1031 Exchange is a method of deferring capital gains taxes on the sale of real estate held for investment purposes by exchanging proceeds from the sale of such asset, into like-kind property of equal or greater value that is held for investment purposes, as defined in IRC Section 1031.
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 45 calendar days from the closing date
A 401(k) plan is an employer-sponsored retirement plan that allows eligible employees to make tax-deferred contributions from their salaries or wages. Employers can offer to match employee contributions up to a certain percentage of salary or specific dollar amount. The 401(k) plan was introduced by law in 1978. The IRS limits the amount an individual can invest into a 401(k). In 2019, the contribution limit was set at $19,000. Withdrawals from a 401(k) account are taxed and are charged with a 10 percent early-withdrawal penalty if drawn upon before a certain retirement age.
Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their
721 UPREIT exchange results in the same tax deferral benefits that are achieved as with a 1031 exchange. Capital gains taxes are deferred until such time as the exchanger sells
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 relinquished property to formally identify a replacement property or properties.
An absolute advantage occurs when a company or country is able to produce a good or service more efficiently than competitors. The company is able to use fewer inputs or time to produce the same quality of goods or services as its competitors. This efficiency allows the company to generate more profit per unit of product. Companies or countries should focus on what they are able to produce efficiently and forego items they can’t produce efficiently. This is a form of specialization. For items that the country can’t produce efficiently, it can import those items from countries that are able to produce such items efficiently.
Also known as a bondable lease, the most extreme form of NNN Lease, in which the tenant is responsible for all property related risks.
Accounts payable is an accounting term that measures the sum of a firm’s short-term obligations to creditors and/or suppliers. Accounts payable must be paid off in a defined period of time to avoid default and maintain a firm’s credit rating, thus ensuring its access to debt financing in the future.
Accounts receivable (AR) is money owed by customers to a company. Companies extend credit to customers, allowing them to receive a product or service before paying for it. Customers are given credit terms that have a credit limit and a certain number of days that a customer can pay. Terms vary by industry and customer credit worthiness. Accounts received is a current asset on the balance sheet. It is also part of a company’s working capital. Companies much manage their AR by ensuring efficient collection of payments from customers. Otherwise, customer accounts can get old and uncollectible, causing a write off for bad debts.
Accretive means gradual or incremental growth. But its meaning varies for finance vs. general lexicon. For example, in finance or business, accretive is an increase in the growth of a business due to an acquisition. When company ABC acquires smaller XYZ, ABC’s overall growth may increase. This can be seen in ABC’s earnings per share. This growth is gradual (i.e., years) rather than immediate. Accretive also refers to growth in zero coupon bonds, which do not pay interest. However, a $1,000 zero coupon bond may be purchased for $500. Over a defined number of years, the bond will grow to $1,000, which is similar to a bond that pays interest.
Actual receipt is physical possession of, exchange proceeds or other property by an exchanger completing a tax-deferred like-kind exchange. Any receipt of the exchange proceeds during the exchange period will disqualify the entire tax-deferred exchange transaction under IRC Section 1031. An actual receipt isn’t a paper receipt for the purchase of something, such as might happen at a retail store. Instead, it is another term used to express possession of sale proceeds of the relinquished property in a 1031 exchange. A common form of actual receipt is a check for the sale proceeds. Two receipts can occur in a 1031 exchange. One is the actual, and the other is the constructive receipt. A constructive receipt may involve the client’s attorney. In this case, the attorney is an agent of the client and takes possession of sale proceeds then passes them on to the client. That violates the 1031 exchange rules.
A tax on the assessed value of real or personal property. Translated from Latin to mean “according to value”, ad-valorem taxes are based upon the monetary value of the asset or good. Common ad-valorem taxes seen in practice are property taxes, sales taxes, and taxes on import goods. Ad-valorem taxes can be transactional or assessed yearly. To provide an example, an 8% sales tax is based on the monetary value of the good being purchased, and is transactional based, as it only applies when a good is being bought or sold. Likewise, a 7% property tax in Travis County is based on the monetary value of the land as determined by a government assessor, however, is paid annually.
An adjustable rate mortgage, or ARM for short, is a mortgage loan which does not have a fixed interest rate throughout its term. With an adjustable rate mortgage (ARM) the interest rate is subject to periodic adjustment. The rate adjustment may be based on any time period (daily, monthly, quarterly, semi-annually, annually, etc.) and the adjusted rate is typically expressed as a spread or margin over a defined index rate. Typical index rates include LIBOR, Prime Rate, and the 30-Day US Treasury rate.
Adjusted basis is the original purchase price of an asset plus its acquisition costs plus any capital improvements less the cumulative depreciation deductions
ADL stands for Activities of Daily Living and is used by insurance companies to determine policy prices. There are six ADLs: Feeding oneself Bathing and cleaning one’s body Getting dressed by oneself Mobility/transferring either by walking or using mechanical assistance to get from one place to another Personal hygiene, including brushing teeth, combing hair, etc Using the toilet independently As people age, they require more assistance with daily activities. Eventually, a person may need to be placed in a nursing home. This usually happens when they are unable two perform two or more ADLs without assistance. At age 65 and over, estimates say that half of the people will require a nursing home or some form of care at their own home. Of that group, most long-term care stays will be for under one year. However, one-fifth will stay for more than a year. As the number of people requiring assistance increases, it increases insurance, Medicaid, and Medicare costs. Determining a person’s ADLs helps insurance companies assess a person’s medical status and the kind of policy that most suits the person. ADLs also help in determining the type of long-term care that may be needed and the appropriate health coverage. Being able to perform all six ADLs without any assistance means a person can live independently. Once they are not able to perform two out of the six ADLs, physicians or caregivers may determine the person needs long-term care, such as a nursing home. ADLs are important because they allow someone to carry out vital daily tasks without the need for assistance. These tasks include driving, grocery shopping, taking medication, and the use of public transportation, among other needs. When it comes time to determine the proper long-term care, families often help with these decisions. Options include in-home care, nursing home, or assisted living community. Many choose for in-home care as moving to a different location is a higher impact decision.
After an individual or corporation has its their heard case heard by a trial-level or other lower court, the case can be further appealed or reviewed. That’s where the appellate or appeals court comes in. It is a higher level court at the federal and state levels. There are 13 federal appellate courts and one for each state. Appellate court does not have a jury. Individuals or corporations with a judgement against them can have the case heard in appellate court. The appellate court will ensure that the law was applied correctly in the original hearing. If the case is overturned, the judgement is dropped, as the appellate court takes precedence over the ruling of the lower court.
Annual percentage rate (APR) is a measure used to calculate the percentage of principal on a loan that an individual or business will pay per year. It is ultimately expressed as a percentage that quantifies the annualized cost of funds during the term of a loan, though it does not account for compounding interest. APR is best used as a measure of the cost of funds and is a bottom-line figure that can be compared across a spectrum of lenders.
Arbitrage is a method of risk-free investment in which an investor acquires an asset at a particular price in a certain market and simultaneously sells that asset for a different price in another market. Arbitrage exists as a result of market inefficiency and would not exist if markets were perfectly efficient. As technology has evolved over time, an investor’s ability to generate profits from arbitrage has diminished. Opportunities do still exist when, for example, the price of an asset on the New York Stock Exchange differs at the same moment in time from the price of the asset as it is listed on the London Stock Exchange.
An asset is a resource owned by an individual, corporation or country that controls the item with the expectation that it will produce a benefit or cash flow in the future. Assets are typically reported on a firm’s balance sheet and are bought or created to increase a firm’s value or enhance a firm’s operations.
A group of investments that behave similarly in the market, and are subject to the same regulations. Today, the three main asset classes recognized are equities, bonds, and cash equivalents. Although real estate and commodities are included by some professionals as well, these investments typically fall in the alternative investment category. Investments within an asset class are associated based on their underlying fundamentals. For example, fixed income investments are grouped because of their similar financial structure, and equities are grouped together because of what they represent and how they are traded. Because the fundamentals of each class differs, each represents a different risk and return profile. By allocating across different asset classes, investors may be able to achieve a degree of diversification in their portfolio. Diversification, however, does not guarantee profits or protect against losses.
Assets Under Management (AUM) is the total market value of assets an investor has managed by a financial institution. These financial institutions vary, but mainly fall under bank deposits, mutual funds, and brokerages.
Bad title is title to a property that does not grant distinct ownership. Often used in the context of real estate, bad title results in the interests in real property not being transferred properly to the new owner. A product of unpaid taxes and liens, faulty transfer documents, building code violations, among other reasons, any encumbrance causing the cloud on title must be remedied before title can be fully transferred.
Balance of trade is defined as the difference between the value of a nation’s imports and exports over a defined period of time. A country is considered to have a trade deficit if the value of the goods it imports exceeds the value of the goods it exports. A country has a trade surplus when the value of its exports exceeds the value of its imports. A country’s balance of trade is a metric used to quantify the relative strength of that country’s economy.
Bankruptcy remote is typically used when discussing a special purpose entity. A bankruptcy remote entity is a separate legal entity whose bankruptcy or insolvency would have a de minimus economic impact on the other entities within the group.
Basis, in the context of commercial real estate, is the original purchase price or cost of investment property plus any out-of-pocket expenses or closing costs related to the acquisition of the property. Also known as “cost basis” or “tax basis”.
The basis point is a common unit of measurement used in the field of finance. One basis point is equal to 1/100th of 1% (0.01%). Basis points are used primarily for noting changes in interest rates, yields, and equity indexes, and are used by analysts to minimize confusion when discussing percent changes in financial instruments.
A blanket mortgage is a type of mortgage that finances more than one piece of real estate. Similar to a conventional mortgage, the real estate acts as collateral under the loan, and depending on the terms, the individual pieces of real estate may be sold without retiring the entire mortgage. In practice, blanket mortgages allow the mortgagee to aggregate its debt obligations under a single loan to a single lender. Due to the size and scope of the loan, the borrower may have the ability to negotiate better terms and achieve a lower interest rates. In addition, a borrower may be able to save on application and closing costs associated with taking on multiple mortgages. The disadvantages of a blanket mortgage include the capability of the lender to foreclose on all of the properties serving collateral in the scenario that the borrower defaults. In addition, blanket mortgages are typically unable to cover properties across numerous states, as each state has unique guidelines regarding how blanket mortgages are issued.
Blue chip stocks are considered stable, low-risk investments. They are the largest companies trading in the stock market. The blue chip refers to the blue chips used in poker. They are the highest value chips available. Blue chip stocks pay consistent dividends that increase over time. When the economy is coming out of recession, blue chip stocks are not expected to recover as quickly as small cap stocks but they are also not expected to be as impacted going into recession. Blue chip stocks have been around for years and, in most cases, decades. They include companies such as Coke, IBM, Apple, Microsoft, Google, and Intel.
A bond is a fixed income instrument that represents a loan from an investor to a corporation or government. A bond is considered a fixed income security that is throughout of as an IOU between the individual lender and borrower with terms that outline the details of the loan and its regular payments. A bond is equipped with an end date when the principal of the loan is due back to the borrower in addition to the specific coupon amount that is due to the lender on a payment schedule, based on the variable or fixed interest rate assigned to the loan.
Bonds are used by corporations and governments to issue debt. Investors buy these bonds to collect interest that must be paid by the bond issuer. Interest can be variable or fixed. Most bonds have an ending date, which is when the return of principal occurs. Although some bonds are perpetual and have no ending date. Interest rates are determined by the credit of the bond issuer. Higher credit ratings equal lower interest rates. Bonds are issued to finance the growth of a country or corporation. For corporations that can’t find favorable bank financing, bonds can be a great alternative.
Boot, although not specifically defined (or even mentioned) in IRC Section 1031, is commonly used and refers to the fair market value of cash,
A budget surplus occurs when a government is running efficiently. It is generating more revenues than expenses and therefore has money left over. Individuals prefer to call a surplus “savings.” When the economy is doing well, there is less demand for government services since more people are employed. When a government creates a surplus, whether, at the federal, state, or local level, citizens will often call for taxes to be lowered. Basically, they are saying that the government has a surplus because it charged too much in taxes. A surplus may be put aside as part of a rainy day fund or to pay off debt that was incurred during a budget deficit.
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.
Business ethics is the study of policies and practices with regard to corporate governance. Business ethics are critical to a firm’s operations, as they ensure that a firm is operating in an ethical manner on behalf of its stakeholders. Businesses began to become increasingly concerned with business ethics in the 1960s as society began to become more concerned with environmental and social causes.
Business risk is anything that jeopardizes a company’s ability to meet its financial goals. This type risk goes beyond the internal operations of a business, such as the actions of upper management, and can include external factors such as new regulations enacted by the government. By becoming aware of the different factors that may cause a particular business to fail, such as compliance and operational risk, a company may be able to enact a proper risk management strategy that mitigates specific risk that may affect their ability to drive revenue or control costs.
