Knowledge leads to informed decision making. Expand your understanding of investing with the articles, whitepapers and curated links in the Crowdfund Builder’s Education Center. Learn more about the terms used in our glossary.
Knowledge leads to informed decision making. Expand your understanding of investing with the articles, whitepapers and curated links in the Crowdfund Builder’s Education Center. Learn more about the terms used in our glossary.
Abatement: Abatement is often and commonly referred to as free rent or early occupancy and may occur outside or in addition to the primary term of the lease.
Absorption rate: Absorption rate is the number of units of property that will be leased or sold in a market over a specific time period. Pre-leased space in buildings under construction is not included in order to avoid double counting of tenants who are in the process of moving within the market.
Acceleration Clause: Acceleration Clause is a loan provision that gives the lender the right to declare the entire principal amount immediately due and payable upon the violation of a certain provision (such as failure to make payments on time) as specified in the loan documents.
Accrue: Accrue is to accumulate, increase or receive.
Adjusted Tax Basis: In real estate, Adjusted Tax Basis generally refers to the net cost of a property after adjusting for tax-related items such as depreciation. This number is used when determining taxes upon the sale of a property.
After Tax Cash Flow (ATCF): After Tax Cash Flow is the cash flow to the equity position after debt service and taxes have been paid. The ATCF is the basis for calculating the Levered IRR.
Amortization Period: Amortization Period is the repayment of a loan with periodic payments on both principal and interest calculated to pay off the loan at the end of a fixed period of time. The loan payment consists of a portion that will be applied to the accruing interest on the loan, with the remainder used to pay the principal. Over time the interest portion decreases as the loan balance decreases, and the amount applied to principal increases so that the loan is paid off (amortized) in the specified period.
Anchor: An Anchor is a tenant that generally occupies the largest space at a given property, serving as the primary draw of customers to the property and usually receiving a lower leasing cost. Anchor tenants are considered lynchpins to the success of a major retail center development and are normally located at the extremes of the mall in order to draw customers through the center.
Annual Percentage Rate (APR): Annual Percentage Rate is the actual cost of borrowing money, expressed in the form of an annual interest rate. It may be higher than the note rate because it represents full discloser of the interest rate, loan origination fees, loan discount points, and other credit costs paid to the lender.
Appraisal: An Appraisal is an estimate of value, made by a professional appraiser who uses a systematic approach including the analysis of market data. Appraisals may be used to determine the price of a property, the size of a loan or hazard insurance requirements.
As Is: A property is provided As Is when it is offered without any guarantee as to its condition. Buyer or tenant accept property including physical defects.
Assignment of Rents: Assignment of Rents is a typical mortgage clause that allows the lender to receive rent from a property in the event of default during the foreclosure process.
Assumable Loan: An Assumable Loan is a loan that allows a new purchaser to undertake the obligation of the loan with no change in loan terms.
Accredited Investor: An accredited investor is anyone who can bear the risk of investing in unregistered securities. There are two tests, each of which independently qualifies an investor as accredited. The first is whether the investor earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year. The second is that the investor has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). Also, non-individual entities can be considered accredited. For more information, see the SEC’s Investor Bulletin. Read more
Balance: Balance is the loan amount left over after subtracting the amount already paid from the original amount owed.
Balloon Loan: A Balloon Loan, also known as a bullet loan, is a long-term loan, often a mortgage, granted on the basis that payments of principal will be deferred until the end of the loan period and only interest will be payable during the loan period. A balloon loan will often have the advantage of very low interest payments, thus requiring very little capital outlay during the life of the loan. Since most of the repayment is deferred until the end of the payment period, the borrower has substantial flexibility to utilize the available capital during the life of the loan.
Base Year: Base Year is the 12 month period upon which an expense escalation of rent is based. This 12 month period is typically the first calendar year of the lease term.
