant for use of a particular space. Occupancy costs include base rent as well as
The actual costs associated with operating a property that do not vary in the short term. These costs do not change with a property’s occupancy rate.
The actual costs associated with operating a property that vary in relation to a property’s occupancy rate or volume of some activity.
Opportunistic properties exhibit the greatest risk but highest potential returns within the four major commercial real estate risk profiles
The income earned from providing services or the sale of goods. Ordinary income is composed mainly of wages, salaries, commissions and
A fee charged by a lender for processing your loan application. Similar to a broker’s commission, an origination fee is the Lender’s way of getting paid for its services. Origination fees range from 0.5% to 1.00%, and are often negotiated with the terms of the loan. In situations where a borrower desires a lower origination fee, the lender may demand an increase in the interest rate. Origination fees usually represent a higher percentage of smaller loans, as the lender is looking to make their time spent worthwhile.
Total rentable square footage of a property divided by the number of parking spaces; typically expressed as a ratio of spaces per 1,000 square
To the extent less than 100% of the proceeds of a relinquished property are reinvested, the difference will result in mortgage boot and/or cash boot.
A pass-through entity is any business organized as a partnership, limited-liability company, S-corporation or sole-proprietorship that reports any profit on its owners’ tax returns -- "passing it through" to them. Pass through entities avoid taxes at the corporate level, reducing the effects of double taxation. Instead, income is allocated amongst the owners, based on percent ownership, and taxed at the individual owner’s marginal tax rate.
For example, Company A has four owners, which each individual owning an equal 25%. After a successful year, Company A saw a net income of $500,000, with each owner having claim to $125,000 of the profits that will be reported on their respective tax returns. Note that if the owners elected to retain the earnings within the business, not distributing it, the owners would still be liable for the taxes on the income they would’ve received, creating a phantom income situation.
Earnings collected from investment property, partnerships, or other enterprise in which the person is not actively participating in operations. Used loosely, passive income is used to describe money that required little to no effort to obtain. Passive income is typically received on a regular basis, and is taxed as ordinary income on a person’s tax return.
One caveat of passive income is that passive losses can only offset passive gains (ex. Schedule E income, some Partnership income). Active income, or income that is derived from activities that a person is materially involved in, can not be reduced by passive income.
Rent due in lieu of, or in addition to base rent that is paid to landlords based on tenant sales. A percentage rent clause is nearly exclusive to
A type of property which, in its most general definition, can include any asset other than real estate. The distinguishing factor between personal
When a business or individual borrows funds and then invests the funds at an interest rate higher than the rate at which they were borrowed.
Potential rental income is the total amount of rental income for a property if it were 100 percent leased at competitive market rates.
The amount of money an investment produces after the collection of all revenue items and payment of operating expenses and debt service. This cash flow comes before the calculation of one’s income tax liability, and does not factor in deductions for depreciation allowance, mortgage interest expense or other non-cash items.
Pre-tax cash flow allows investors to calculate their current return on investment, and when comparing to after-tax cash flow, provides context to the extent of tax shelter a particular investment may generate.
Preferred Equity is an equity investment which is superior in interest to common equity but subordinate to debt. Preferred equity is secured by a
A prepayment penalty is a mortgage provision that states that a penalty, or fee, will be assessed to a borrower if an outstanding liability is paid off before a certain time period. Lenders typically calculate these fees as a percentage of the outstanding loan balance, the cost of lost interest payments, or as a flat fee. For example, if $300,000 of principal is still owed on a mortgage and a lender charges a 2% prepayment penalty, the borrower would owe an additional $6,000 in fees to the lender for the privilege of repaying the loan before its maturity date.
These fees are used in practice to protect a lender from the loss of interest payments that would have been received if the borrower had not prepaid the loan balance early.
Expected value, as of the date of valuation, resulting from discounting future amounts.
The interest rate banks charge their most creditworthy customers, or customers with the least risk of defaulting. In other words, the minimum rate a bank would be willing accept on an outstanding debt. Prime rates directly affect other lending rates, as the prime rate serves as a basis for determining interest rates for mortgages, business loans, and personal loans.
Private equity real estate funds are an asset class consisting of equity and debt investments in property. These types of funds usually involve active management from private equity entities, and follow low-risk to high-risk strategies.