Buying on margin is the process in which an investor purchases an asset with leverage by borrowing a balance from a bank or a stock broker. Buying on margin allows for an investor to purchase assets with, for example, 20 percent cash and 80 percent leverage, where the leverage is secured by marginable securities held by the investor. In order to buy on margin, an investor needs to apply for approval from a bank or broker. The degree of buying power an investor has access to is a function of the total dollar amount of purchases the investor can make with cash and securities holdings.
Cap and trade is a term that refers to government regulation programs that cap the emissions of certain chemicals, especially carbon monoxide. Cap and trade is an alternative to a carbon tax. The regulation is meant to be designed in such a way that it doesn’t do adverse damage to the industries being regulated. Part of cap and trade is that it provides companies an incentive to begin switching to cleaner, alternative forms of energy. Cap and trade involve issuing emissions credits to companies. Those companies that emit dangerous chemicals use up credits. If all of their available credits are used, they are taxed. Those with leftover credits can sell them to other companies. The total number of credits declines over time, pushing companies towards cleaner alternatives.
Capital assets, for corporations and business entities, are assets that have a useful life longer than one year and are not held for sale in the ordinary course of business.
Capital Expenditures are, in the context of commercial real estate, funds used by a company to acquire or upgrade physical assets that cannot be expensed as
Capital gain is an increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the basis of the asset. Capital gains can also
The capital gains yield of a stock represents the absolute return from time 1 to time 2. It is calculated using the formula: (p2 - p1) / p1, where p1 is the price at time 1 and p2 is the price at time 2. For example, the price of the stock ABC is $100 on day 1. On day 5, it is $105. Its capital gains yield is (105 - 100) / 100 = 0.0105 or a 1.05% gain. Capital gains yield is often used to find out the return of a stock from the time of purchase to the time of sale. In the above example, the investor would have purchased the stock at $100 and netted a $5 gain in dollar terms, resulting in a 1.05% gain. Capital gains yield doesn’t include stock dividends, which is considered total return.
Capital goods are tools created for a business to use in producing consumer goods. Capital goods have a useful life of over one year and are considered tangible assets. Examples of capital goods include buildings, vehicles, machinery, and equipment. Because capital goods have a long lifespan, they are depreciated rather than expensed. Depreciation accounts for the loss of the asset’s value each year of its lifetime. Depreciation is taken by determining the capital goods’ lifespan, then taking partial depreciation each year. For example, a capital good with a lifespan of 20 years is depreciated at the rate of 1/20 per year.
In the context of commercial real estate, capital reserves are funds designated for long term capital investment projects or future capital expenditures.
Capitalization rate is the initial rate of return an investment property is expected to generate. The Capitalization Rate is determined by dividing the
Carry costs are any expenses the owner must pay on investment property over the course of owning it. These costs usually include utilities, debt service payments, taxes and insurance, among other items.
Cash is legal tender, which is issued by a country’s government. Rather than carrying around goods or something else for trading, cash reduces weight and simplifies transactions. Cash is lightweight and small, which makes transporting it easy. It represents specific values of goods, which makes the exchange of cash for goods straightforward. Cash is also considered liquid since it can be immediately exchanged for goods or services. On a corporate balance sheet, cash is considered a current asset — meaning, the most liquid asset available to the company. The cash flow statement shows all cash coming in and going out of a company, such as cash used to pay for expenses.
Cash and carry is an arbitrage technique used with a stock or commodity and the associated futures contract. When there is a spread or difference in the stock and futures prices, arbitrage is possible. For example, buying the S&P cash index and shorting the S&P futures contract. The two eventually come back into price alignment, as the cash index rises and the futures drop (or vice versa). There are risks to this strategy, which are called carry cost. The arbitrageur holds the futures contract until expiration, which also means the storage of the physical asset, such as oil or wheat. This storage of the asset is called carrying the asset. Another carry cost is margin on the futures contract. Non-physical assets such as the S&P 500 do not have to be stored, which means its carry cost is only margin.
A cash sweep is the use of a borrower’s excess free cash flow to pay down a loan’s principal balance or build a reserve account for the benefit of the lender. Commonly used in situations where a borrower’s cash flow is uncertain or volatile, a lender may implement a cash sweep provision to protect itself from the financial risk that may occur in years where a borrower’s cash flow may not be sufficient enough to satisfy its financial obligations to the lender. A cash sweep is commonly activated in scenarios where a borrower fails to meet certain financial requirements or loan covenants as laid out in the loan terms. These may include failure to meet a minimum debt service coverage ratio, leverage ratio, or debt to equity ratio.
Charitable remainder unitrust is a “split-interest” structure. It first disperses income to its beneficiaries for a specific period of time. Once this period of time expires, the trust donates the remainder of its assets to charities, which are also beneficiaries of the trust. This structure allows the trustor to save on taxes. A charitable remainder unitrust is a tax-exempt irrevocable trust. An irrevocable trust means it cannot be changed or terminated without the beneficiary’s permission.
A lease provision that protects retail tenants in the event that major tenants leave an area or a certain percentage of the retail center they occupy is vacant. Based on the belief that high occupancy with strong tenants drives traffic, co-tenancy clauses remedy smaller tenants when larger tenants vacate the premises. These remedies can include a reduction in rent or the ability to terminate a current lease. Heavily negotiated in lease contracts, co-tenancy clauses create a degree of risk for the landlord. Contingent on the property, lawful acts of third-party tenants, co-tenancy clauses may create a “domino effect” of vacancies in the event that a major tenant does not comply with the terms its lease.
Commercialization involves taking a product or service and making it widely available to a broader audience. For businesses, the goal is to create such products for less than they are sold to the public. Product costs include production, distribution, marketing, sales, and customer support. Commercialization includes three different stages: The ideation stage, the business process stage, and the stakeholder stage. These stages include brainstorming, deciding if there is enough demand for a product at the right price point, and understanding of the company will be able to benefit its stakeholders by selling the product.
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.
Complementary goods create value when used together but offer little to no value when used alone. An example is hamburger patties and buns. Consumers will often purchase them together. As stand alone products, they don’t offer much value. Additionally, if the price of one complimentary product increases, such as hamburger patties, sales in the other related product (buns) will decrease, along with sales of hamburger patties. This relationship between the two goods is also referred to as the joint demand nature of the two products. The formal terminology for the relationship is called cross-elasticity. As demand for one of the complementary products increases, so does the demand for the other product and vice versa as demand falls. There are two types of cross-elasticity for complementary goods — weak and strong. Strong elasticity is as described above, where there is close to a 1-to-1 relationship between the two products. Weak elasticity means that as demand for one product decreases, it doesn’t have as much impact on the other product. For example, if the price of coffee rises and demand falls, it doesn’t affect the demand for creamer, since there are many uses for creamer outside of coffee. Even though coffee and creamer are complementary goods, creamer is a complementary good for many other products. Complementary goods can also be affected by price changes in competing products. If the price of steak decreases, sales of hamburger patties and buns will both decrease, as they are seen as inferior goods compared to steak. Complementary goods shouldn’t be confused with substitute goods. Substitute goods are different products or services that satisfy the same consumer need. The iPhone and Samsung phones are different products. If the price for one phone increases, consumers may switch to the other to satisfy their mobile communication needs.
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.
Conflict theory, as put forth by Karl Marx, says that societies are in constant conflict over competition for limited resources. Marx also believed that the rich and powerful would try to remain that way at the expense of poorer members of society. However, every group/class within a society will work to maximize their own benefits. As it relates to the financial crisis, banks took on excessive risks because the government turned a blind eye to their activities. They were bailed out by a government that used funds, which it said it previously did not have for social programs, thus benefiting the rich and powerful. The poor received nothing. Marx would say that the financial crisis was inevitable due to conflict theory.
Consumer goods are items purchased by consumers for final consumption. These are goods that have reached the end of the manufacturing process and are not resold. The consumers, rather than another manufacturer, is the final buyer of the good. Consumer goods are classified as durable (useful for longer than 3 years). These are goods such as refrigerators, ovens, furniture, and cars. Durable goods are considered necessities and purchased regardless of current economic conditions. The other type of consumer good is nondurable (useful for less than 3 years). This also includes pure services (consumed at the same time they are produced). Examples include clothes, food, gasoline, and oil.
A clause commonly written in retail leases that requires a tenant to continuously operate at a property for the entire term of the lease. As anchor tenants may act as a demand driver for a retail center, landlords may enforce this clause to minimize the risk of a major tenant “going-dark.” In situations that a continuous operation clause is not included in the lease terms, a non-profitable tenant may leave the premises, and the center may suffer as a whole. Smaller tenants may negotiate rent abatements to make up for the loss in traffic due to the anchor tenant ceasing operation.
Core properties exhibit the lowest risk and lowest potential returns amongst the four major commercial real estate risk profiles, and represent
A corporate bond is a debt security issued by a company. Investors buy corporate bonds for the stability and consistency of interest payments. Basically, investors are lending the company money for a certain time period. Once a bond expires or reaches maturity, payments cease, and the investor’s capital is returned, which means the loan has been paid back. Interest payments are pre-determined and rates can be fixed or variable. A corporate bond’s interest rate is determined by the company’s creditworthiness. Companies with good credit (i.e., AAA) pay less interest because of the bond’s lower interest rate. Whereas those companies with poor credit (i.e., junk status) pay a high interest rate because they are considered risky.
CPM stands for cost per thousand and is a metric used in webpage advertising. In an effort to attract customers, companies will pay for ad space on popular websites that are related to the product they are selling. Advertising companies charge per 1,000 impressions or displays of an ad. CPM-based advertising is used for brand awareness or to advertise specific messages. As an example, an ad company that charges $2 per CPM will earn $200 per client from 100,000 ad impressions. CPM is related to CTR, which stands for click-through rate. CTR tracks the number of clicks per 1,000 ad impressions. Ad companies will often charge extra based on the number of CTRs. CTR doesn’t necessarily mean success for a client. A customer may not purchase anything after clicking on an ad while another customer may see an ad and decide to purchase days later by phone or by walking into the store.
Credit tenant lease is a method of financing real estate where the landlord borrows money to purchase the property and pledges the rent to be received from the tenant as security.
Credit unions are financial institutions that perform banking activities and are created, owned and operated by participants. Under the credit union structure, members pool money together via deposit accounts to provide loans and other financial products and services to other members. Credit unions and their members are typically comprised of individuals with some sort of common bond, whether that be occupation in a regional fire department or status as health workers in a hospital system. Income generated from the activities conducted by a credit union are used to fund projects and services that will benefit the interests of the credit union’s members.
Curb appeal is the attractiveness of a residence or investment property from the sidewalk or street. Often a term used by real agents when selling a property, increasing curb appeal may attract potential buyers to particular property over a less appealing property of similar size and scope. Items that may play into curb appeal include landscaping, painting, fixtures, and even the surrounding area and neighborhood.
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.
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.
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 real estate, delivered means the total square footage or number of properties in a particular asset class that have been completed (status changing from under construction to inventory) and received a certificate of occupancy during a given period of time. Once a certificate of occupancy has been given, the property will be deemed delivered, regardless if tenants have occupied the space or not.
Depreciation, in our context, refers to the allocation of an asset’s cost over the timeframe of its “useful life”, or duration for which it will be useful
Descriptive statistics are used to describe a data set, whether that be the full data set or a sample. There are two categories of descriptive statistics — measures of central tendency and measures of variability or spread. Measures of central tendency look at the center of a data set while measures of variability look at how the data is dispersed. Measures of central tendency include mean, median, and mode, which measures the most common patterns within the data. Measures of variability include standard deviation, variance, range, quartiles, absolute deviation, the minimum and maximum variables, and the kurtosis and skewness. Measures of variability help in determining the shape of the distribution.
Direct taxes are often income taxes, which are paid annually. Direct taxes are paid by both businesses and individuals. Payments go directly to a government entity, such as the IRS, Treasury, state agency, or local municipality. To understand direct taxes, let’s look at their mirror opposites - indirect taxes. An indirect tax is paid by consumers on goods and services. For example, taxes are paid on groceries but instead of paying a government entity, the consumer pays those taxes to the grocery store. The grocery store must then submit those taxes to the proper government entity. Additionally, a grocery store tax is a flat tax, whereas income taxes are a progressive tax.
A valuation method used to estimate the feasibility and attractiveness of an investment opportunity. DCF analysis utilizes future free cash flow (FCF) and discount rate estimates to determine a net present value (NPV) of the investment. If the present value of the cash flows is higher than the initial cost of the investment, the DCF analysis will show a favorable investment, or positive net present value (NPV). If the initial cost is higher, however, the NPV will be negative, showing an unfavorable investment. For example, an investor has estimated that a project they are investing in will generate a FCF of $50,000 over the next 5 years with a cost of capital of 9%. Taking into account the time value of money, the investor determines that the present value of the investment is approximately $195,000. If the initial cost of the project is $200,000, the NPV would be about -$5,000, showing a poor investment opportunity.