Basis (Tax): Basis is the point from which gains, losses, and depreciation deductions are computed. Generally the cost, or purchase price, of an asset.
Basis Point: Basis Point is one 100th of 1%.
Blind Pool: Blind Pool is an investment program in which funds are invested into an entity without investors knowing which properties will be purchased.
Bridge Loan: A bridge loan is a short-term loan that is most typically used to fund either property purchase or construction costs until permanent financing is obtained. Bridge loans usually have high interest rates relative to permanent loans because they are short-term, must be obtained quickly and often are not supported by stable rents.
Broker (Real Estate): A Real Estate Broker is a state-licensed agent who for a fee, and within the scope of that state’s law, acts for property owners in real estate transactions.
Broker’s Opinion of Value (BOV) : A Broker’s Opinion of Value is an estimation of property value by a real estate broker. A BOV is often intended to provide market pricing guidance to property owners without incurring the time and expense of a real estate appraisal. However, it is important to note that a BOV is not a substitute for an appraisal. A fee may or may not be charged.
Build-Out: Build-Out is the space improvements put in place per the tenant’s specifications. Build-Out takes into consideration the amount of Tenant Finish Allowance provided for in the lease agreement.
Buy-Sell Clause: A Buy-Sell Clause is an agreement among LLC members pursuant to which some members agree to buy the interests of others, upon some event.
Call Provision: A call provision is a term in a debt instrument that allows the issuer to repurchase the debt at a specified time and price.
Cap Rate: The capitalization rate is the ratio of the net operating income of a property to the market value of the property. The cap rate is a good way to determine the risk premiums associated with compared properties where the property with the higher cap rate is perceived to entail more risk. Read more
Capital Balance: A Capital Balance is an investor’s current cash investment balance in a particular investment.
Capital Call: A Capital Call is a request made to existing equity owners for additional money in order to fund deficits due to construction or operating costs.
Capital Expenditure: A Capital Expenditure Expenditures is incurred to acquire property for the long term or to increase the permanent value of property. In general, money spent on improvement, alternation, or renewal is considered a capital expenditure, but money spent on repair and maintenance is not.
Capital Gain: A Capital Gain is the gain on the sale of a capital asset like real property. Long term capital gains on assets held for generally at least one year often enjoy lower tax rates than ordinary income.
Capital Reserves: Capital Reserves is the money set aside for unforeseen property expenses that you cannot budget for (e.g. carpet spills, accidents in garages, etc).
Capital Stack: The capital stack is the hierarchy of capital used to fund the purchase of a property. The capital sources at the bottom of the stack are the most secure and will be paid first from the property income or sale proceeds and have foreclosure priority. The capital sources at the top of the stack have the least secure position because they get paid last and usually have no foreclosure priority. Because they are relatively low risk, the lower sources in the stack will provide lower yields than those higher in the stack. Usually, the senior debt is at the bottom of the stack and commonly accounts for more than half of the stack. The next level up will be junior debt, if it is used. Then, the mezzanine investments are in the middle. The penultimate level is preferred equity, and the top level is common or sponsor equity. It is important to note that capital stacks can utilize every source noted above, combinations of sources or a little as one source (i.e. 100% equity).
Cash Flow: Cash Flow is the cash generated by an investment after all payments have been made that are necessary to sustain the investment; it equals the income available to the owner after the payment of all operating expenses, but before depreciation and tax.
Cash-On-Cash Return: The cash on cash return of an investment is the annual cash flow from the investment divided by the cash invested. It is only one of many metrics used to evaluate a real estate investment. Read more
Central Business District: A Central Business District is the center of a ‘downtown’ area within a city. It is the core of an urban area where generally there is the greatest concentration of administrative and financial offices, retail establishments, entertainment facilities and hotels. In the United States, the CBD is the area that historically was the center of a town or city for business and shopping and was the area of highest land values, i.e. the area where economic activity is at its highest, creating the greatest amount of competition for property.