An offering of securities that is not registered with the Securities and Exchange Commission (SEC) and which are sold not through a
An offering document for a private placement that contains relevant disclosures so that an investor may make an informed investment decision.
Forward-looking cash flow projection based on a set of assumptions. Pro forma financial statements depict future financial results if the underlying
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 share of the profits of an investment or investment fund that is paid to the investment manager as compensation. It is given in exchange for
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
A number assigned to parcels of real property by the tax assessor of a particular jurisdiction for purposes of identification and record keeping.
An ad-valorem tax applied to real estate, based off the value of the land and it’s improvements. Paid by the owner, this tax is calculated by multiplying the property’s current market value by the applicable tax rate. Market value is typically determined by a government hired assessor, who conducts an appraisal of the property to obtain the assessed value. Tax rates vary by state and jurisdiction.
When property taxes are left unpaid, a governing authority may impose a lien upon the property. A tax lien may restrict the transfer or refinancing of the property until satisfied. One should always be sure that a property is free of all outstanding liens before purchasing a property.
Short for “flexible”, flex properties are typically considered a subsect of industrial properties that contain a higher percentage of
Consists of a wide range of product types including hotels, travel centers, water parks, amusement facilities, golf courses, cruise ships and restaurants.
An establishment that provides lodging and sometimes meals, entertainment and various personal services for travelers and tourists.
One of the four main asset classes of commercial property, which is typically used for the purpose of production, manufacturing, or distribution.
Typically considered apartment buildings that can accommodate more than one family. Condominiums can sometimes be covered in this property type
Commercial property that is primarily used to maintain professional or business offices. Encompassing term that may include
Properties used to market and sell consumer goods and services. This category includes single tenant retail buildings, small neighborhood
Properties where storage space (such as containers, lockers, and/or outdoor space) is rented to tenants, usually on a short-term basis.
Senior living property is housing that is catered to seniors, typically over the age of 55. Contrary to standard multifamily properties, senior living communities usually include specialized amenities or services. Senior living covers a wide range of property types that include active-adult communities, assisted living, and memory care facilities.
A legal document between a buyer and seller of real estate that lays out the terms and conditions of a future transaction. The agreement looks to contractually bind the two parties, in hopes of ensuring that both will fulfill their promises and obligations regarding the sale.
An independent person, company, or entity that enters into a written agreement with the exchanger to facilitate the transfer of proceeds from
Under Section 2(a)(51) of the Investment Company Act, a "qualified purchaser" means:
A legal document that may be used to sell or transfer interests in real property. A quitclaim deed transfers whatever interest the seller or
The profit or loss on an investment over a specified period of time expressed as proportion of the investment amount.
Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water.
A licensed intermediary between buyers and sellers of real estate, typically working for commission. Real estate agent is a broad term which includes
A licensed intermediary between buyers and sellers of real estate, typically working for commission. A real estate broker typically has completed
Real estate debt is a debt instrument that the borrower is obliged to pay back with a predetermined set of payments. The debt instrument is secured by
The difference between the current fair market value of a property and the amount of debt owed against the property.
Real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence or personal use.
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.
A method of pooling capital from multiple investors for the common goal of acquiring real estate.
Land, and generally whatever is erected or affixed to the land, such as buildings, fences, and including light fixtures, plumbing.
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 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.
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
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.
A person or firm that is compensated for providing investment advisory services. Contrary to a broker who is transaction based, RIAs are typically compensated based off a percentage of assets under management, and have a fiduciary responsibility to their clients. RIAs compete with mutual funds, hedge funds, and wire house firms for clients.
A Securities and Exchange Commission (SEC) regulation governing private placement exemptions that allows companies to raise capital through
A business deal or arrangement between two parties who are joined by a personal or other relationship prior to the deal.
A provision or clause to release certain collateral from a loan or mortgage in exchange for the borrower’s payment of a defined amount.
In a tax deferred (aka 1031 exchange or like-kind) exchange, the property being sold or disposed of is referred to as the relinquished property.
In the context of commercial real estate, rent bumps refer to periodic adjustments on the rental rates pursuant to a lease, typically stated as a
Rentable Square Footage equals the usable square footage plus the tenant’s pro rata share of the building common areas, such as
In a tax deferred (aka 1031 exchange or like-kind) exchange, the property being purchased or acquired is referred to as the replacement property.
