Glossary of Terms

Capital

Capital is defined as a type of financial asset that includes funds held in a deposits account or a physical factor production, e.g. manufacturing equipment and facilities and buildings used to produce and store goods. To be classified as capital, assets must serve as an ongoing source of service to the business used to generate wealth. Combined with labor, capital is combined with individuals who exchange their time and skills for money to create value.

“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.

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Capital Asset

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.

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Capital Expenditures (CapEx)

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

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Capital Gain

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

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Capital Gains Tax

Capital gains tax is tax payable on capital gains realized from the sale of a capital asset. Capital Gains Taxes are assessed by the federal government in the United States

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Capital Improvement

See Capital Expenditures (CapEx).

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Capital Reserves

In the context of commercial real estate, capital reserves are funds designated for long term capital investment projects or

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Capital Stack

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.

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Capitalization Rate (Cap Rate)

Capitalization rate is the initial rate of return an investment property is expected to generate. The Capitalization Rate is determined by dividing the

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Carry Costs

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.

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Cash Flow

Cash flow is the net amount of cash moving in and out of a business, usually measured during a specified, limited period of time.

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Cash Reserves

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

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Cash Sweep

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.
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Cash-On-Cash Return

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.

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Census Tracts

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.

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Certificate of Occupancy (CO)

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.

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Closing Cost Expenses

See Closing Costs.

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Closing Costs

Closing costs are expenses over and above the price of the property that buyers and sellers normally incur to complete a real estate transaction.

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Co-tenancy Clause

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.

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Collateral

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.

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Commercial Mortgage-Backed Securities (CMBS)

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

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Commercial Real Estate

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

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Common Area

Common areas are the areas of a building that are available for the nonexclusive use of all its tenants, such as lobbies, corridors, and parking lots.
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Common Area Maintenance (CAM) Charges

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. 

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Community Development Financial Institutions Fund (CDFI Fund)

Promotes economic revitalization in distressed communities throughout the United States by providing financial assistance and information to community development financial institutions (CDFI)

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Comparables (Comps)

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.

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Compound Interest

Compound interest is “interest-on-interest”, or the ability of a financial instrument to generate earnings on its earnings.

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Concessions

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.

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Concurrent Exchange

Concurrent exchange refers to a method of executing a tax deferred exchange (aka 1031 exchange or like-kind exchange) where the sale of the relinquished property

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Condemnation

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

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Conservation Easement

A landowner voluntarily agrees to sell or donate certain rights associated with his or her property – often the right to subdivide or develop – and

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Constructive Receipt

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.

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Consumer Price Index (CPI)

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.

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Continuous Operation Clause

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.

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Contract for Deed

A contract between a seller and a buyer of real property in which the seller provides financing to the buyer to purchase the property.

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Contract Rent

This term is used synonymously with Stated Rent.
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Core Property

Core properties exhibit the lowest risk and lowest potential returns amongst the four major commercial real estate risk profiles, and represent

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Core-Plus Property

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.

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Credit Rating

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. 

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Credit Risk

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.

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Credit Tenant

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,

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Credit Tenant Lease

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.

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Cross-Collateralization

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.

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Crowdfunding

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.

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Curb Appeal

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.
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Low Income Housing Tax Credits

Created in 1986 and made permanent in 1993, is an indirect federal subsidy used to finance the construction and rehabilitation of low-income affordable rental housing.
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Low-Income Community Census Tracts

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)].

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New Market Tax Credits

Designed to increase the flow of capital to businesses and low-income communities by providing a modest tax incentive to private investors.

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Opportunity Zone vs. New Market Tax Credits

Although there are similarities between the Opportunity Zone Program and the New Markets Tax Credit program, a crucial difference will be in underwriting the potential financial success of the low-income community businesses in which an Opportunity Fund invests.
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Qualified Opportunity Fund Certification

To become a Qualified Opportunity Fund, an eligible taxpayer self-certifies.  As of now, no approval or action by the IRS is required.

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Title III Regulation Crowdfunding

Title III Regulation Crowdfunding is a Securities and Exchange Commission (SEC) regulation that exempts non-accredited investors from registering with the SEC to invest in crowdfunded equity offerings. Title III requires that issuers gather funds through either a broker-dealer or registered funding platform.
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Valuation, Cost Approach

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.

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