Certificate of Occupancy: A Certificate of Occupancy is a document presented by a local government agency or building department certifying that a building and/or the leased premises (tenant’s space), has been satisfactorily inspected and is/are in a condition suitable for occupancy.
Class A Property: A Class A Property is a p roperty with buildings of the highest quality in terms of location, design, building standards, efficiency and definitive market presence. Premier businesses compete with each other to lease this property thereby driving rents far above average for the area. Property that falls short of this standard may be classified as Class B or Class C as the particular attributes merit.
Class-A, Class-B, Class-C: The class of a building describes the level of desirability of the building within its market area. Class-A buildings are the newest, most sought-after spaces and have the best qualities that tenants would want, such as access, amenities, and finishes. Class-A buildings also command the highest rents in the market area. Class-B buildings have moderate finishes and command moderate rents in the market area. Class-C buildings are the oldest and have the lowest level of finishes and command the lowest rents in the market area.
Closed-End Fund: In real estate private equity funds, closed-end funds have a finite investment horizon. In some instances, the investment time-frame may be extended to accommodate market conditions.
Closing Costs: Closing Costs refers to the money expended by a party in completing a real estate transaction above and beyond the purchase price, including: legal fees, taxes, mortgage application charges, interest adjustments, registration fees, appraisal fees, etc.
Commercial Mortgage Backed Securities (CMBS): Commercial mortgages that are originated, pooled and tranched for sale as bonds in the secondary market. CMBS creates liquidity for originators and investors by creating heterogeneous real estate debt securities.
Commercial Property: A Commercial Property is a property designed for uses other than personal residential purposes. Commercial property includes retail shopping centers, multi-family apartment buildings, office buildings, industrial buildings, and hotels and motels. Read more
Common Area Maintenance: Common area maintenance (CAM) charges are fees charged by a landlord to a tenant for maintaining the common areas of a building not rented by tenants. Usually, tenants divide a full year’s CAM charges based on pro rata shares of rented square feet of building space.
Comparables (Comps): Comparables are the lease rates and terms, or sale rates and terms, of properties similar in size, construction quality, age, use, and typically located within the same sub-market and used as comparison properties to determine the fair market lease rate, or sale price, for another property with similar characteristics.
Comparative or Competitive Market Analysis: A Competitive Market Analysis is an estimate of the value of a property using some indicators taken from sales of comparable properties (such as price per square foot). These value estimates, similar to a broker’s price opinion of value, are not appraisals and do not meet the standards of appraisal as defined by regulatory bodies.
Concessions: Concessions are cash or cash equivalents expended by the landlord in the form of rental abatement, additional tenant finish allowance, or other compensation expended to influence or persuade the tenant to sign a lease.
Consumer Price Index (CPI): The Consumer Price Index is a measurement of inflation in relation to the change in price of a fixed market basket of goods and services purchased by a specified population during a “base” period. In real estate, this is commonly used to increase the base rental rate periodically as a means of protecting the landlord’s rental stream against inflation.
Contiguous Space: Contiguous Space is either multiple suites/spaces within the same building and on the same floor which can be combined and rented to a single tenant, or a block of space located on multiple adjoining floors in a building.
Conveyance: Conveyance most commonly refers to the transfer of title to property between parties by deed. The term may also include most of the instruments by which an interest in real estate is created, mortgaged or assigned.
Core: A core investment strategy is one where the investor targets low-risk, stable properties that are usually located in primary markets. This strategy poses the lowest risk and provides the lowest returns to the investor. Contrast this strategy with core-plus, opportunistic, and value-added.
Core Factor: The Core Factor is the percentage of Net Rentable Square Feet devoted to the building’s common areas (lobbies, rest rooms, corridors, etc.)
Core-Plus: A core-plus investment strategy is one where the investor is willing to assume more risk than a Core investment strategy in exchange for higher returns. Core-plus investment strategies often involve acquiring stabilized Class B assets in core to near-core locations. This strategy poses moderate risk to the investor. Compare this strategy to core, value-added, and opportunistic investing.
