“Capital” and “money” are commonly interchanged, but the two terms are distinct. Capital is deployed to crate growth and expand a company’s capacity to provide its service or develop its product, while money is a means purchasing and developing a company’s specific source of capital.
Capital 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
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
Capital stack is a term used to describe the composition of total capital invested in a project. Listed from most risky to least risky, capital stacks in real estate are usually comprised of common equity, preferred equity, mezzanine debt, and senior debt. Usually, the riskier positions in the capital stack tend to earn higher expected returns due to the increased risk taken on.
There are two meanings for capitalization as it relates to accounting and finance. In accounting, capitalization refers to a method by which a firm expenses the costs associated with the acquisition of an asset over the useful life of the asset rather than at the time it is acquired. In finance, capitalization is a measure of a firm’s book value (the sum of its stock, long-term debt, and retained earnings) or its market value (the product of the number of outstanding shares and the stock price).
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.
Cash flow is the net amount of cash moving in and out of a business, usually measured during a specified, limited period of time.
Cash reserves, in the context of commercial real estate, is cash and cash equivalents held in short term accounts used to cover things such as
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.
Cash-on-cash return is the ratio of annual before-tax cash flow from an investment to the total amount of cash invested, represented as a percentage.
Small, relatively permanent statistical subdivisions of a county or equivalent entity that are updated by local participants prior to each decennial census as part of the Census Bureau's Participant Statistical Areas Program. The primary purpose of census tracts is to provide a stable set of geographic units for the presentation of statistical data.
A certificate of deposit (CD) is a savings certificate issued by a financial institution that has a fixed maturity date and interest rate that restricts the certificate holder’s access to funds from the time of issuance to the specified maturity date. CDs are tools that financial institutions and banks use to generate deposit growth and are typically issued electronically. Financial institutions typically charge a fee if an investor wishes to obtain access to funds prior to the maturity date.
Certificate of Occupancy is a document issued by a local government agency, certifying that a building meets certain requirements and codes that indicate its fitness to house tenants. These requirements differ across building types, as well as cities and states, and are usually required to be met by new developments.
A certified public accountant (CPA) is a designation bestowed upon an individual by the American Institute of Certified Public Accountants (AICPA) when that individual satisfies the educational requirements and passes the CPA exam. In order to be deemed a CPA, an individual must obtain a bachelor’s degree in business administration, finance or accounting, have no fewer than two years of public accounting experience, complete 150 hours of education, and pass a certification examination.
Checking accounts typically do not offer high interest rates because of the high level of liquidity it offers to customers. Funds held in a checking account at a chartered banking institution regulated are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,0000 per individual depositor
Closing costs are expenses over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction.
A 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.
A property or asset that a borrower pledges to a lender in the event of default. When a borrower fails to make debt service payments as stated in the loan agreement, collateral looks to secure repayment of the loan, providing protection to the lender. In real estate, typically the property that is being financed by the loan serves as collateral, whether this be a house or commercial property. Other common types of collateral include: plant and equipment, marketable securities, and personal property.
Collision insurance is automobile insurance. It covers collisions that are under your control. Collision insurance shouldn’t be confused with comprehensive insurance, which covers acts of God, such as weather-related events or a deer jumping in front of your car. Collision insurance is extra coverage on top of basic insurance coverage.
Collision insurance covers the following incidents: Your car is the only one involved in an accident, collision with another car, collision with an obstacle in the road, and pothole damage. Collision insurance does not cover theft, hail, flood, fire, vandalism, natural disaster, or being struck by an animal.
A commercial bank is where most everyone does their local banking. This is in contrast to an investment bank. Commercial banks offer a range of financial products, including loans, mortgages, checking, savings, CDs, retirement products, credit cards, and more. These banks make their money from lending.
When you open a deposit account such as a saving, checking, or CD, you are basically lending the bank money. As a lender, you expect to be paid interest, which the bank does. Although it is a very small amount. The bank uses your funds as loans to its customers. Because the bank lends at a higher rate than the interest it pays on deposit products, it is able to generate a profit.
Commercial Mortgage-Backed Securities are securities collateralized by loans secured by commercial property. A CMBS loan is a first-mortgage secured by commercial real estate which is
Commercial real estate is real estate intended to generate income or profit for the owner of the property. Generally includes all categories of non-residential real estate
Common area maintenance charges are the contribution or fee paid collectively by individual tenants for the maintenance and upkeep of the non-exclusive areas of the premises.
