Glossary

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.

Bad Title

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.

Bankruptcy Remote

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

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”.

Bond Economics

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.

Build-to-Suit (BTS)

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.

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.

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

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

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.

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.

Commercialization

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.

Core Property

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

Dark Space

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.

Depreciation

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

Economic Trough

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.

Expansion Economics

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.

Factors of Production

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.

First-Loss Position

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.

Flexible Payment Plan

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.

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.

GDP

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.

General Market Factors

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.

Going-in Cap Rate

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.

Grants In Aid

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

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.

Hard Cost

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

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.

Health Ratio

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.

Inelastic

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.

Infill Location

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 Rate

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.

Institutional-Grade Property

While not a precisely defined term, an institutional-grade, or institutional-quality property generally refers to a property of sufficient size and stature to

Insurable Value

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.

Interest-Only Loan

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.

Line of Best Fit

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

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.

Load Factor

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.)

Lock-out Period

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.

Market Adjustments

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.

Medium of Exchange

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.

Net Absorption

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 Operating Income (NOI)

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)

Net present value (NPV) represents the amount by which the expected cash flows of an investment exceeds the initial amount invested.

Net Square Footage

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.

Normal Good

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.

Official Settlement Account

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.

Original Use

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.

Overdraft

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

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.

Parking Ratio

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.

Partial Payment

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.

Physical Capital

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.

Pre-Tax Cash Flow

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 Return

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.

Principal, Debt

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.

Promoted Equity (Carried Interest)

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.

Property Type, Flex

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.

Real Estate Debt

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.

Registered Investment Adviser (RIA)

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.

Release Provision

A provision or clause to release certain collateral from a loan or mortgage in exchange for the borrower’s payment of a defined amount.

Sales Load

See Equity Load.

Shortage Economics

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.

Single Tenant Property

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.

Soft Costs

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

Sponsor

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.

Stock Economics

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.

Store Of Value

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.

Submarket

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.

Subsidy

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.

Substitution Effect

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.

Suitability

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.

Surplus (In Economics)

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.

T-Test

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.

Terminal Cap Rate

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.

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.

Title Holding Trust

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.

Trade Surplus

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.

Union

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.

Vacancy Allowance

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)

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.

Value Add Property

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

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.

Yield

Yield is the return on an investment or the amount of profit, stated as a percentage of the amount invested. Also known as the rate of return. Yields can be depicted in a variety of ways including levered and unlevered and before tax and after tax.

Glossary

Realized