Cost Approach The Cost Approach is a method of appraising real property whereby the replacement cost of a structure is calculated using current costs of construction.
Coupon: The coupon is a somewhat antiquated term for the interest rate paid on a debt instrument.
Covenant: A Covenant is a written agreement inserted into deeds or other legal instruments stipulating performance or non-performance of certain acts or, uses or non-use of a property and/or land.
Credit Tenant: A credit tenant is a tenant that has the size and creditworthiness to be rated. In certain instances, developers will pledge the rents from a credit tenant as security for a loan.
Crowdfunding: Crowdfunding is a new tool for raising money for businesses and an easier way to access such ventures for investors. It utilizes social media outlets like Facebook, Twitter and LinkedIn to reach an audience of potential investors. The idea behind crowdfunding is that many people are willing to invest a small amount, and when they do, large sums of money can be raised quite quickly. It opens doors for businesses to investors they could never reach otherwise. Read more
Debt Instrument: A debt instrument is a document that evidences an enforceable promise to repay money created by contract.
Debt Service Coverage Ratio: The debt coverage ratio (DSCR) is the ratio of the net operating income of a property to the annual debt service (ie – principal and interest). A DSCR of 1.0 means that the net operating income equals the loan payments. Generally, banks may target a specific DSCR to size a loan. Sometimes borrowers will be required to maintain a certain DSCR while repaying the loan or face penalties or the possibility of default.
Default: Default is the failure to perform a contract duty. There are generally two types of default: monetary and non-monetary. Monetary default is simply the failure to pay money by the time it is due. Non-monetary default, then, is the failure to perform any contract duty other than payment of money. For instance, making loan payments on time is a monetary default, but failing to maintain a specified debt service coverage ratio is a non-monetary default.
Discount Rate: The discount rate is the rate applied to future cash flows to determine their present value, or, in other words, what they are worth today. The discount rate used by firms will vary and will take into account inflation and risk.
Distribution Waterfall: Also known simply as a Waterfall, a distribution waterfall prescribes the order and amounts of cash flow distributions in a private equity investment. In the commercial reaI estate industry, waterfalls are typically used to define the hierarchy and percentage splits between a sponsor (or general partner) and passive investors (or limited partners). It may specify, for example, that an investor will receive a return of capital on his or her initial investment plus a preferred return before the general partner can participate in the profits. Waterfalls also typically allow for disproportionate sharing of profits between a General Partner and Limited Partners once performance benchmarks are achieved. Waterfalls are often used to mitigate investor risk and align general partner and limited partner incentives.
Due Diligence: Due diligence refers to the steps taken to vet a property, investment, organization, or individual to reduce risk and avoid legal liability.
Effective Gross Income: The effective gross income of a property is the gross potential income minus projected vacancy and collection losses.
Equity: Equity is ownership of a share of a business entity. A characteristic of equity ownership is that the owner shares in the potential profits and losses of the business. In other words, an equity investor has a meaningful stake in the success or failure of a business, while a lender to the partnership does not.
Full-Service Gross Lease: A full-service gross lease is one where the landlord bundles taxes, insurance, CAM charges, utilities, and janitorial services into the base rent. The base rent may increase as costs of the services to the landlord increases. Compare this type of lease to a triple net lease.
Gateway Market: Gateway markets are metro regions that are global competitors for investment and business interest. While gateway markets are often also regarded as primary markets, it is not necessarily the case (e.g. Houston).
General Partner: A general partner is a member of a partnership who may have full managerial and voting powers. Usually, a general partner is actively engaged in the partnership business, shares in profits and losses, and may be liable for malfeasance. Compare this type of partner with the limited partner.
Gross Potential Income: The gross potential income of a property is all income that could be realized from a property in a given year. This includes the total rents that could be collected if all units were rented for the entire duration as well as fees.