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.
The Dow Jones Industrial Average (DJIA) is a stock index composed of the 30 largest blue chip companies that trade on the NYSE and NASDAQ exchanges. The DOW, as it is sometimes referred to, is the second oldest stock index, behind the Dow Jones Transportation Average. It was created in 1896 by Charles Dow and his partner Charles Schwab. It is meant to represent the broader stock market. When market commentators say the market is up, they are generally referring to the DOW. If an investor wants to invest in the DOW, he can buy shares of ETFs or mutual funds that track the index. Investors can also buy individual stocks within the DOW, such as Walt Disney Company, Exxon Mobil Corporation, and Microsoft Corporation.
Also expressed as average space downtime, downtime is the general term used to describe the typical amount of time expected between the expiration of a lease and the commencement of a replacement lease for a particular property. Downtime pertaining to real estate is usually expressed in weeks or months.
DST Interests represent equity ownership in a large property by multiple investors through an investment structure known as a
Dumping occurs when an exporting nation lowers the price of its product below that of competitors in the importing nation. The goal of dumping is for the exporting nation to gain a competitive foothold in the importing nation. Because the importing nation’s customers can buy the imported product cheaper than other domestic products, the exporting nation creates a competitive advantage. Dumping is legal under the World Trade Organization unless the importing nation can show that the lower-priced product is hurting domestic producers. Dumping is a type of price discrimination, which is seller (i.e., exporting nation) driven.
Duration is a measure of the sensitivity of a fixed income security’s price to changes in interest rates. There are generally two methods of calculating a bond or debt instrument’s duration. The first method of duration calculation is called Macaulay duration, which accounts for the present value of future bond payments and value at maturity. It is the standard by which markets calculate bond pricing. The second method of duration calculation allows an investor to know how much a bond’s price will fluctuate if the yield to maturity rises or falls by one percent.
Easement is a non-possessory right that allows the holder to occupy or use real property that he or she may not actually own. Easement rights are limited in nature, and are restricted to whatever is “convenient or necessary” to satisfy the purposes of the easement. There are two main types of easements that are common in real property: easements appurtenant and easements in gross.
Economic efficiency is an economic state where all resources have been efficiently allocated to all individuals or entities. In other words, goods have been produced at the lowest cost and delivered in the most efficient manner. Waste and inefficiencies have been eliminated. Economic efficiency is a zero-sum game. Each resource has a person it can be allocated to. If we assume a 1-1 relation between goods and consumers, taking one good away from someone and giving it to someone else results in a loss for one person and gain for the other (zero goods vs. two goods). However, the net benefit across all goods and consumers is zero.
An economic trough occurs after an expansion. Troughs are a regular part of the business cycle. As an economy expands and its GDP grows, it will eventually reach a peak. The economy will then begin to contract as it slides down the backside of the peak and goes into recession. From there, the economy will hit a trough — its lowest point in the cycle. In a trough, the stock market may hit bottom, unemployment is highest, credit is difficult to obtain, and business sales and earnings are at their worst. As the economy pulls out of the trough, expansion begins again.
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 the landlord from a lease after deducting the value of concessions and costs incurred to secure the lease such as leasing commissions and tenant improvements.
In 1952, Nobel Laureate Harry Markowitz created the efficient frontier. It represents a set of optimal portfolios with the highest expected return for a given level of risk. These optimal portfolios are also well-diversified.
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.
Encumbrance is any limitation on the ownership of real property. Similar to a lien, an encumbrance can restrict both the free use and the transferability of the property until removed. Encumbrances include leases and mortgages, but are not always financially related. Encumbrances are non-possessory, holding no interest in the title of real property.
An entrepreneur is someone who creates a company based on an idea. For the entrepreneur to succeed, the company must succeed. Meaning, it must become profitable. Entrepreneurs face many challenges in their endeavor, which include finding startup funds, identifying and selling to a viable customer base, weathering downturns, and competition. If the business succeeds, jobs will be created and there will be a net increase to the local economy. Depending on how large the business becomes, the contribution to overall GDP can be significant. Entrepreneurship is high-risk but can also be high-reward if the entrepreneur succeeds.
Equity Interests are ownership interest in a business entity, from the concept of equity as ownership.
ESports are to gamers what a live football game is to football fans. eSports are not physical games. Instead, they are watched on computers, smartphones, and television screens. For many eSports fans, instead of watching in isolation, they gather at large events and watch together, just like a regular sporting event. Often those playing the games are there as well to add a little more action, provide in-person interviews, feedback, and meet with fans. For eSports fans, these events have the same intensity as a live sporting event.
Used when completing a reverse exchange, an Exchange Accommodation Titleholder (EAT) is an unrelated party who holds legal title to either
A written agreement between the exchanger and the Qualified Intermediary (QI) defining the transfer of the relinquished property, the ensuing purchase of the replacement property, and the restrictions on the exchange proceeds during the exchange period.
An exchange rate is a metric that quantifies the value of a country’s currency as it relates to the value of another country’s currency. Most exchange rates are considered floating rates, meaning that the rate rises and falls as a result of changes and developments on the foreign exchange market. An exchange rate tells an individual for example how many euros he or she can obtain in exchange for one U.S. dollar.
An exchange-traded fund (ETF) is collection or basket of securities traded on a financial exchange. ETFs can be bought and sold via brokers just as stocks can. ETFs can have any type of investment concentration and offer investors exposure to thousands of stocks, commodities or bonds operating within or originated in the United States, emerging markets such as India or Brazil, Europe or any other geography. It can also focus on a specific industry or sector such as banking, telecommunications, minerals or technology.
An expansion within an economy is a phase of the business cycle that goes from trough to peak. It is defined by at least two consecutive quarters of GDP growth. Expansions can last a few months to over a decade. During an expansion, life is good. Businesses are ramping back up and hiring people, unemployment is low, money is cheap to borrow, and the stock market is rising. Because borrowing costs are low, businesses and consumers borrow and spend more, fueling the expansion. The Federal Reserve will usually cut interest rates at the beginning of an expansion, reducing interest on savings and driving consumers into the stock market for better returns.
The factor market is also called the input market. It consists of companies that buy raw materials and labor to produce final products that are sold to consumers (output market). Factors are the purchased raw materials and labor. Consumers also participate in the factor market. When a consumer applies for a job, they are a seller, since they are selling their services. The company that hires them is a buyer since the company is buying labor, which is a factor.
Factors of production are inputs that firms use to generate economic profit during the production of a good or service. These factors include land, labor, capital, entrepreneurship, and technology. Firms leverage these factors to generate economic profits by generating revenues from the sale of a good or service that exceeds the costs of producing or maintaining these factors.
Fannie Mae is the more common alias of The Federal National Mortgage Association (FNMA) is a publicly traded
The Federal Deposit Insurance Corporation (FDIC) was created in 1933, during the Great Depression. It was created due to all the bank failures from the 1929 stock market crash. The FDIC is an independent government agency. It insures depositor funds for up to $250,000 per depositor. If a depositor has more than $250,000 to deposit, they can spread funds across multiple banks, never exceeding $250,000 per bank, to get more FDIC protection. Banks pay for FDIC insurance. Depositors must check that a bank is a member of the FDIC. If not, their funds will not be FDIC insured. As of 2018, there were over 4,700 FDIC insured banks.
The U.S. federal income tax is a tax levied on the income of individuals, corporations, trusts, and other legal entities. The federal income tax is a source of revenue for the federal government. The government uses money from the tax to build and improve the country’s infrastructure, fund entitlement programs, and disaster relief. The federal income tax is different from local and state taxes. Local taxes create revenue for cities and counties. State taxes do the same at the state level. Local and state taxes are also levied on the income and purchases of individuals and corporations. Not all states have an income tax. There are currently nine that do not.
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.
Financial literacy is the knowledge and ability to successfully manage one’s finances. The lack of financial literacy can be a detriment to a person getting ahead financially. Being financially literate consists of a number of components but generally includes financial planning, budgeting, paying off debt, investing, planning for college, estate planning, and understanding how interest is calculated. Financial literacy is also about our attitude toward money, which ultimately affects our decisions about spending and saving money. Financial literacy can be obtained by reading about personal finance and working with a financial advisor.
The term financial security represents a stake in a publicly-traded company, whether through stocks, bonds, or options. Owning stock in a company means the holder of the stock has an equity stake in the company. Bonds represent a creditor relationship. Options are rights to ownership. Stockholders have voting rights in the company, usually dependent on the number of shares they own. Creditors (bondholders) don’t have voting rights. For giving up their voting rights and any potential appreciation in the company’s value, bondholders are paid a consistent interest on their bonds. Bondholders are also one of the first in line (before stockholders) to be repaid their principal if the company files for bankruptcy.
FinTech, which is short for Financial Technology, is the word used to describe new technology that is developed to automate and improve the financial and banking services sectors. Typically delivered through different algorithms and software packages on computers and smartphones, FinTech looks to help corporations, business owners, and consumers facilitate and manage their financial operations and needs.
First loss position is an investment’s or security’s position that will suffer the first economic loss if the underlying assets lose value or are foreclosed upon. In the context of commercial real estate, the first-loss position typically refers to the equity position of an investment. For instance, if an investment property is acquired for $1,000,000 by utilizing $250,000 of equity and $750,000 of debt and the property is later sold for $900,000, then the sales proceeds would first be used to repay the loan, and any remaining funds would then belong to the equity investor.
A fixed asset is property, plant, and equipment that a company has owned for more than a year. These assets are listed on the company’s balance sheet. Unlike inventory, fixed assets are not resold. Fixed assets can be depreciated over their lifetime. How much depreciation is dependent on the kind of asset. For example, a $3,000 investment in equipment that has a three-year lifespan might depreciate at a rate of $1,000 per year. This means the company can expense $1,000 per year, reducing its overall net income and taxes.
A type of loan where the interest rate is predetermined, and does not fluctuate during the term of the loan. Fixed rate loans allow borrowers to accurately calculate future financial obligations, in the form of both principal and interest payments.
A flexible payment plan allows consumers to purchase a product and pay for it over time. It’s similar to a credit card but is on-the-spot financing. Companies such as Affirm and Paypal Credit allow merchants to offer financing at checkout. Customers are often approved but those with the best credit get the best terms. Sometimes this means no interest for a specific period of time. Consumers with poorer credit will often have to pay high-interest rates (up to 30%). Missing a payment can mean high fees and may even void an interest-free period. Flexible payment plans can often lead to debt. Consumers are using the plan because they don’t have the cash to purchase the product. The alternative is to finance it. However, with a high-interest rate and late fees, payments can become difficult to pay while debt increases.
FAR stands for Floor Area Ratio and is the total usable floor space in a building compared to the building’s lot size. The formula for FAR is (total floor area of building) / (gross lot area). The total building floor space may also be based on permitting. A high FAR means more density. City governments use FAR for zoning. Usable space varies across buildings. Elevator shafts, stairwells, pillars, and other occupiable spaces do not count as usable space. Developers desire a higher FAR, as it allows for more occupancy per lot. City planners must balance the desire for more usable space with the strains it can put on a city, known as a safe load factor.
Foreclosure is the legal process by which the mortgage holder attempts to recover the balance of a loan from a borrower who has defaulted by forcing the sale
Fringe benefits are an additional, often non-monetary compensation for employees. They can be used to help set a company apart from its competition by offering benefits that other companies don’t offer. This differentiation helps in attracting hard-to-find talent. Some common fringe benefits include health and life insurance. Other benefits can include a gourmet cafeteria (as is the case with Google), 20 weeks paid leave (Microsoft), commuter passes, gym memberships, and more. Fringe benefits help enhance the work environment for employees, making it a more desirable place to work. For this reason, and in addition to attracting talent, fringe benefits help retain and keep employees motivated.
Full employment is an economic state where labor resources are being used most efficiently. It includes the use of the most skilled and unskilled workers. Full employment does not mean that everyone within the economy is employed. Even in a full employment economy, there are levels of unemployment, which are referred to as natural or cyclical unemployment, which is made up of two components. Frictional unemployment occurs when people are unemployed because they are moving, just starting a job search, or quitting their existing job for a better one. Structural unemployment occurs when people are unemployed because they can’t find work or companies can’t find labor.
A fully amortizing loan is a type of loan which is completely paid off by the end of its term, given the borrower makes complete payments based on the loan’s amortization schedule. Whereas fixed rate loans will have equal payments of interest and principal over its term, debt service on floating rate loans will change as the interest rate changes. Due to the fact that all principal will be paid off, fully amortizing loans will not see a balloon payment at the end of its term, regardless of whether it is fixed or floating.
Gross domestic product (GDP) is a broad measure of a nation’s productivity. GDP is defined as the monetary value of all finished goods and services a nation produces within its borders in a specific time period.