Replacement Property InterestsTM is the term Realized uses to describe equity ownership in large properties by multiple 1031 exchange investors through Delaware Statutory Trusts (DST) and Tenant-In-Common (TIC)
ROI measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is
The right of first refusal is the contractual right, but not obligation, to enter into a buy-sell transaction with the owner of an asset before any other third party. In commercial real estate, the right of first refusal allows an interested party to buy a property before the seller negotiates any other offer. In the scenario that the party with the right of refusal declines to buy, the seller is then free to negotiate and sell with other interested parties.
Measure of the return on an investment relative to the expected risk of that investment, over a specific period.
The minimum incremental yield by which the expected return on a risky asset must exceed the known return on a risk-free asset in order to
Defined as an evaluation of an individual or organization’s willingness to take risks, as well as the threats to which an organization is exposed. Risk profiles are important for determining which asset classes and allocations are appropriate for a portfolio. This risk profile signals the tolerable level of risk that is accepted. A corporation’s risk profile attempts to determine how a willingness to take risk will affect overall decision-making strategy.
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 requirement in a 1031-exchange transaction, the same taxpayer provision states that the taxpayer who owned the relinquished property must be the same taxpayer who takes ownership of the replacement property. This ensures that the taxpayer’s basis is carried over into the new property, and that there is a continuity of deferral.
A Schedule K-1 is a type of tax document used to report partnership incomes, losses, and dividends. Each individual partner is obligated to complete one of these forms, whenever necessary, and must include it with their respective personal tax returns.
A financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or
Seller financing is a loan provided by the seller of a property or business to the purchaser of that property or business.
Debt that takes priority over other unsecured, “junior” debt. Senior debt sits at the bottom of the capital stack, and offers the lowest risk with the lowest return.
Single tenant property is property that is fully occupied by a single user. Single tenant properties often feature a triple-net (NNN) lease structure and generally have remaining lease terms of at least 10 years.
Fees that are not directly related to labor and direct constructions costs. Soft costs include architectural, engineering, financing, and legal fees, and
A legal entity established by the sponsor or borrowing entity whose operations are limited to the acquisition and financing of specific assets.
In the context of real estate partnerships, a sponsor is an individual or company in charge of finding, acquiring, and managing the real estate property on behalf of
Stabilized occupancy is the long-term average occupancy rate that an income-producing property is expected to achieve after exposure for leasing in the open market for
The rent amount paid by the occupant to the landlord as specified in the lease. Stated rent does not account for any concessions or landlord costs
When a taxpayer bequeaths an asset to a beneficiary upon death, the beneficiary’s tax basis in the asset is “stepped up” to the fair market value of
A submarket is broadly defined as a distinct part of a larger market. In the commercial real estate context, a market is typically a city or an MSA and
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.
In the context of commercial real estate, an asset’s basis is the original purchase price or cost of an investment property plus any out-of-pocket
Instance where investment earnings such as interest, dividends, or capital gains accumulate tax-free until the payment of taxes related to the
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.
A document filed with the IRS that reports income, expenses, and other related tax information for an individual or entity. Tax returns allow taxpayers to calculate their taxable income and tax liability, while providing a medium to request tax refunds in situations that a taxpayer has overpaid. Typically, tax returns are filed annually.
Tax returns can be broken down into three sections: income, deductions, and tax credits. The income section lists all sources of income, including capital gains. The deduction section lists anything that reduces taxable income, such as interest deductions and charitable donations. Similar to deductions, tax credits will reduce taxable income as well, and typically includes credits given for the care of dependent children and seniors, education, and saving for retirement.
A tax shelter is a financial technique used by taxpayers to reduce taxable income. Tax shelters include both investments and investment accounts that provide favorable tax treatment, as well as deductions as laid out by the Internal Revenue Service (IRS).
Typical investment accounts that shelter returns from taxes are 401(k) accounts and traditional IRAs. Other items that lead to tax efficiency are interest expenses and depreciation, which are deductible from taxable income. In some cases, a taxpayer may be able to realize a loss after these deductions are factored in, resulting in tax loss carryforwards that may be able to offset future profits.
Certain real estate investments may provide income tax shelters through mortgage interest deductions and depreciation allowance and, depending on the legal structure, may provide the ability to defer capital gains via a 1031 exchange.