Illiquid: An investment is illiquid when it is not easily converted to cash. Usually, real estate investments are illiquid. Stock traded on a public exchange has high liquidity.
Institutional Investor: An institutional investor is an large organization such as a pension fund, private equity fund or investment bank that trades securities in large volume or dollar amounts. An institutional investor typically investors on behalf of other individuals or organizations.
Internal Rate of Return (IRR): The IRR of a real estate investment is the discount rate at which the net present value of the future cash flows equals the initial investment. The IRR is one of the metrics used to evaluate an investment relative to other investment options. All else being equal, a project with a higher IRR than that of another project is typically considered to be the superior investment option.
Investment Property: Investment property is real estate property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property or both. An investment property can be a long-term endeavor or an intended short-term investment such as in the case of flipping, where real estate is bought, remodeled or renovated, and sold at a profit. Read more
Junior Debt: Junior debt is debt that has lower lien priority than senior debt. If the property is foreclosed upon and sold by the lender, the senior lender will be receive proceeds from the sale first. Then, any leftover proceeds will go to the junior lender until it is fully repaid. The senior debt usually will have a lower interest rate because it has seniority over the junior debt and thus is considered relatively more secure than the junior debt.
K-1: The K-1 is an IRS form used to report income or losses received from a business entity that uses pass-through taxation.
Leverage: Leverage is the technique of using debt to increase returns on an investment. By reducing the size of the equity investment, the size of profits relative to investment will increase. Therefore, the benefit of a highly leveraged investment is that it will have a high rate of return, but a drawback is that it will be riskier because there is a greater chance of losing the entire investment if income is not as high as expected.
Leveraged IRR: The leveraged IRR is the internal rate of return of a project applied only to the equity portion of projects that are leveraged with debt.
Limited Partner: A limited partner is a member of a partnership who has limited managerial and voting powers. Usually, a limited partner is a passive investor who shares in partnership gains and losses but is shielded from other forms of liability. Compare this type of partner to a general partner.
Liquidity: Liquidity refers to the ease and speed by which investments can be converted into cash.
Market Leader: A market leader is the entity with the greatest share of sales or profitability in any given market.
Mezzanine Debt: Mezzanine debt is a loan secured by equity interests and subordinate to a senior loan but has payment priority over equity interests. Since the mezzanine loan is subordinate to the senior lender, the mezzanine loan is less likely to be repaid upon a foreclosure than the senior loan. The higher interest rate on the mezzanine loan reflects this risk.
Net Operating Income: The net operating income (NOI) of a property is the effective gross income minus operating expenses (ie – utility costs, repairs, management fees). The net operating income is one of the primary metrics used to value income-producing property.
Net Present Value: Net present value (NPV) is the current value of future cash flows considering the time value of money. The concept is rooted in the notion that a dollar in the future is not worth as much as a dollar today. The NPV is a way of applying time value to money at a given discount rate.
Opportunistic: The unifying principle of an opportunistic investing strategy is that the investor is willing to take entrepreneurial risk to achieve out-sized returns. Opportunistic real estate investment strategies sit at the highest end of the risk spectrum. From a structural standpoint, they typically begin with accepting risk at the highest level of the capital stack. Addition, elements of risk in the investment strategy may be associated with the business plan (e.g. ground up development and adaptive re-use) may reside in the location (e.g. emerging markets) or the asset itself (distressed or foreclosed scenarios). Contrast this strategy with core, core-plus, and value-added.
Pari Passu: Pari passu, translated as “equal footing,” means that two investors have the same terms. For instance, if a sponsor is pari passu with the investors, then both the sponsor and the investors will receive the same percentage returns and share the same risk of loss to their investments.
Permanent Financing: Permanent financing, or a permanent loan, is the long-term loan that a sponsor obtains when a property has stabilized and that takes out the bridge loan.
