Glossary

Absolute Advantage

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.

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Absolute Triple Net Lease

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

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Absorption

Absorption is the rate at which rentable space is leased within a market or submarket over a given period of time. Gross absorption measures total square feet

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Accommodator

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

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Accounts Payable

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.

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Accounts Receivable

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.

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Accredited Investor

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

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Accretive

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.

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Active Conduct

Proposed Regulations released in April 2019 dictate that a Qualified Opportunity Zone Business must generate at least 50 percent of its gross income from the active conduct of a trade or business in a Qualified Opportunity Zone. The regulations indicate that ownership and operation of a property used in a trade can be treated as active conduct of a business, but merely entering into a triple net lease at a property is not considered active conduct. Active conduct can be measured by the following: Hours Test - if at least 50 percent of services of a business or trade is performed in the QOZ, the QOZB qualifies. Pay Test - if at least 50 percent of services are performed in QOZ, calculated by the amounts paid by a QOZB to its employees and independent contractors, the QOZB qualifies. Qualitative Test - A qualitative test gauges whether or not the property is responsible and/or critical for generating at least 50 percent of the business’s revenues.

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Actual Receipt

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

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Ad-valorem Tax

A tax on the assessed value of real or personal property. Translated from Latin to mean “according to value”, ad-valorem taxes are based upon the monetary value of the asset or good. Common ad-valorem taxes seen in practice are property taxes, sales taxes, and taxes on import goods. Ad-valorem taxes can be transactional or assessed yearly. To provide an example, an 8% sales tax is based on the monetary value of the good being purchased, and is transactional based, as it only applies when a good is being bought or sold. Likewise, a 7% property tax in Travis County is based on the monetary value of the land as determined by a government assessor, however, is paid annually.

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Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage, or ARM for short, is a mortgage loan which does not have a fixed interest rate throughout its term. With an adjustable rate mortgage (ARM) the interest rate is subject to periodic adjustment. The rate adjustment may be based on any time period (daily, monthly, quarterly, semi-annually, annually, etc.) and the adjusted rate is typically expressed as a spread or margin over a defined index rate. Typical index rates include LIBOR, Prime Rate, and the 30-Day US Treasury rate.

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Adjusted Basis

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

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Adjusted Gross Income

Adjusted gross income (AGI) is a calculation used to determine how much income is taxable on a taxpayer’s tax return. Starting with gross income, which is a sum of all wages, investment income, capital gains, retirement income, among other things, AGI factors in a number of allowable deductions to arrive at the monetary amount a taxpayer will be taxed on. The allowable deductions that can be factored into gross income to arrive at AGI include, but are not limited to: retirement plan contributions, medical expenses, capital losses, alimony payments, and school tuition and student loan interest.

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ADL

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.

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After-Tax Cash Flow

The amount of money an investment generates after any tax liabilities have been paid. The first step in calculating after-tax cash flow is determining taxable income, then applying the appropriate marginal tax rate to produce one’s tax liability. As stated by the IRS, there are several deductions a taxpayer may claim that reduces taxable income, and thus his or her’s tax liability. Common deductions include mortgage interest payments and depreciation. To provide an example, say a property generates $500,000 of Net Operating Income. Now assume that annual depreciation for the property is $400,000, taxable income would be $100,000. If an investor falls into a marginal income tax bracket of 35%, the tax liability would be $35,000. Deducting this number from the pre-tax income of $500,000, after-tax cash flow would equate to $465,000.

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Aggregate Demand

Aggregate demand (AD) is the total demand for all services and finished goods at every price level over a specific time period. Over the long-term, AD is the same as GDP (gross domestic product), as they are calculated the same way. The formula for AD is C + I + G + (X - M), where C = consumer spending, I is capital goods or investment from companies, G is government spending, and X - M is known as a country’s balance of trade (exports minus imports).

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Aggregate Supply

Aggregate supply is the total amount of goods and services that an economy produces during some period at a given price. Price is important because it determines how much companies are willing to produce at that price. The relationship between price and supply (quantity of output) is visually represented by the aggregate supply curve. The period in which aggregate supply is calculated is often one year. This is because changes in supply will lag changes in demand. There are two types of aggregate supply to consider — short-term and long-term. Short-term supply is impacted most by changes in demand, while long-term supply is most impacted by changes in technology and other changes within an industry.