Taxable income is calculated as total revenue less total expenses and applicable deductions and exemptions that are allowed in that tax year.
A person or entity who rents real estate from another though a lease. A tenant also may be referred to as a lessee.
Leasing incentive offered by a landlord in order to entice tenants to lease space. The tenant improvement allowance is the dollar amount, typically
The customized alterations a building owner makes to rental space as part of a lease agreement, in order to configure the space for the needs of that
The individual or company that packages and markets Tenant-In-Common (TIC) properties. The sponsor is in charge of a variety of different
A type of shared ownership of property, where each owner owns a share of the property. Unlike in a joint tenancy, these shares can be of unequal size,
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of
The concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
Company that examines and insures title claims for real estate purposes. The title company verifies legal title to a property through a review of
A fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or
Insurance that protects the holder from financial loss resulting from defects in title to real estate. The most prominent form of title insurance is lender’s title insurance, which usually must be obtained to secure a mortgage, however owner’s title insurance does exist as well. Whereas lender’s insurance is usually paid for by the buyer, owner’s title insurance is paid for by seller.The purpose of title insurance is to protect both real estate owners and lenders against potential damage or loss due to defects in title. These defects include claims of ownership by another party, fraud of title documents, unidentified
Traded REITs are a type of security that invests in real estate properties and mortgages, and trades like stock on major exchanges. Like any REIT, traded REITs must pay out at least 90 percent of the company’s taxable income each year in the form of shareholder dividends. Unlike non-traded REITs, however, traded REITs are very liquid and relatively easy to value, a tribute to it’s existence on a major exchange.
A retirement account that allows an individual to allocate pretax income toward investments that can grow tax-deferred. Income contributed to the account is limited, and may be deductible from taxable income based on the taxpayers amount of income and filing status. Capital gains taxes or dividend income taxes are only assessed once funds are withdrawn from the account.
A slice of the capital stack that reflects an investor’s credit or equity ownership position in a company or project. Different tranches have different cash flows and risks involved, as well as different claims to cash distributions.
A lease agreement that states the tenant is solely responsible for all of the costs relating to the property being leased in addition to the rent.
A fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or
An arrangement created during a person’s life, in which the trustee holds legal title to assets for a beneficiary.
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
The process of evaluating the future performance of a property. Similar to an insurance underwriter, in the context of commercial real estate,
As stated in the U.S. Internal Revenue Code, any income derived from a business activity that is not related to the tax-exempt purpose of the organization is subject to taxation. An exempt organization must file a Form 990-T if unrelated business income exceeds $1,000.
The risk attributed to the assets of a single industry or company. Commonly referred to as “specific risk”, unsystematic risk is not correlated to the performance of the overall market. Examples of unsystematic risk include new competition, regulatory changes, fraudulent behavior by a company’s senior management, and union strikes.
An Umbrella Partnership Real Estate Investment Trust (UPREIT) is a partnership formed between the owner of appreciated real estate and a
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 allowance is a line item on a real estate pro forma that accounts for expected vacancy of the property. The specific allowance is dependant on the property type and
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.
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.
A real estate appraisal method that values a property by taking net operating income and dividing it by a predetermined capitalization rate. The income valuation method is not suitable for valuing owner-occupied residential properties, as it relies on income produced as a function of the property’s overall value. The income capitalization formula is as follows:
A real estate appraisal method that estimates a property’s value by comparing it against other properties with similar attributes that have been sold recently. This approach considers all of the individual features of a property, adjusting the value to reflect a sum of all the property’s features. A sales comparison approach may be used to evaluate both commercial and residential property.
Investment properties that need corrective action to fully realize their value. Value-add is a term given to describe one of the four major risk profiles of
The amount of uncertainty associated with the size of change in a security or market index’s value. In statistics, volatility is determined by the standard deviation or variance of returns for the same security or index. A higher volatility means that a security’s value is more unpredictable, typically carrying a greater amount of risk. A lower volatility means that the security’s value does not fluctuate as much, and tends to be more stable.
For example, say Security A has fluctuated in value from $50 to $120 three times this year, while Security B has fluctuated between $70 to $80 three times as well. Given that Security A has changed in value at a higher variance from its average during this time period, it is said to be more volatile, or more unpredictable.
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