Glossary of Terms

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

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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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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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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.

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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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After-Tax Cash Flow

The amount of money an investment generates after any tax liabilities have been paid. The first step in calculating after-tax cash flow is determining taxable income, then applying the appropriate marginal tax rate to produce one’s tax liability. As stated by the IRS, there are several deductions a taxpayer may claim that reduces taxable income, and thus his or her’s tax liability. Common deductions include mortgage interest payments and depreciation.

To provide an example, say a property generates $500,000 of Net Operating Income. Now assume that annual depreciation for the property is $400,000, taxable income would be $100,000. If an investor falls into a marginal income tax bracket of 35%, the tax liability would be $35,000. Deducting this number from the pre-tax income of $500,000, after-tax cash flow would equate to $465,000.

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Alternative Investment

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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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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Fully Amortizing Loan

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.

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