A general ledger is a double-entry form of accounting. Each transaction records an entry to a debit and credit account. One side of the general ledger is the sum of debits, while the other side is the sum of credits. The sum of all debits and credits should be equal. The debit side includes entries for assets, expenses, losses, and dividends. The credit side includes liabilities, gains, income, revenues, and equity. As an example of how the ledger works, when paying utilities, a debit is recorded to utilities expense while a credit is recorded to cash. The general ledger is what the company’s financial statements (income statement and balance sheet) derive from.
General market factors refers to the overall conditions within a defined market that affect all properties within that market. These factors are influenced by the demographic, economic, and locational characteristics of a market. General market factors change over time with demographic patterns, economic and business cycles, employment trends and government policies, amongst other factors. As an example, rising unemployment in a region could cause office rental rates to decrease and tenant defaults to increase throughout that region. This differs from a property-specific factor such as a particular tenant declaring bankruptcy and thus defaulting on his or her lease.
GAAP stands for Generally Accepted Accounting Principles, which is a set of accounting standards, procedures, and rules that public companies must follow. GAAP is issued by the Financial Accounting Standards Board (FASB). GAAP ensures that all publicly traded companies follow the same accounting reporting standards, which makes it easier for investors to compare the financials of different companies. Some reporting areas covered by GAAP include revenue recognition, balance sheet classification, and materiality. For publicly traded companies, they must use GAAP reporting as mandated by the U.S. Securities and Exchange Commission (SEC).
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.
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.
Going-in-cap rate is the cap rate based on the ratio of the first year of net operating income to the property purchase price.
A federal grant in aid is basically a grant awarded to states, local municipalities, or individuals. These grants are awarded for specific projects. The government places restrictions on how grant money can be spent. The government is able to monitor how grant money is used based on information from grant applications. Grant recipients are required to indicate on their application how the money will be spent. Grants are not loans and therefore do not need to be paid back. Federal grants are funded through income taxes paid to the government. Many grants require recipients to meet certain requirements and, in some cases, demographics. The pursuit of grant money is very competitive.
Gross absorption measures total square feet absorbed or leased without regard for vacated space during the same period, while net absorption accounts for vacated space as well. The rates are typically expressed by specific property type and asset class.
Gross income is a term used to describe an individual’s or a business’s total earnings in a given period of time. For individuals, gross income is primarily derived from wages and salary as well as other forms of passive income such as interest, dividends, rental income and pensions. For businesses, gross income is measured as the firm’s total revenue less its cost of goods sold. It is ultimately a measure of a firm’s profitability, measuring the firm’s ability to derive profit from the production of goods or services prior to servicing other costs related to administrative activities, taxes and other costs of running a business.
Gross national product is a measure of the total value of goods and services produced by a nation in a given period of time by that nation’s residents. It is a sum of personal consumption expenditure (PCE), private domestic investment (PDI), government expenditure (GE), net exports (NE) of a nation and the total income earned by a nation’s residents’ income from investments outside of the country, less the income earned by investments within the domestic economy. It ultimately is a measure of the output of a country’s residents and is very similar to gross domestic product (GDP). GDP seeks to measure a similar level of activity but excludes the difference of investment income earned on investments outside the domestic economy and within it.
Gross proceeds are the amount that a seller receives from the sale of an asset. These proceeds include all costs and expenses. Gross proceeds are often not the taxable amount from the sale. Instead, net proceeds are used for that calculation. Net proceeds are the amount after subtracting out fees and expenses. This is the actual amount the seller takes home. Costs and expenses can be a substantial amount of gross proceeds, leading to a smaller amount of net proceeds.
Gross profit is the amount of company income remaining after subtracting the cost of goods sold (COGS). Gross profit appears on the income statement. COGS includes the cost of materials, labor, and other costs related to producing goods. Gross profit is a pre-tax number. Gross profit can be used to measure a company’s efficiency compared to its competitors. Those with a higher gross profit have lower COGS and can be said to be more efficient. Another way to measure gross profit is gross margin, which is (revenue - COGS)/revenue. Gross margin represents gross profit as a percentage of revenue.
Gross square footage is the total square footage of a building including all rentable spaces as well as all “non-rentable” space including common areas,
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
Health insurance is a type of policy that protects an individual from being liable for the total costs of medical and surgical expenses incurred in the event of illness or injury. Employers often include healthcare insurance in benefits packages to attract highly skilled workers. Insurance plans often require policyholders to seek care from a defined network of care providers and dictate that policyholders pay a higher percentage of costs if they obtain care from providers outside that network.
A health ratio, also known as an occupancy cost ratio, is the relationship between a retailer’s sales and total occupancy costs. A retailer’s health ratio for a given location is calculated using the formula of total annual rent (inclusive of reimbursements) of the location divided by its gross annual sales for that location.
Properties held for investment purposes can be any property or asset that are acquired and held for income production (rental or leasing activities) or for growth in value (capital appreciation). In order to qualify for tax-deferred treatment, property must have been held for investment or for business use. Property held for resale (e.g. inventory such as for-sale condo units) typically will not qualify for tax-deferred treatment.
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 Department of Housing and Urban Development (HUD) is a government agency that enforces the Fair Housing Act. The Fair Housing Act enforces discrimination in housing based on sex, race, color, national origin, and religion for renters and homeowners alike. HUD is meant to foster community development and homeownership. HUD is most visible in its assistance to low-income people and those who are disadvantaged with disabilities. Through its enforcement of the Fair Housing Act, HUD ensures that landlords are not able to take advantage of people through false claims of availability, application denial, different terms, or (negative) conditions that are different from those of other tenants.
Income is money or compensation that an individual or business earns in exchange for a product or service. For individuals, income is typically earned via wages, salary or via interest, dividends or capital gains obtained from investment holdings. For businesses, income is the difference between its total revenues and expenses and taxes.
Income tax is a tax levied by governments on individuals and businesses and serve as a source of revenue for governments that collect them. The Internal Revenue Service (IRS) collects income taxes and enforces the tax code. The tax code offers individuals and businesses deductions and credits, which mean that most entities do not pay taxes on all income. For example, a taxpayer may earn $70,000 in a year but also be eligible for $15,000 in deductions, which will reduce that taxpayer’s taxable liability to $55,000. Similarly, businesses are able to reduce their tax liabilities by deducting operating and capital expenses.
An indirect tax is paid by the consumer with the purchase of a product. The tax is indirect because the consumer is not paying it directly to the government, as is the case with income taxes. Instead, the consumer pays the tax indirectly as part of their product purchase. Supply chain entities or those selling products collect the tax. It is up to the selling entity to charge the correct amount of tax and submit those taxes to the government. As the price of a product increases, so does the tax paid on it. The tax is levied regardless of income, making it more burdensome to lower-wage earners than those with a higher income.
An individual retirement account (IRA) is a type of investment tool that individuals use to allocate funds for retirement. There are two predominant types of IRAs: traditional IRAs and Roth IRAs. Contributions to traditional IRAs are tax-deductible, which allows individuals to claim contributions as a deduction on their tax returns. When the individual withdraws these funds from the account during retirement, these funds are taxed at an ordinary income tax rate.
A good or service is inelastic when the demand for it is not affected when its prices go up or down. In contrast, an elastic good that has a 10% price increase may also see a 10% drop in demand. This good is said to have a 1:1 ratio in demand and price movements, or an elasticity of 1 or greater. Inelastic goods have an elasticity of less than 1. If the price of a good or increases, why would a consumer continue buying that good? Why not buy a different good? Unlike elastic goods, inelastic goods do not have substitutes, so consumers have no choice but to buy at a higher price. Inelastic goods consist of medication, cigarettes, electricity, and gasoline.
Inferior goods are goods which, due either to relative or actual quality, has the demand for itself decrease as the income levels rise. In other words, inferior goods have a lower price compared to similar goods. In some cases, it can also mean the good is inferior quality. People with lower incomes tend to prefer inferior goods because they are more affordable. Examples of inferior goods vs. normal goods are:
Infill Location is a real estate development site that exists within a mostly built out market. Usually located within an urban area, infill locations look to fill the few vacant lots that exist between other developments in the area. Infill locations are characterized by having a high level of demand, due to increased property values in desirable locations, with high barriers to entry. In real estate, an infill location may serve to fundamentally benefit a property’s performance. Limiting the number of new developments in an area, infill locations can help keep new, competitive properties out of a market. For example, a Whole Foods located in downtown Denver may see success due to the lack of available space that could be used to house another major grocery store chain. Infill development is different from redevelopment. Redevelopment converts an existing site into one that has a better economic benefit for the community. Some municipalities offer incentives for infill development. These incentives can come in the form of various tax benefits, simplified permitting, and other incentives. Municipalities often see advantages to utilizing infill development. Infill development encourages higher density, more compact communities, which contribute to better walkability and less car traffic. At the same time, it discourages sprawl. Infill locations can be both commercial and residential. Examples of residential infill are removing an older, larger home on a property and replacing it with two homes with a smaller footprint that are two stories each. This configuration uses the same land, but instead of one house, there are two. Some Infill development deals with toxic locations, such as an old gas station or mill. After removing the old structure and remediating the land, newer structures with completely different uses can be built in the same location. This type of infill development is called brownfield.
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling.
Inflation is a percentage measurement of how quickly the price of goods is increasing. It is measured for each country — although regions within a country can experience different rates of inflation. Most countries target 2-3% annual inflation.
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.
An insurance rider is an additional coverage to a standard insurance policy. Insurance companies offer riders for customers who need certain coverage that isn’t available through a standard policy. An example is a standard home insurance policy but the customer also wants coverage for earthquakes. Earthquake coverage can be added as an additional feature of the policy. Riders come at a cost. Depending on what the rider covers, the cost can be high. However, if the customer is unable to self-insure or the value of the rider is worth it than the cost can make sense.
The interest rate is the percent of principal charged by a lender for the use of its money. Interest rates are typically expressed on an annual basis, or annual percentage rate (APR). To the borrower, the interest rate is the cost of debt, and to the lender, the interest rate will be the rate of return. Interest rates are reflective of how much risk the lender thinks it is assuming by lending to a particular borrower. Higher interest rates are typically given to entities more susceptible to default, or a lower credit rating. In addition to credit rating, interest rates are determined by other extraneous factors. This includes the supply and demand for credit, inflation, and monetary policy set by the U.S. Federal Reserve. In situations where a loan is backed by collateral, a borrower may be able to obtain a lower rate than if the property was not secured.
Interest-Only loan is a loan in which, for a set period of time, the borrower pays only interest on the principal balance, with the principal balance remaining unchanged.
Internal rate of return is the discount rate at which the net present value of all cash flows (both positive and negative) from a project or investment equal zero.
The Internal Revenue Service is the government agency in the United States responsible for the collection of taxes and enforcement of tax law. Founded in 1862 by Abraham Lincoln, the IRS performs the taxation of all American individuals and firms. The IRS operates as a subsidiary government agency under the larger umbrella of the US Department of the Treasury.
Any product used by investors to achieve a positive return on their money, although a favorable return is not guaranteed. Investment vehicles span all asset classes, and include ownership investments, lending investments, cash equivalents, and pooled investment structures such as a mutual fund. For investors looking to diversify past asset classes as a whole, holding several types of investment vehicles may help further spread risk.* For example, corporate bonds and Treasury Inflation-Protected Securities (TIPS) each allow an investor to put his or her money into a debt instrument, but are subject to different market pressures and risks. Likewise, from a real estate perspective, investment may be made through various investment vehicles including LLCs, Limited Partnerships, REITs, or Delaware Statutory Trusts, with each vehicle having its own set of strengths and risks. *Diversification does guarantee returns and does not protect against loss.
The invisible hand is a concept discussed in Adam Smith’s 1776 book titled An Inquiry into the Nature and Causes of the Wealth of Nations. The invisible hand exist in free markets. It’s the unforeseen force that allows product and service prices to find their natural equilibrium. This is in contrast to planned economies or those that are heavily government-regulated. An example of the invisible hand is a product that a seller prices high and is unable to sell. The seller drops the price until people begin buying. Adam Smith would say the invisible hand is at play here. It also works in the other direction. If a product is priced too low, the manufacturer will sell out unless the price is raised. In both cases, supply and demand find equilibrium.
In the context of a Delaware Statutory Trust (DST), the lease coverage ratio is calculated by dividing the property’s NOI by the sum of the debt service payments and the master tenant’s stated lease payment to the DST.
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. The concept of a leasehold interest is most commonly applied with ground leases. A leasehold interest can be sold or traded just like any other property.
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 agent representing a tenant, or to a “landlord rep” which is an agent representing the property or landlord, or both.
Upon the sale of an investment property, capital gains may be deferred by completing a 1031 exchange provided that the investor purchases
The line of best fit is used to identify the trend on a scatter plot graph. This line is also called a regression line. It can be found by using the least-squares method, which results in a geometric equation for the line. The line of best fit shows a relationship between points in a scatter plot. However, if the various scatter plot data points are too scattered, a trend will not be identifiable, and the line of best fit will be unreliable. An example of a line of best fit is plotting manager experience (x-axis) to salary (y-axis). As experience increases, so does salary. If 10 different managers at different stages in their careers are plotted, we should see a line that goes from the bottom left to the upper right.
Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market allows assets to be bought and sold at stable prices. Cash is the most liquid asset, while real estate, fine art and collectibles are all relatively illiquid.
The multiplier to a tenant's useable space that accounts for the tenant's proportionate share of the common area (restrooms, elevator lobby, mechanical rooms, etc.)
A loan is an agreement between and lender and a borrower in which a lender agrees to provide funding, property or material goods to a borrower in exchange for repayment of principal and interest at a later date.
A predetermined period of time following loan origination in which the loan cannot be prepaid, as set forth in the loan documents. The lock-out period can vary greatly from no lockout period at all to nearly the entire loan term. From a lender’s perspective, a lock-out clause is a form of call protection as it prevents prepayment. There is considerable time and effort involved to underwrite and originate a loan, thus the lender wants to ensure a certain level of minimal return on the loan.
In a margin account, a margin call can occur when the value of the account drops to a certain level, triggering a margin call. Some traders/investors borrow funds from a broker for investments. The broker loans the funds at a certain interest rate. Borrowing money on margin is called using leverage. Using leverage is a double-edged sword — while it can boost an investor’s returns and can also multiply their losses. As an example, a trader has $10k in cash and borrows $10k from his broker to take a position in XYZ that is worth $20k. The trader is using 50% margin. XYZ’s stock price proceeds to immediately fall, leaving the trader with an account value of only $12k. The trader has $2k in equity and a $10k loan. However, his broker has a minimum margin requirement of 25%. 25% x $12k = $3k, which means, the trader should have $3k in equity for the position but only has $2k. The trader will receive a $1k margin call to bring his equity back up to 25%.
Marginal benefit is a dollar amount that a consumer is willing to pay for an additional unit of a product or service. Because of marginal benefit, the consumer receives additional satisfaction. A producer may try to create artificial demand by limiting the production of a product or access to a service. Driving up demand means consumers are willing to pay more, increasing the product’s or service’s marginal benefit to consumers. Marginal benefit is related to marginal utility but they are not the same. Marginal benefit is a dollar measurement, while the marginal utility is a use measurement.
Marginal land is land that has little value and offers its owner little opportunity to profit from it. The term typically refers to land with poor soil or other undesirable characteristics that makes it difficult or near impossible to grow crops and thus turn a profit. While undesirable to hold, marginal land does have some utility in certain cases. It can be used as grazing grounds for livestock. Additionally, land that is considered marginal at one time can be considered desirable at another time if conditions in that market change. For instance, if the cost of growing corn on marginal land at one point in time does not exceed the revenue associated with selling such corn, land is considered marginal. But if conditions change and the price of corn rises, this land once considered marginal now offers some utility and opportunity to profit.
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 supply and demand). These changes are typically characterized as cycles, fluctuations, or trends.
A market basket is a group of consumer goods and services used to create the consumer price index (CPI). By comparing prices in the CPI from one year to the next, economists can determine if inflation is rising or falling. Market baskets are also used by investors to create indexes and mutual funds from stocks and bonds. These various market baskets are used by economists, retailers, and investors alike. Retailers use the CPI to predict impulse buys by consumers. As mentioned above, economists create a permanent mix of goods that are bought and sold. Investors create a market basket from bonds, stocks, and even of other indexes, such as the S&P 500. CPI is a macroeconomic indicator and a reflection of spending patterns. That is why it is useful to retailers. It is not a cost-of-living index. The government uses CPI to adjust monetary policy. Through feedback from consumer surveys, officials are able to put together spending patterns and average prices for items. To provide an accurate representation of the economy, the CPI covers a broad range of goods and services categories. These categories include recreation, apparel, housing, transportation, and education. In addition to consumer-related goods and services, CPI also includes government fees of public goods such as water and sewage. Any taxes levied on the products and services that are in the CPI are also included.
Market 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. A lease executed at the market lease rate is said to be “at market” or “market rate.” Leases with rental rates greater than or less than the prevailing market rate are said to be “above market” or “below market, respectively.
Market share is the percentage of revenues earned by a company within an industry compared to total revenues within the industry. It provides a method of determining a company’s size by revenue compared to similar companies.
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.
A medium of exchange replaces barter/trading economies. Rather than moving around products for trading, the economy’s consumers use the medium of exchange as a way to conduct various transactions. In a modern economy, the medium of exchange is currency. A medium of exchange must have a standard and stable value. Consumers must also accept and trust that the medium of exchange will retain its value and continue to remain in demand. If the medium of exchange begins to lose its value, consumers will no longer be able to budget or forecast with any accuracy. As well, determining supply and demand will become impossible.
Mezzanine financing is financing that is junior in interest to the mortgage but senior in interest to equity. Mezzanine financing has a similar risk and return profile to
Money supply is a snapshot of the amount of currency and liquid assets in an economy. Central banks control the money supply. When an economy is growing slowly, its central bank increases the money supply to provide stimulation. When the economy is growing too fast, the central bank will decrease the money supply to slow it down and decrease inflation. The method central banks use to control the money supply is the increase/decrease of interest rates, a part of monetary policy. Money supply has five different subgroups — M0, MB, M1, M2, and M3. M0 is hard currency in circulation. MB is M0 + hard currency held in bank reserves. M1 is M0 + checking accounts. M1 is a common measure of money supply. M2 is M1 + savings + CDs. M3 includes larger deposits + institutional money market funds + other larger liquid assets.
A moral hazard is created when two parties enter into an agreement or contract, but there are no consequences for not following the agreement. In a formal business contract, one party may take unnecessary risks in an attempt to generate profits before the contract finalizes.
Mortgage is a legal instrument that pledges the rights of ownership of an asset or property to a lender as security for a loan.
A mutual fund is an investment vehicle that pools money from the public and provides individual investors access to professional managed portfolios of equities, bonds and other security types. The value and performance of a mutual fund is thus based upon the pro rata performance of the various securities that comprise the fund.
National tenant refers to a tenant that has a national footprint with locations throughout the US. The term is most frequently used in the context of retail properties.
A natural monopoly is a market that is controlled by one firm. This one firm supplies all consumer demand in the market. There are no other competitors within the market. A natural monopoly creates high barriers to entry and generally operates at a large scale. For those two reasons, competitors are not able to enter the market. By the time any competitors come along, the one firm has already taken virtually all consumer demand, built out an elaborate infrastructure for delivering its services, and has become regulated by the government. Barriers to entry come in the form of high fixed costs. These costs are a result of the massive infrastructure needed to create a natural monopoly. For example, utility companies such as electric companies must build miles and miles of power lines and substations. Railroads must do the same for rail tracks and train cars. Gas and oil companies must build out pipelines and refineries. For a natural monopoly to recoup those high fixed costs, it must operate on a large scale. Operating on a large scale doesn’t mean the natural monopoly is the only company supplying some specific service or product. One electric company may supply the northeast region of the U.S. while a different one supplies the northwest. Both are natural monopolies within their own region and are different utility companies that do not compete. Regulation To ensure that natural monopolies do not take advantage of consumers, they are regulated by the government. This is the case for utility companies such as electric and water, railroads, and gas and oil companies. Without competitors to offer choices, the government is the only option to ensure that a quality product at a reasonable price is delivered to consumers. Subsidization Just because a company is a natural monopoly doesn’t mean it will be profitable. In fact, many natural monopolies are not. But because the natural monopoly provides an essential service (i.e., electricity or water) and possesses the required infrastructure to deliver that service, the government will often subsidize the firm’s operations. These firms may also sell bonds to help fund operations.
The amount of occupied space at the end of a period less the amount of space occupied at the beginning of the same period. Net absorption accounts for space vacated during the period as well as new additions (ex. new construction) over the applicable period.
Net cash flow can be determined using the formula net operating income (NOI) less debt service payments, tenant improvements,
Net income is the total revenue minus total expenses. It represents the amount of money remaining after all operating expenses, interest, taxes and preferred stock
Net operating income is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue generated from the property less
Net present value (NPV) represents the amount by which the expected cash flows of an investment exceeds the initial amount invested.
Net square footage (NSF) 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 such as common areas, hallways, and mechanical rooms.
Nominal GDP (gross domestic product) is a measure of economic production for a country. It includes inflation, which allows nominal GDP to use current prices or the price that products and services are sold for during that year. This is in contrast to real GDP, which does not include inflation, making nominal GDP a higher value than real GDP. Nominal GDP can be compared from quarter to quarter during a single year. To compare GDP across different years, real GDP must be used. To compare GDP across years also requires a base year.
A nonprofit is an organization, also called an NPO, that doesn’t pay taxes on its earnings. The IRS has granted the nonprofit a tax-exempt status because it both furthers a social cause and benefits society. Some nonprofits take in donations to help further their cause. Individuals and businesses donating to a nonprofit do not have to pay taxes on those donations. Financial documents of a nonprofit must be made public so donors can see how money is being used by the organization. The technical IRS tax code name for a nonprofit is a 501(c)(3). 501(c)(3) status must be requested for the organization to receive its tax-exemption. Additionally, the organization has to maintain compliance through its state.
Non-recourse loan is a loan that limits the lender’s remedies to foreclosure of the mortgage and acquisition of the collateral or property in the event of financial default
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.
Normal goods have a relation to a person’s income. As income increases, purchases of normal goods also increase but by a lesser amount. This is because the income elasticity of normal goods is between 0 and 1. Elasticity can be calculated by dividing the increase in demand for a good by the increase in wages. For example, a 15% increase in wages results in a 5% increase in the purchase of clothing. The income elasticity is therefore .05/.15 = 0.33. Normal goods are different from inferior or luxury goods. Inferior goods have an income elasticity of less than 1, while luxury goods have an income elasticity that is greater than 1.
Office percentage is the percent of an industrial property’s square footage that is attributed to office usage. In scenarios where mezzanine office space been built above an area that would have otherwise been used for industrial use, the additional square footage is not factored into the total square footage of the building.
An official settlement account is a type of account that a central bank uses to track its reserve asset transactions with other central banks. Types of transactions include those involving gold, foreign exchange reserves, bank deposits, and special drawing rights among other items.
Fixed operating expenses are the actual costs associated with operating a property that do not vary in the short term. These costs do not change with a property’s occupancy rate. Property insurance is a common example of a fixed operating cost.
Variable operating expenses are the actual costs associated with operating a property that vary in relation to a property’s occupancy rate or volume of some activity. Utilities are an example of a variable operating cost.
Opportunity cost represents the benefits an individual or business forgoes when it makes one decision in place of another. Opportunity costs are oftentimes unseen in that the consequences of choosing not to pursue one strategy in place of another, but individuals and firms can benefit greatly from working to quantify the cost of not pursuing a particular option.
In order to qualify as a qualified opportunity zone business property (QOZBP), property acquired by a QOF or QOZB must satisfy the requirements of an “original use” test or a “substantial improvement” test. Original use is defined as the date on which the property is placed into service in the QOZ for purposes of depreciation or amortization. Additionally, original use and substantial improvement requirements do not apply to land. Suppose a QOF acquires a property in a QOZ that is worth $20 million, where the actual building is worth $14 million and the land is worth $6 million. In order to meet the substantial improvement requirements, the QOF must add $14 million of basis to the property within a 30-month period in order for the property to be treated as a QOZBP.
An outstanding check represents a check that hasn’t been cashed or deposited by the recipient or payee. Outstanding checks can have two different states. One state is that the payee has the check but hasn’t deposited or cashed it. The other state is that the check has not yet reached the recipient and is still in the payor’s bank-clearing cycle. An outstanding check is a liability for the person (i.e., payor) who has written the check. They must make sure that enough money remains in their checking account to cover the check until it is paid. The payee may cash the check immediately or might hold onto it for months. Checks that remain uncashed for long periods of time are called stale checks. Eventually, these checks will become void. This period can range from 60 days to six months. Sometimes a payee forgets about the check or loses it without notifying the payor. The payor has no control over when the payee will cash or deposit the check. The only thing the payor can do, for a fee, is stop payment on the check. When this happens, the check becomes void. The payee cannot cash or deposit the check once a stop payment has been issued. The payer’s bank has no way of knowing that a check has been written until the payee deposits or cashes the check. This puts the burden of tracking the check on the payor. Besides the liability it creates, the payor may forget that they wrote the check and spend money allocated for the check. When the payee cashes the check, and their bank tries to pull funds from the payor’s account, the payor will get hit with an overdraft or non-sufficient funds (NSF) fee. The payor must then deposit funds to cover the check. The payor can void these fees using overdraft protection on their checking account.