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Alternative Investment

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

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Amenities

Defined as a desirable or useful feature of a building or place, amenities look to provide comfort and convenience for tenants occupying the property. Amenities encompass additions that are in excess of the basic needs of an individual, and usually include features such as pools, workout facilities, and internet.

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Amortization

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

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Anchor Tenant

Anchor tenant is the tenant that acts as the primary draw to a commercial property. It is usually the largest tenant in a shopping center or retail development. A common example is a grocery store.

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Angel Investor

An angel investor is a high net worth individual who is one of the first investors in a startup. This stage of investing is well before venture capitalists come in and is one of the riskiest stages to invest in. The amount invested by an angel investor is often only a small percentage of their overall net worth. In exchange for investing, angel investors generally take a sizeable percentage of the company and may set certain conditions on the entrepreneur. Angel investors may sometimes be the only source of capital a startup might receive early on, as banks do not favor risky investments.

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Annual Percent Yield

The annual percentage yield allows investors to compare investments with different annual percentage rates (APR). It’s a way to do an apples to apples comparison. APY accounts for periodic compounding interest. As interest is added to the account, the next interest payment will be bigger. The longer an investor allows the account to compound interest, the bigger it will be at the end of some predetermined period. It’s important to point out that APY does not take into account any fees. APR does account for fees. This is another difference between APY and APR.

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Antitrust Laws

Antitrust laws prevent companies from taking over an industry sector and thus stifling fair trade within that sector. A single company that dominates a sector without competition is called a monopoly. Generally, monopolies are not good for economies, as they reduce choices and increase prices for consumers. Antitrust laws also prevent mergers that will result in less choice and competition. One of the most famous antitrust cases is that of Microsoft vs. The United States. Charges of antitrust were brought against Microsoft because of its Internet Explorer web browser, which was installed on Windows PCs by default. The court ruled that Microsoft constituted unlawful monopolization. Microsoft appealed the case and eventually reached a settlement.

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Appellate Court

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.

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Appraisal

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

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Appreciated Property

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

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Appreciation

Appreciation is the increase in the value of an asset over time, which can be affected by a number of factors such as increased demand, weakening supply, or changes in inflation.

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APR

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.

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Arbitrage

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.

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Assessed Value

The monetary value of property determined for tax purposes. Assessed values are given by government assessors, and act as the basis for property taxes. Each tax district has a different method for conducting assessments, although all tend to rely upon similar factors such as comparable home sales, replacement value, and any income being generated from the property. Assessed values are typically less than private appraisal valuations in most jurisdictions, as assessed values act as a percentage of fair market value. In Mississippi, for example, the assessed value is just 10% of the determined fair market value for single-family, residential real property.1 While market values may fluctuate substantially, increasing or decreasing every year, assessed values tend to be less volatile. This is commonly due to state legislation limiting how much the assessed value of a property may increase year to year. In Oregon, for example, it is prohibited that the assessed value of land, that has not been improved from the previous year, increase in value more than 3% from the prior year.2

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Assessor

A local government official who determines the assessed value of taxable property in a county or municipality. This valuation is used to determine the tax basis for a property in a given area. After being appointed or elected, assessors are trained in common property appraisal techniques, reaching a degree of certification that varies city to city. In some cases, continuing education or even no certification is required for an assessor to maintain his or her status.

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Asset

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.

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Asset Class

A group of investments that behave similarly in the market, and are subject to the same regulations. Today, the three main asset classes recognized are equities, bonds, and cash equivalents. Although real estate and commodities are included by some professionals as well, these investments typically fall in the alternative investment category. Investments within an asset class are associated based on their underlying fundamentals. For example, fixed income investments are grouped because of their similar financial structure, and equities are grouped together because of what they represent and how they are traded. Because the fundamentals of each class differs, each represents a different risk and return profile. By allocating across different asset classes, investors may be able to achieve a degree of diversification in their portfolio. Diversification, however, does not guarantee profits or protect against losses.

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Assets Under Management (AUM)

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

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