Common stock allows the holder of the stock a percentage share of ownership within a company. Owning shares gives the owner voting power to elect members to the board of directors and vote on other company matters. However, without a significant holding of common stock within a company, the owner’s vote may not have much sway.
Owners of common stock are the last to receive any assets in the event of bankruptcy (liquidation). Debts are first in line, which includes bond and preferred shareholders. If anything is left over, which it usually isn’t, common stock shareholders may receive some compensation. On the positive side, common stock generally outperforms debt instruments such as bonds.
Promotes economic revitalization in distressed communities throughout the United States by providing financial assistance and information to community development financial institutions (CDFI).
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.
Comparative advantages cannot be explained without understanding opportunity costs, which are measured as the potential benefit an individual misses out on when choosing one course of action over another. On an individual basis, a college degree provides an individual a comparative advantage over not having a college degree, as that credential provides the individual the ability to convince employers that he or she is capable of providing tangible value to a firm.
Compound interest is “interest-on-interest”, or the ability of a financial instrument to generate earnings on its earnings.
A benefit given by a buyer, seller, landlord or tenant in order to help facilitate a real estate transaction. Concessions can be given in both residential and commercial real estate, and are often predetermined during the negotiation period. Concessions are often included in closing costs, but come in various forms: covering moving expenses and repair costs, rent reduction, or even cash back to the buyer.
Condemnation is the seizure of property by a public authority for a public purpose. Condemnation typically occurs when a taxpayer owns property in a place
A landowner voluntarily agrees to sell or donate certain rights associated with his or her property – often the right to subdivide or develop – and
Constructive receipt is direct access to tax-deferred like-kind exchange funds or other property by an exchanger completing a tax-deferred like-kind exchange.
A measure of the change in the value of consumer goods and services, such as food, medical care, and recreation. CPI is used to gauge inflationary and deflationary periods, providing an economic indicator as to the effectiveness of current monetary policy. The index is calculated and published by the U.S. Bureau of Labor Statistics each month.
A 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.
For example, assume a major grocery store has begun to operate at a loss in a shopping center, and has requested to “go-dark.” Knowing that the grocery store may drive a substantial amount of people to the area, the landlord may have negotiated a continuous operation clause that requires that the tenant maintain full operations. Although the grocery store may not be profitable, staying open continues to drive traffic and traffic helps to maintain the value of the overall retail center.
A contract between a seller and a buyer of real property in which the seller provides financing to the buyer to purchase the property.
A controller’s position is just under the CFO of a company. The controller is involved in daily accounting, such as preparing reports, budgeting, hiring/firing people in the accounting department, and ensuring compliance. The CFO is part of the executive team, overseas financial strategy, and is often speaking on earnings calls (if the company is public).
In a smaller company, the controller and CFO may be the same position. The controller ultimately handles putting together the financial information that the CFO and other top management use for company strategy.
Core properties exhibit the lowest risk and lowest potential returns amongst the four major commercial real estate risk profiles, and represent
Core-plus properties are generally similar to core properties, but have a slightly higher degree of risk and potential for slightly higher returns than core properties.
A cosigner is a term used to identify an additional source of repayment on a loan. A cosigner can aid a borrower by increasing the amount of principal for which he or she is eligible. A borrower may need a cosigner if he or she has a low income or minimal credit history.
They say first impressions are everything. This is especially true when applying for a job. A cover letter is your chance to make a great first impression. The cover letter is a summary of you and includes parts of your resume. It’s meant as a conversational piece to show off your best attributes and why you’re the best candidate.
Consumers will have limits on their lines of credit based on their credit score and annual salaries and wages. Credit cards feature higher annual percentage rates (APRs) than other lines of credit because of the lack of collateral associated with the line of credit. Whereas a financial institution may repossess a delinquent borrower’s home or vehicle if repayment stops, a financial institution will have a harder time obtaining recourse on the unsecured personal line of credit.
A credit limit is the maximum amount of credit that a financial institution extends to an individual or business. Credit might come in the form of a credit card or line of credit. The amount of credit extended depends on an individual’s creditworthiness. Creditworthiness is a factor of credit history and debt to income ratio, among many other things.