Phase I: A Phase I Environmental Site Assessment (Phase I) is a due diligence document provided by a qualified environmental professional that opines whether environmental contamination is likely to exist at a property. The Phase I is used to avoid liability for environmental contamination that may arise under federal law.
Phase II: The Phase II Environmental Site Assessment (Phase II) is a due diligence document provided by a qualified environmental professional in the case where a Phase I recommends further investigation or identifies possible environmental contamination. The Phase II will be a more intrusive investigation to determine the manner and extent of environmental contamination, and it will help to determine the extent of remediation that would be required for the property.
Preferred Equity: A class of equity that has a higher claim on the assets and earnings than common equity. Preferred equity sits below common equity in the capital stack and is insulated by it from first dollar losses. Preferred equity also generally receives priority in cash flow distributions, in exchange, usually accepts reduced voting rights and lower targeted returns in comparison to common equity.
Preferred Return: A preferred return is the right to receive distributions from cash flows before other investors up to a pre-determined rate of return.
Primary Markets: As it pertains to real estate, primary markets are metro regions that have high property transaction volume, larger populations, and high asset liquidity. Generally, the markets grouped in this category by industry professionals are New York, San Francisco, Los Angeles, Washington DC, and Chicago.
Primary Market Area: The primary market area (PMA) for a building is the geographical region from which demand for its use will drawn. For instance, the PMA for a retail building will be the area from which the building will draw shoppers. For an office building, the PMA will be the area from which the offices will draw employers and employees.
Private Placement Memorandum: The private placement memorandum is a document that provides relevant disclosures about the offering and is designed to satisfy the requirements of Reg. D. It contains descriptions of the structure of the offeror, the projected distributions, manager compensation, the risks to the investor, potential conflicts of interest, and anything else that a typical investor might deem material to making an investment decision.
Pro Forma: The pro forma is a document that forecasts the financial performance of a property. Generally, a pro forma for a real estate acquisition will contain a breakdown of acquisition costs, a detailed analysis of projected income and operating expenses, and an analysis of cost items that fall below net operating income (e.g. debt financing, asset management fees and a profits participation waterfall) that culminates in a projected rate of return before taxes.
Promote: A promote is form of profit-sharing where a general partner or sponsor receives a disproportionate share of profits in a limited partnership in exchange for creating value. The promote is usually paid in over and above distributions attributable to the general partner’s or sponsor’s capital contribution and is usually subordinated to limited partners’ or investors’ return of capital and preferred returns. The promote is sometimes also referred to as “carried interest”.
Property Condition Assessment: The property condition assessment (PCA) is a due diligence document generated by a third-party inspection agency that details the physical condition of the improvements on a property. The PCA will apprise the prospective investor of possible capital improvements that could be necessary.
Property Management: Property management is the administration of residential, commercial and industrial real estate including apartments, detached houses, condominium units and shopping centers. Property management typically involves the managing of property that is owned by another party or entity. The property manager acts on behalf of the owner to preserve the value of the property while generating income. Read more
Rate of Return: A rate of return is the gain or loss on an investment over a specified time period, expressed as a percentage of the investment’s cost. Gains on investments are defined as income received plus any capital gains realized on the sale of the investment. Rate of return can also be defined as the net amount of discounted cash flows received on an investment. Read more
Real Estate Investment Trust – REIT: A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges like a stock. REITs provide investors with an extremely liquid stake in real estate. They receive special tax considerations and typically offer high dividend yields. Read more
Recapitalization is a type of corporate reorganization involving substantial change in a company’s capital structure. Recapitalization may be motivated by a number of reasons. Usually, the large part of equity is replaced with debt or vice versa.
Recognized Environmental Condition: Recognized environmental condition (REC) is a term used in Phase I due diligence that means the presence of likely presence of a hazardous substance or petroleum product at a property that has been released or poses a threat of being released into the environment.