An overdraft is an issuance of credit to a borrower from a lender at a time when the borrower’s account balance goes to zero. The issuance of an overdraft allows for the account holder to continue to withdraw money despite the absence of sufficient funds to cover the withdrawal. The bank or financial institution charges an interest rate and/or a fee in the event of an overdraft.
Overhead is a business cost that can’t be associated directly to the production of a product or service. It’s a necessary expense of operating a business. Overhead expenses include utilities to operate a building, employee salaries, insurance, rent, administration, and taxes. Overhead expenses show up on the income statement. Overhead expenses must be factored into product costs when setting a price for a product. The difference between the product price and cost is profit. If overhead expenses are left out of a product’s cost, the result will be a smaller profit or even a loss on the product.
Par value is the stated value of either a stock or bond at the time it is issued. Most typically used in the bond market, par value is used to describe the amount of cash the bond issuer agrees to pay the purchaser at the bond’s maturity. The market price set to buy the bond initially is a function of par value, considering other factors such as interest rates, coupon rate, and the bond’s credit rating to set the price. Although par value exists within the equity market as well, it is less commonly used in practice, and is often set to adhere to regulations that require that a particular stock not be sold below par value. Due to this fact, companies will set their par value at a very low nominal amount. For example, Google’s current stock par value is $0.001.1
Total rentable square footage of a property divided by the number of parking spaces; typically expressed as a ratio of spaces per 1,000 square feet. As an example calculation, a 40,000 square foot office building with 180 parking spaces has a parking ratio of 4.5 spaces per 1,000sf. Different property types or tenant uses may require different parking ratios.
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 partial payment is basically an installment payment on an invoice. Through an arrangement with the billing party, a schedule of payments is created. In some cases, half of the invoice is paid on receipt and the other half once a job is completed. Paying the invoice only once a job is complete ensures the terms of the job are met. For longer jobs, a contractor may invoice as they go. This helps to cover the expenses incurred by the contractor.
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.
A pell grant is a government grant for college/university tuition and educational expenses. Unlike a loan, a pell grant does not need to be repaid. Students must apply each year for a Pell Grant through the Free Application for Federal Student Aid (FAFSA). The Pell Grant award amount is determined by the school. To figure out how much money a student should receive, the school calculates the gap between expected family contribution (EFC) and the cost of attendance (COA). EFC is the student’s and parent’s income and the parent’s investments and assets. COA includes school tuition, expenses, and room and board. A pell grant is only one method of filling the EFC/COA gap. Other financial assistance may come in the form of government loans and work-study programs.
A pension plan is a type of retirement plan where employees contribute to a pool of funds that are used to pay for the employees’ retirement. The employer controls the type of investments in the plan, although some plans may have a voluntary investment component. There are two types of pension retirement plans. The older type is called a defined-benefit plan. In this plan, the employer invests the pension's contributions into low-risk assets. Retirement payments are determined from a formula based on years of service and independent of the retirement fund’s performance. The more modern version is called a defined-contribution plan where employee plan contributions are usually matched by the employer. In these plans, retirement benefits are dependent on the plan’s performance.
Income paid to a taxpayer during the tax year that is not constructively received at the taxpayer’s end. Although not commonly seen, phantom income can happen in investments such as limited partnerships, in scenarios where there are earnings that are not directly received by a partner. This includes earnings that rolled over into retained earnings or reinvested into the business. Phantom income can occur with zero-coupon bonds as well, that are issued as a discount and mature at par. The interest payments for zeros are credited to the taxpayer, but they do not receive the cash. The bondholder effectively is paid a maturity, when the bond is redeemed at a higher par value.
Physical capital is one of the three factors of production used in the production of goods. Physical capital is used to make goods and is also reusable. This is in contrast to raw goods, which become part of the final product and are not reusable. The three factors of production include land/natural resources/real estate, human capital, and physical capital.
Positive leverage is when a business or individual borrows funds and then invests the funds at an interest rate higher than the rate at which they were borrowed.
Potential rental income is the total amount of rental income for a property if it were 100 percent leased at competitive market rates.
The amount of money an investment produces after the collection of all revenue items and payment of operating expenses and debt service. This cash flow comes before the calculation of one’s income tax liability, and does not factor in deductions for depreciation allowance, mortgage interest expense or other non-cash items. Pre-tax cash flow allows investors to calculate their current return on investment, and when comparing to after-tax cash flow, provides context to the extent of tax shelter a particular investment may generate.
Preferred Equity is an equity investment which is superior in interest to common equity but subordinate to debt. Preferred equity is secured by a
Preferred return is a priority return (often in the 5-10% range) that is paid to investors prior to any profit sharing or promote to the sponsor.
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.
Principal, in the context of debt financing, is the initial amount of money that is borrowed in a loan. Once paid down over the course of the loan’s term through debt service payments, principal can then be referred to the amount that is still owed on the loan. The amount of interest and amortization paid annually, assuming it is not an interest-only loan, is a function of the loan’s principal amount.
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.
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.
Probate court handles the distribution of a deceased person’s assets to beneficiaries in the case that a will is not present. Having a will makes this process much easier for those left behind. Probate court is not needed when a will is available. But in the absence of a will, the state probate court must settle the affairs of the deceased. This can be a time-consuming and frustrating process for the beneficiaries. Probate also settles disputes when a will is left behind, but it is not clear how assets should be divided. Additionally, probate court is involved in conservatorships, guardianships, and committing a mentally ill person to an institution that can help them.
Profit is defined simply as revenue less expenses. It is the financial benefit a business generates from its revenue after subtracting all expenses, costs and taxes it needs to pay to sustain operations.
A promissory note is generally issued by a company in exchange for cash (i.e., a loan). It may also be issued by a financial institution. A promissory note is a promise to pay back a loan at a future date. Promissory notes are not as formal as loans and not as informal as IOUs. They sit somewhere in the middle. Terms of the promissory note (interest, due date, principal, signatures, etc.) are worked out between the lender and borrower. Promissory notes can be sold to other companies. In order to do this, the note must be unconditional and salable. Such notes are also called negotiable instruments.
Promoted equity (carried interest) is a share of the profits of an investment or investment fund that is paid to the investment manager as compensation. It is given in exchange for creating value or bearing a disproportionate share of downside risk.
Short for “flexible”, flex properties are typically considered a subsect of industrial properties that contain a higher percentage of office buildout than traditional industrial space. Flex properties generally contain 25% or greater office buildout and as such, typically have higher parking ratios than industrial warehouse buildings. Flex is a broad term which can be applied to a variety of specific uses including research and development, light manufacturing and/or assembly, small distribution centers, retail or office showroom space, tech uses or call centers.
Consists of a wide range of product types including hotels, travel centers, water parks, amusement facilities, golf courses, cruise ships, assisted living facilities, and restaurants.
Hotels are establishments that provides lodging and sometimes meals, entertainment and various personal services for travelers and tourists.
Retail property types are properties used to market and sell consumer goods and services. This category includes single tenant retail buildings, small neighborhood shopping centers, larger centers with grocery store anchor tenants, and "power centers" with large anchor stores.
Self-storage are properties where storage space (such as containers, lockers, and/or outdoor space) is rented to tenants, usually on a short-term basis.
A proportional tax or flat tax uses the same tax rate regardless of income. Sales taxes are considered proportional. For example, an 8% sales tax is applied for someone who earns $20,000 or $1 million. Income is not factored into proportional tax calculations.
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.
Purchasing power is defined in two different ways — one is economical, and the other is investment-related. In economic terms, purchasing power represents the value of goods or services that one unit of currency can buy. Purchasing power is degraded over time by inflation. $20 today buys fewer groceries than $20 five years ago. Additionally, a five year 6% bond bought today doesn’t factor in purchasing power five years from now. In regards to investments, purchasing is the amount of investments that can be bought on margin. For example, if an investor has $10,000 in their account with a 50% margin, the investor can actually purchase $20,000 worth of investments.
A Qualified Intermediary, also known as a 1031 exchange accommodator, is an independent person, company, or entity that enters into a written agreement with the exchanger to facilitate the transfer of proceeds. The transfer moves the 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.
The 2017 tax reform reconciliation act (the Act), enacted December 22, 2017, includes a new tax incentive program, Internal Revenue Code Subchapter Z – Opportunity Zones, aiming to promote investments in certain economically distressed communities.
"Qualified Purchaser" means, under Section 2(a)(51) of the Investment Company Act:
Quantity demanded is an economic measurement of demand for goods or services over a period of time. The price of a product and demand for that product have an inverse relationship, according to the law of demand. As the price of a product decreases, its demand will increase and vice versa. There isn’t a 1:1 relationship between the increase/decrease in the price of a product and the increase/decrease in demand for that product. The change in price that affects demand is called elasticity of demand.
Quantity supplied represents the number of goods and services available at a given price, generally the market price. Changes in supply from changes in price are called elasticity. If the supply does not change when prices change, it is inelastic. Prices can change due to regulations, market forces, or because of price ceilings or floors. When prices increase, suppliers will provide more of a good at a higher price in order to maximize their profits. As demand dries up due to higher prices, the price falls. The result is that suppliers are less willing to create the same volume of goods at a lower price.
Racketeering is term used to refer to crimes committed through extortion or coercion. Racketeers seek to obtain money or benefits from other individuals or firms via intimidation or force. Racketeering is a term that describes a broad array of crimes and is typically associated with organized crime.
A licensed intermediary between buyers and sellers of real estate, typically working for commission. Real estate agent is a broad term which includes
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 a specified real estate property as collateral. Real estate debt typically takes the form of a mortgage or deed of trust.
Real estate syndication is a method of pooling capital from multiple investors for the common goal of acquiring real estate.
Real Gross Domestic Product (GDP) is the gross domestic output (i.e., economic output) of a country, factoring in the effects of inflation. The flip side of this coin is that nominal GDP doesn’t account for the effects of inflation and thus has a higher value. Real GDP can be thought of as nominal GDP minus inflation. While nominal GDP is used to measure quarters within the same year, real GDP measures output across years. Real GDP provides a practical method for comparing the quantity and value of goods and services across different years. The Bureau of Economic Analysis (BEA) puts out quarterly numbers for both real and nominal GDP.
Real property is land, and generally whatever is erected or affixed to the land, such as buildings, fences, and including light fixtures, plumbing.
Reconciliation is an accounting task that compares two records to ensure they match. Any mismatch must be tracked down, as it could mean there was an accounting mistake or potential fraud. For example, comparing receipts against credit card statements is a type of reconciliation. Credit card receipt amounts should match statement amounts. Also, the number of receipts should match the number of credit card transactions on the statement. While manual reconciliation is an option, using accounting software can reduce the work required. Reconciliation is used by individuals with their personal finances and by companies of all sizes.
The payoff and replacement of an existing loan with a new loan, typically under different terms. Refinancing differs from debt restructuring, which is the modification of an existing loan. There are several reasons an investor may consider refinancing an existing loan including: 1) to improve on the loan’s interest rate; 2) to extend the loan’s maturity date; 3) to change the interest rate from variable to fixed, or vice versa; or 4) to access embedded equity by increasing the loan amount. Reasons 1 through 3 above are often referred to as “rate-and-term refinance” while reason 4 may be referred to as a “cash-out refinance.” The ability of an investor to refinance a loan is dependant on a variety of factors including general market conditions, the availability of financing, the borrower's credit worthiness, and the value of the underlying property. Note however, that an investor may be constrained from refinancing a loan due to lockout provisions or prepayment penalties. Additionally, there may be costs associated with refinancing that may make it a less attractive option.
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 regressive tax is one that is applied uniformly to consumers and thus takes a higher percentage of income from low-income earners than high-income earners. It is considered the opposite of a progressive tax, which taxes higher income earners at a higher rate than lower income earners. The United States has a progressive method of taxation with regard to its income tax, but taxes levied on goods at the point of sale are considered regressive because they are applied uniformly, regardless of the individual’s level of income.
A Regulation D Offering is a Securities and Exchange Commission (SEC) regulation governing private placement exemptions that allows companies to raise capital through
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. The relinquished property is on the opposite side of a 1031 exchange to the replacement 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 fixed percentage of the rents currently in place.
Rent roll is a distinctive document providing information as to the current re-occurring revenue gained from existing leases. The rent roll is the property owner’s representation of the rental income gathered from the underlying real estate asset, and serves as the most important document when valuing income generating property, like an apartment.
Rentable Square Footage equals the usable square footage plus the tenant’s pro rata share of the building common areas, such as
Renters insurance is stand-alone insurance available to renters of apartments, single family homes, duplexes, condos, or townhomes. It protects the insured against property damage, liability, and provides living expenses in the event the structure becomes unlivable. The insurance does not protect the structure, which is what homeowners insurance does and is required by the landlord. The cost of renter’s insurance is dependent on which possessions the insured is covering and how much liability protection they need. Liability protection covers what the landlord’s insurance does not. The living expense portion is often set by the insurance company and can’t be changed.