For people with no credit history or those who have poor credit, they can have difficulty when trying to get new credit. Also, interest will generally be higher for such people until they establish or improve their credit. Those with great payment histories, good income, and a low debt to income ratios receive the most credit along with favorable interest rates.
A measure of a person or entity’s ability to meet certain financial requirements or obligations. Credit ratings are based on credit history, current financial position, and ability to generate future income, and look to predict the likeliness of the debtor defaulting. Common rated debt instruments include government bonds, municipal bonds, corporate debt, and collateralized securities.
A credit report provides a breakdown of an individual’s credit history and is a measure of that individual’s creditworthiness in the future. Credit bureaus compile credit reports by compiling financial information about an individual’s previous history of repayment and current levels of debt, among other factors. A credit report is a tool that lenders use to assess the risks associated with issuing debt to an individual.
The risk of loss resulting from a borrowers inability to repay its loan obligations. When a borrower is given funds from a lender, there is always risk that the borrower may not be able to meet its obligatory principal and interest payments. Although impossible to quantify, managing credit risk may reduce risk of loss. Common methods of managing credit risk on loans include assessing a consumer’s credit history, ability to repay, and access to capital. A lender may also look at loan conditions and the collateral securing the loan, to ensure that the risk of loss is compensated for.
FICO is the most commonly accepted method of credit score. A credit score is a key component of a lender’s decision to extend a line of credit to an individual. Individuals with credit scores below 640 are considered subprime borrowers, while borrowers with credit scores above 700 are considered creditworthy.
Credit tenant is a tenant with the size and financial strength worthy enough of being rated as investment grade by one of the three major credit agencies: Fitch, Moody’s,
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.
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.
The act of using multiple properties to secure one or more loans. Common in situations where a borrower lacks the capital to purchase a property, a cross-collateralized loan allows the borrower to use the untapped equity in another property to secure the loan on another property. This type of loan reduces the lender’s risk by securing their position in multiple properties.
For example, say John wants to buy Property A for $2 million. He currently has $200,000 in cash, and needs to borrow $1.8 million to close. The lender, however, will not lend past an 80% loan-to-value, leaving John $200,000 short on his down payment. Given that the lender will accept additional property in the place of the down payment, John looks to use a property he already owns, Property B, as further collateral. Property B has a $400,000 loan in-place, with John’s equity representing about $600,000.
Together, the market value of these properties is $3 million. The combined debt is $2.2 million, representing a loan-to-value of 73.33%. John’s debt level is then below the 80% threshold, making the lender more inclined to fulfill his loan request. The Lender now has claim to both properties in the event of default.
Crowdfunding is a form of financing that utilizes small amounts of capital from a large number of people to fund a new venture or project. Originally brought forward as a way for organizations and entrepreneurs to secure general funding and donations from the public, regulatory changes passed in the JOBS Act have allowed for equity crowdfunding to emerge so that investors could gain a return on their crowdfunding investment.
Crude oil, which is a fossil fuel, is a natural resource found within the Earth. It is composed of hydrocarbon deposits and other organic materials. Crude oil must be drilled from the Earth and refined and processed to create petroleum products such as gasoline, diesel, kerosene, and asphalt. Drilling, refinement/processing, and the creation of particular products are what the crude oil industry is built around.
Crude oil isn’t being created as it is a nonrenewable resource. Once it is gone, there will be no more. This means crude oil is a limited resource. It is getting increasingly difficult for the industry to find new deposits of crude oil and bring them to the surface.
A low-income community census tract has an individual poverty rate of at least 20% and median family income up to 80% percent of the area median [Section 45D(e)].
Designed to increase the flow of capital to businesses and low-income communities by providing a modest tax incentive to private investors.
To become a Qualified Opportunity Fund, an eligible taxpayer self-certifies. As of now, no approval or action by the IRS is required.
Cost approach valuation is a real estate valuation method that bases a property’s market value off the cost it would take to build an equivalent structure. The cost approach takes into account the cost of land plus the cost of construction, less depreciation. Similar to its counterparts, the cost approach may have other forces that prove it inaccurate. For example, if vacant land is not available to compare against, the professional valuing the property will have to derive an estimate, making the end value less accurate.