Replacement property, during a tax deferred (aka 1031 exchange or like-kind) exchange, is the property being purchased or acquired.
Replacement Property InterestsTM is the term Realized uses to describe equity ownership in large properties by multiple 1031 exchange investors through Delaware Statutory Trusts (DST) and Tenant-In-Common (TIC)
Reserve requirements are the amount of money that banks must hold to cover customer deposits and liabilities. The reserve is meant to protect banks against sudden withdrawals. Reserve requirements are set by the Fed’s board of governors. In addition to reserve requirements, the board has two other monetary tools — open market operations and the discount rate. The reserve requirement amount is adjusted each year. Banks with deposits of less than $16 million are considered to have no reserve requirements. Those with $16 million to $122.3 million in deposits have 3%, and those with over $122.3 million have 10%.
Residual income can be split into three categories — personal income, business income, and equity valuation. Personal residual income, also called excess income or disposable income, is money left over after all bills have been paid. This income can be put into savings or spent on non-essential items. Having residual income can help in getting a loan. It shows that a person has more than enough money coming in every month to pay their bills. This is likely to lead to a loan approval (assuming the person doesn’t have high debt) if the individual can show that their income and bills will remain consistent. The more residual income a person has, the less likely they are to default on the loan. Choosing candidates with higher residual income reduces default risk for lenders. In business, residual income is (the net) income generated above the required rate of return for the business. It is excess income after the business has paid all of its bills. Technically, it is the operating profit remaining after all costs of capital has been paid. The cost of capital is incurred to generate revenues for the business. In this way, residual business income is similar to its personal residual income counterpart. However, businesses may invest money and earn additional income that doesn’t require labor or raw materials. It is only the invested capital that is needed to earn additional income. This type of income is also called passive income. Some examples of passive income include stocks, bonds, royalties, and real estate. All are considered investments. They are not without risks, however. Companies evaluate whether it is worth taking the risk based on the expected returns. The equity valuation of residual income is basically the same equation we’ve been using: Net income minus the cost of capital (equity charge). To determine the equity valuation, we must look at what goes into the equity charge. It is the value of equity capital multiplied by the cost of equity (required rate of return on equity).
A contractual obligation by the owner of an asset to offer a sale to the rights holder before negotiating with any third party. Often included in tenant-landlord contracts, right of first offer provisions allow a tenant to make a reasonable offer before anyone else, with the intent of not having to move his or her business. Although similar to a right of first refusal, a right of first offer is thought to favor a seller, as it can reduce transaction costs while locking in a serious buyer. In addition, a seller has the option to deny the right holder’s offer, with the opportunity to negotiate with other buyers. In the event that negotiations with other buyers are unsuccessful, the seller may come back to the rights holder to pursue a new offer.
The right of first refusal is the contractual right, but not obligation, to enter into a buy-sell transaction with the owner of an asset before any other third party. In commercial real estate, the right of first refusal allows an interested party to buy a property before the seller negotiates any other offer. In the scenario that the party with the right of refusal declines to buy, the seller is then free to negotiate and sell with other interested parties.
Risk premium is the minimum incremental yield by which the expected return on a risky asset must exceed the known return on a risk-free asset in order to
The rule of 72 is a quick and easy mental calculation that tells you the number of years it will take for an investment to double, given some rate of interest. The calculation is based on compound interest, which calculates accumulated. The rule of 72 can be used on investments and inflation. As an example, an investment earning 8% interest will double in 72/8 = 9 years. For inflation, it tells you the number of years a dollar amount will halve, as inflation eats away at the non-invested savings. For example, 3% inflation means it will take 72/3 = 24 years to halve the value of a specific amount of savings.
The S&P 500 is a stock market index containing 500 US-based large cap companies. Some people consider it a better representation of U.S. companies than the Dow Jones Industrial Average, which has only 30 companies. The S&P 500 is a market-capitalization-weighted. This method gives a higher percentage allocation to companies with the largest market capitalizations. It is also a float-weighted index, which means that companies’ weights are determined by the number of available shares for that company. The S&P 500 is not the only index of its kind as there are many derivative indices available to invest and that track the S&P 500.
Salvage value is the approximate value of an asset at the end of its useful life. Using both purchase price and a given accounting method, such as straight-line or double declining balance, one can calculate the amount of annual depreciation being attributed to an asset based on its salvage value. Salvage value is an estimate, while depreciation is a calculation based off this amount.
A 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.
The secondary market is where existing securities are bought and sold. Once a security has been purchased by an investor in the primary market, whether it be a public or private market, all further transactions are done on the secondary market. Securities are then exchanged between interested buyers and sellers, with exchanges facilitating the trade. For example, the New York Stock Exchange is considered a secondary market for public equities. Note, that private securities may not have an active secondary market to conduct secondary trades.
The Securities and Exchange Commission (SEC) is responsible for enforcing securities laws created by Congress. The SEC makes sure that any individual or company trying to sell securities fully discloses information about the securities being sold. This gives investors an opportunity to evaluate the security and make an informed decision to invest in it or not. The SEC was formed in 1934 by Congress as part of the Securities Exchange Act of 1934. The SEC also ensures securities markets function in an orderly manner. As well, it oversees corporate takeovers since any company looking to take over another must register with the SEC.
Securitization is a financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or
A shareholder is a person or firm that owns one or more shares of a company’s stock. Individual investors or firms can purchase shares of publicly traded companies on exchanges such as the New York Stock Exchange and in turn own equity in the company. As owners in the company, shareholders have certain rights that include the right to review a firm’s books and records, vote on key company matters, receive dividends, attend annual meetings and vote on certain matters.
A shortage is created when the demand for a product is greater than the supply of that product. Typically, shortages are temporary and can be fixed by replenishing the supply of goods and products. There are three conditions that can create a shortage: - Increase in demand — occurs when consumers suddenly demand more of a product. For example, demand for a new automobile that a manufacturer cannot fulfill. - Decrease in supply — occurs when the supply of a good drops. For example, a virus among pigs means many of them must be euthanized, creating a shortage of pork products. - Government intervention — a government can impose a cap on prices (i.e., a price ceiling), allowing more people to buy a good than would be realized in a free market.
A signatory trustee is the individual who will be managing the Delaware Statutory Trust (DST). The Sponsor of the DST typically serves as the Signatory Trustee.
A simple random sampling is a small sample of a population. The small sample is meant to represent the larger population being sampled. Rather than sampling an entire population, which may be impractical due to the population’s size and time requirements, a small sample of people that are similar to the larger population can be sampled instead. From this small sample, facts can be derived about the larger population. As an example, upper management wants to survey its 10,000 employees. Rather than send out 10,000 surveys, 500 can be sent to accomplish the same goal. It’s important that the sample takes into consideration any groups within the population. If 50% of the population are male and 50% are female, the sample should represent this same grouping.
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.
An SKU (stock-keeping unit) is a scannable code that keeps track of products in a retail store. It is part of the store’s inventory tracking system. In addition to a scannable barcode, an SKU is also composed of an alpha-numeric set of around 8 characters. The bar code is usually above the set of characters. The SKU contains information about a product’s price and its manufacturer. Instead of shutting the store down to do an inventory count periodically, employees can use a handheld scanner to scan each item in the store. This information is fed back into the inventory system to reconcile what has been purchased against the remaining (unpurchased) units. The part of the inventory system that deals with SKUs is called a POS (point of sale). In some stores, customers are also able to scan SKUs on their mobile phones for additional information about a product. When a store item is purchased, it is scanned by the cashier (or by the customer for self-checkout). Once scanned, the item is subtracted from the store’s available inventory. When the inventory for an item gets low, the manager is notified. In more sophisticated inventory systems, a notification will be sent to the vendor, who will then submit a re-order for those specific products. SKUs can be used with non-tangible items as well, which includes repairs and warranties. For example, an auto repair shop will use an SKU for different types of billable time. SKUs are also used in marketing. When a customer purchases a certain product or group of products, the store’s inventory system can analyze those purchases. An advertisement for a similar product may be displayed to the customer. This type of informed ad has a higher chance of making a sale than some random ad. Additionally, store managers can see which items are hot sellers vs. those that are not. Depending on the type of POS being used, managers can see this information in real-time.
Social Security is a term used to represent the United States government’s Old-Age, Survivors and Disability Insurance (OASDI) program. It is an insurance program structured such that workers pay into the program via a payroll withholding on their wages. These withholdings go into two Social Security trust funds that are used to provide benefits to individuals who currently qualify. Individuals over the age of 62 who have paid into the system for 10 years or more qualify for Social Security retirement benefits.
Soft costs are fees that are not directly related to labor and direct constructions costs. Soft costs include architectural, engineering, financing, and legal fees, and
When a company specializes in one category of products, it is able to focus all of its efforts on making the best product possible. Such a focus can create a competitive advantage for the company and even allow it to command higher prices, leading to higher earnings. Even if the market for a specialized product is small, this group of customers is often willing to pay more for a hard to find product. Specialization can have disadvantages in the cost of materials and labor. Just as customers are willing to pay more for specialized products, companies may also have to pay more for rare raw materials. Talent (i.e., labor) can be difficult to attract as well as specialized skill sets are generally in demand, leading to higher wages for such employees.
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 the partnership. In the context of a Delaware Statutory Trust (DST), the sponsor is the entity that has created the DST and solicited investors.
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 a reasonable period of time at terms and conditions comparable to competitive offerings.
The standard deduction is an IRS tax deduction that is used in place of itemization of expenses (Schedule A). For people who do not have complex tax filings or qualifying expenses, the standard deduction is the preferred tax deduction. Taking the standard deduction will reduce your overall tax bill. The standard deduction amount varies depending on the filing status, age, and whether you are disabled or claimed as a dependent on someone else’s tax return. Not everyone will qualify for the standard deduction, including those who choose not to itemize their expenses.
The standard deviation is a measure of volatility. It is commonly used to measure the volatility of investments (i.e., stocks). Volatility is associated with the riskiness of an investment. The higher an investment’s volatility, the higher its risk and vice versa. Investors generally prefer lower risk (lower volatility) investments. The standard deviation is a statistical measure of dispersion relative to the mean. It can be calculated by taking the square of variance based on each data point relative to the mean. To perform the calculation step-by-step for a stock, add up its returns across a period of time (i.e., monthly returns across 6 months) and divide by the number of observations to get the historical return. Subtract those returns from the average, square them, and add up those results. Now divide that sum by the number of observations minus one. Finally, take the square root of the last result to get the standard deviation.
When a taxpayer bequeaths an asset to a beneficiary upon death, the beneficiary’s tax basis in the asset is “stepped up” to the fair market value of
A stock broker is an individual or firm that performs securities transactions on behalf of clients in exchange for a fee. Stockbrokers often work on behalf of a brokerage firm and handle transactions both for individual investors and institutional customers in exchange for commissions. In today’s market, stockbrokers are critical for retail investors to obtain exposure to the market, because major exchanges such as the New York Stock Exchange (NYSE) require membership to trade on its exchange. Thus, retail investors cannot trade directly through an NYSE window and must hire a broker at a member firm to perform the transaction on their behalf.
Stocks are certificates that entitle the holder of the stock to a proportionate share of ownership in a company. For example, if there are 100 shares of stock available from a company and an investor owns 10 shares, the investor owns 10% of the company. For publicly traded companies, investors hold their shares with a brokerage rather than actual certificates of paper. Companies do not need to be public to issue shares of stock. Private companies can issue shares as well, although private shares are far less liquid than public shares. Companies generally issue stock to raise money for their business.
A store of value is an asset that does not depreciate. Gold and silver are great examples since their shelf life is basically perpetual. Food and vehicles are not stores of value since they depreciate rapidly and lose value. A store of value is something you can use to exchange for something else now or in the future and expect that it will hold its value. The U.S. dollar is considered a store of value since the amount it is valued at does not change. Treasury bonds are also good stores of value. They are backed by the U.S. government, pay interest, and at maturity, the bondholder receives all of their principal back.
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 a submarket is a smaller defined area within the market such as a neighborhood or suburb. The term describes a defined area that is geographically contiguous and does not overlap with other submarkets. Submarket boundaries may be formed from a variety of factors including natural elements such as a river or lake, man-made structures such as a road or park, or socioeconomic boundaries such as school districts or areas high in a certain demographic.
A subsidy is meant to supplement a particular adverse or burdensome economic condition for individuals and businesses. Subsidies may be provided by both governments and businesses. Governments may provide subsidies in the form of tax cuts and unemployment and welfare benefits. A business may subsidize the operations of a newly acquired business until it becomes profitable. Subsidies are meant to be a temporary relief. Some common subsidies are tax benefits for electric car owners and payments to farmers. Electric car owners receive a tax break due to the low emissions of electric cars, which promote social benefit. Farmers may receive subsidies for not farming specific land because crop yields will result in a loss for the farmer due to depressed prices.
The substitution effect occurs when consumers switch from a more expensive product to a similar, less expensive product. For example, if beef and chicken cost the same price, but beef begins rising in price, consumers will switch to the cheaper chicken. Chicken is a comparable alternative compared to beef and a better value. Once the demand for beef drops, its price will drop as well. Consumers will then switch back to beef. It’s important to note that the substitution effect only works if consumers’ spending power remains the same. If consumers begin earning more, the substitution effect doesn’t impact their choice as much. Consumers are less likely to stop eating beef, even if the price rises.
A firm must ensure that an investment is suitable for an investor as outlined by Financial Industry Regulatory Authority (FINRA) Rule 2111. Suitability ensures that an investor’s situation matches the particular investment recommended by an investment firm. FINRA has specific rules for determining this match. In general, suitability can be determined from an investor’s profile, which contains information such as the investor’s risk tolerance, investment time frame, and goals. Suitability is not the same as fiduciary standards/requirements.
A political action committee (PAC) is a group of people formed to raise money for a political campaign with the ultimate goal of influencing the election. Super PACs raise unlimited funds for the same reason but can’t donate directly to a campaign. Corporations are not allowed to contribute directly to campaigns but can funnel that money through a PAC to support the campaign. While Super PACs cannot contribute to a campaign, they can spend money in other ways that support the campaign. Once an organization raises $2,600, it is considered a PAC.
A supply curve is a graphical representation of the relationship between the price of a good or service and its supply. There are two variables involved — price on the Y-axis and supply on the X-axis. When the supply curve is sloping from the bottom left to the upper right, supply will increase as price increases. The supply curve can help to show what will happen to the price of a product or service as the level of its supply changes and vice versa. Be aware that price is considered the independent variable. In statistics, the independent variable is on the x-axis instead of the y-axis, but not in economics. When factors outside of price or supply come into play, a new supply curve must be drawn. This means the supply curve will shift left or right. Some factors that will shift the supply curve include more competition entering into the market or the introduction of more efficient technology for producing goods or services. Both will increase the supply for those goods or services. For example, if more car repair shops open in the same city, rates will become competitive and it will be difficult for anyone car repair shop to maintain higher rates, much less increase them. This can also happen for soybean farmers. When more farmers enter the market, or new technology is introduced that allows farmers to harvest more soybeans, the supply of soybeans will increase. In both cases, supply increases. This increase in supply shifts the supply curve to the right. The correlation between the price and supply movement along the curve is called supply elasticity or price elasticity of supply. A one-to-one movement has a supply elasticity of 1. Meaning that if price increases by one unit on the curve and supply does the same, there is a supply elasticity of 1. The supply curve, in that case, is straight (diagonally). If price rises by 5 units and the supply only rises by 1 unit, price elasticity is only 0.2. That curve is closer to horizontal and has higher elastic supply. Lower elastic supply means the curve is closer to vertical.
A surplus is the amount of an asset or resource that is unused. For example, an inventory surplus occurs when there is unsold inventory. A budget surplus occurs when there is more income than expenses. An economic surplus has two types — consumer and producer. A consumer surplus occurs when the price of a good or service drops below the maximum price that a consumer will pay. In that case, the consumer can buy the product with cash left over. A producer surplus occurs when the price of a good that is being sold sells for a higher price than was expected by the producer, allowing the producer to make an excess profit. Note that these two scenarios are mutually exclusive — one’s gain is the other’s loss.
A capital loss that cannot be realized in a given tax year due to passive activity limitations. The losses are suspended until they can be netted against passive income in a future tax year. These suspended losses are a result of passive activities, and can only be carried forward. Suspended losses that are a result of the disposition of a passive interest are subject to an annual capital loss limit. For example, if a taxpayer incurs a $10,000 suspended loss from a passive activity and participates in the activity in the following year and earns $20,000, then the suspended loss may be applied against $10,000 of the earned income, leaving the taxpayer with $10,000 of declarable income for the year.
SWOT (strengths, weaknesses, opportunities, and threats) is a type of analysis that lets companies take an assessment of their position within an industry. It is a framework that helps companies look both inward and outward. SWOT is divided into two main areas — internal and external. The internal analysis includes strengths and opportunities, and external analysis includes weaknesses and threats. Companies should try to take advantage of strengths and opportunities while minimizing weaknesses and threats. SWOT is often performed by a group of people rather than a single person. It’s also important that the group feels they can speak freely and without consequences.
Systematic sampling is a method of population sampling for statistical inference. It is a form of random sampling. To perform systematic sampling, a sample size from a population must be determined. Then the nth value can be calculated. For example, if the population size is 10,000 and the target sample size is 100, then every 10,000/100 = 100 participants should be chosen. 100 is the nth value. This means every 100 people within the population should be sampled. One drawback of systematic sampling is skew. If the population is categorized or grouped, skew can occur in the samples. An example of this is a company with departments of 100 people. If each first person in every 100 samples is a manager of the department, then the sampling will be overweight towards managers. When performing systematic sampling, the starting point should be chosen at random. From there, the constant interval (i.e., nth value) is used consistently throughout the sampling to choose participants. The main benefit of using systematic sampling is that statisticians don’t have to sample every individual within a population — often an impractical task. Systematic sampling is popular with researchers because it is fast and easy. While only a few participants from the population are selected, systematic sampling provides an accurate representation of the total population. The starting point of a systematic sampling must be random. Using the example from above, a number between 1-100 can be chosen as the starting point. If 25 is the random number that comes up, then the 25th person in the first 100 block of participants is chosen first. In the next round, the 125th person is chosen since 100 is the nth value. Additionally, a time element can be injected into the process. Perhaps a participant is chosen each 12 hours until all participants have been chosen.
A T-Test is a statistical test mainly used with small groups of data. A T-Test compares the means of data points between two populations. The test checks if the two populations are significantly different. This is accomplished by using a null hypothesis. The T-Test was developed in 1908. Some of the first T-Tests were used to check the quality of stout brewed by the Guinness beer company.
A tax credit reduces the amount of taxes owed to the government. Tax credits shouldn’t be confused with tax deductions and exemptions, which reduce taxable income. Tax credits provide a dollar for dollar reduction in taxes owed, making them more favorable than deductions and exemptions. Tax credits come in three types — nonrefundable, refundable, and partially refundable. Each type of credit will reduce your taxes. A nonrefundable credit can’t create a refund, while a refundable credit can create a refund. A partially refundable credit allows, in some cases, taking part of the credit as a refund.
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.
Tenants-In-Common is a type of shared ownership of property, where each owner owns a share of the property. Unlike in a joint tenancy, these shares can be of unequal size,
The estimated or actual cap rate of a property on the date of disposition or sale. Also known as the exit cap rate and the reversionary cap rate. The terminal cap rate is a metric used to estimate an investment property's gross value at the sale (i.e., end of the holding period). The terminal cap rate is also an important metric in determining the resale price of a property. The resale price is used for determining potential capital gains and the return on the property. It is calculated by dividing the expected net operating income (NOI) by the expected sale price and is expressed as a percentage. For example, if the NOI in the year of sale (or the following year) is $450,000 and the expected sale price is $7,000,000, then the terminal cap rate would be 6.43% (NOI of $450,000 divided by $7,000,000 sale price). In practice, the terminal cap rate is more typically applied to the estimated NOI in order to estimate terminal value.
The value of an investment at the end of its holding period. In the context of commercial real estate, the terminal value of an investment property is often estimated by applying a terminal cap rate to its projected net operating income (NOI) at the time of sale, or the year following sale.
The Federal Insurance Contributions Act (FICA) is a US law introduced in 1935 that mandates a payroll tax on employee salaries and wages and on employer contributions to Social Security and Medicare programs. FICA contributions are mandatory. Funds collected as a result of this payroll tax help fund programs such as Social Security and Medicare that pay for current retirees’ and other beneficiaries’ benefits.
The Three Property Rule is defined under IRC Section 1031, which states that an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their relinquished property to formally identify a replacement property or properties.
Time value of money is the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.
Title holding trust is a fully revocable grantor trust designed and drafted specifically to acquire, hold, manage and ultimately dispose of real estate on a confidential or private basis to better protect an investor’s assets.
Total return is the actual rate of return of an investment or a pool of investments over a given evaluation period which includes income and appreciation.
A trade surplus occurs when a country exports more than it imports. A country’s trade balance can be calculated from a simple formula: Total Value of Exports - Total Value of Imports. When a country exports more than it imports, its currency rises in value relative to other currencies. The country also has more control over its currency because less of it is leaving the country. A trade surplus may eventually work back to equality where imports equal exports and can even result in a trade deficit, where exports are less than imports. This happens because as a country’s currency rises, it costs more for other countries to purchase its products (exports). As demand for the country’s products decreases, so do its exports and currency.
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.
The Tragedy of the Commons is an economic problem where individual use depletes a resource, removing it from use by the general population. Because each individual is concerned only about their benefit from the use of the resource, no one individual is looking out for the welfare of the common resource. There is no investment in the well being or management for the resource’s future. Every individual pursues the use of the resource for their personal gain. Some solutions to the Tragedy of the Commons include privatization and government intervention. Through privatization of the resource, owners will ensure the resource is taken care of, so it continues to benefit them and potentially others (for a price). Government intervention may place restrictions on the use of the resource to ensure it is not depleted.
Tranche is a slice of the capital stack that reflects an investor’s credit or equity ownership position in a company or project. Different tranches have different cash flows and risks involved, as well as different claims to cash distributions.
A Turnkey Asset Management Program (TAMP) is a technology platform that handles much of the investment and portfolio management administration that financial advisors, investment advisors, wealth managers, broker-dealers, insurance companies, banks, law firms, and CPA firms must oversee. By outsourcing those tasks to a TAMP, managers free themselves up to focus on their core competencies and being able to meet in person with clients. TAMPs allow people who specialize in particular tasks to focus on those tasks. This keeps managers from being spread too thin.
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.
A labor union is an organization formed to protect the rights of workers in specific industries. Labor unions unite workers of similar trades to obtain leverage in negotiations with employers over wages, hours, benefits and other working conditions. Unions function like democracies in that leaders and officers are elected by peers to make decisions that are beneficial to the union as a whole.
The USDA or United States Department of Agriculture is a federal government program responsible for the management of food, agriculture, natural resources, rural development, and nutrition. Many Americans know the program for overseeing food safety. The USDA was founded in 1862, a time when 50% of Americans lived on farms. In addition to food safety, the USDA is broad-reaching and provides services in the following areas: - Hi-speed Internet access to rural areas - Disaster assistance to farmers, ranchers, and rural residents - Soil, water, and other natural resource conservation to landowners - Wildfire prevention - Agricultural research and statistics - Nutrition in foods It is also responsible for welfare programs such as food assistance for women, infants and children (WIC), and food stamps.
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
Utility is a measure of how much satisfaction or use a consumer receives from a good or service. As you might imagine, there isn’t really a way to put a number on satisfaction or use, since both are fairly subjective. However, that doesn’t stop economists from trying to do so. For example, let’s say you buy a car with a sunroof. Your friend buys the same exact car without a sunroof but pays $500 less. Economists will say that you received $500 of utility from the more expensive car. In other words, you received a specific amount of satisfaction for the additional cost. Another form of utility is a company that provides a public service such as electricity or water.
VA Loans are mortgages issued by private lenders, but partially guaranteed by the Department of Veterans Affairs. To be eligible to apply for a VA Loan one must meet one of the following criteria1:
Vacancy allowance is a line item on a real estate pro forma that accounts for expected vacancy of the property. The specific allowance is dependent on the property type and supply and demand factors of the underlying market. The vacancy allowance applied during underwriting may be greater or less than the current actual vacancy rate the property is experiencing.
Valuation, income approach (direct capitalization) is a real estate appraisal method that values a property by taking net operating income and dividing it by a predetermined capitalization rate. The income valuation method is not suitable for valuing owner-occupied residential properties, as it relies on income produced as a function of the property’s overall value. The direct capitalization method estimates a single year’s income.
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
War bonds are issued by a government to help finance military activities in times of war. These bonds do not pay interest and have a below-market-rate of return. US Government war bonds were issued at 50-75% of face value with a 10-year maturity. Because of low returns, governments must appeal to its citizens to invest in war bonds. In 1917, the US Government issued Defense Bonds, also called Liberty Bonds, which were the predecessor to war bonds. These bonds were used to help finance US military activities during World War I. The US Government raised $21.5 billion worth of Liberty bonds. The government was able to raise $180 billion worth of war bonds during World War II.
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.
The World Bank is a financial institution established to provide financing, advisory services and research to emerging markets and developing nations in support of economic advancement in public and private markets. Its key objectives are the reduction of poverty and fostering of economic development in nations around the world by providing low-interest loans, credits and grants to foster education, healthcare and infrastructure in developing nations. The World Bank was created in 1944 following the Bretton Woods agreement near the end of World War II at a time when many nations needed financing to rebuild following the conflict.