Regulation A+ (or Reg A+): Regulation A+ contains rules providing exemptions from the registration requirements, allowing some companies to use equity crowdfunding to offer and sell their securities without having to register the securities with the SEC. Read more
Regulation D: Regulation D is a federal regulation that provides exceptions to the registration requirements of the Securities Act of 1933 and describes the processes and limitations under which unregistered offerings may be made. CrowdStreet and many platforms advertise investments pursuant to the exceptions provided in Regulation D. Read more
Return on Equity: The return on equity is similar to the cash-on-cash return but with equity appreciation (or depreciation) factored in. The return on equity is calculated as the net income returned as a percentage of the current value of the equity. The value of the equity is an estimation of the building’s current value minus the amount required to pay off the debt (balance + prepayment premium + sales costs).
Rollover Investor: A rollover investor is an investor who has made at least one prior investment with the deal sponsor. The rollover investor does not need to verify accreditation in order to invest with the same sponsor.
Rule 506: A company that satisfies the following standards may qualify for an exemption under this rule: Can raise an unlimited amount of capital; Seller must be available to answer questions by prospective purchasers; Financial statement requirements as for Rule 505; and Purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering. Read more
Secondary Markets: As it pertains to real estate, secondary markets are metro regions that have moderate property transaction volume and asset liquidity. Generally, the markets grouped in this category by industry professionals are metros such as Atlanta, Dallas, Denver, Las Vegas, Portland, Seattle, Nashville, and similarly situated cities. Secondary markets can provide opportunity for higher yields because property values are lower and less stable in these areas than in primary markets.
In a finance context, the term secondary market refers to the market where investors purchase securities from each other rather than from the issuer. A stock exchange is an example of a secondary market.
Security: A security is any contract or scheme where a person invests money in a common enterprise with the expectation of profit from the efforts of the issuer, promoter, or third party.
Securities Act of 1933: The Securities Act of 1933 is a federal statute that requires registration of all securities unless the securities or the methods by which they are offered fall under specified exemptions. Violations of the Securities Act of 1933 may result in criminal and civil liability. The primary exemptions upon which crowdfunding platforms rely are found in Reg. D.
Senior Debt: Senior debt is debt that has payment and foreclosure priority over junior debt., meaning that, in the event of a borrower default,, the senior lender will be paid first. Typically, proceeds from the sale that exceed the senior debt will then go to the junior lender until it is fully repaid. Senior debt usually has a lower interest rate because it is considered more secure than the junior debt in the capital stack.
Special Purpose Entity: A special purpose entity (SPE) is a legal entity, such as an LLC, that serves a narrow purpose. In real estate, sponsors usually set up SPEs to acquire individual assets in an effort to isolate risk and meet lender requirements.
Stabilization: Stabilization refers to the period after a project reaches a target occupancy and rents from the project become relatively predictable. Once a project is stabilized, it is easier to obtain a permanent loan with a lower interest rate and more flexible terms than a bridge loan.
Subordination: Subordination is the process by which a lienholder with priority allows a lower-priority lien holder to have greater priority.
Subscription Agreement: The subscription agreement is a contract in which the investor, or subscriber, agrees to purchase a membership interest of an entity. The subscription agreement will provide the purchase price, the fraction of ownership, and a summary of representations and warranties of the subscriber and issuer.
Takeout Financing: Takeout financing, or a takeout loan, is a loan that a property owner obtains to replace a property’s current financing e.g. a bridge loan. A takeout loan usually possesses a longer term than the financing it is “taking out” and is often what becomes the permanent financing for the property but is not necessarily so (e.g. a second bridge loan).
Tenant Improvements: Tenant improvements are the costs incurred preparing a building space to accommodate a particular tenant. Generally, these costs are calculated after NOI and do not factor into the cap rate to determine building value.
Tertiary Markets: Tertiary markets are metro areas that are not large enough to be classified as primary or secondary markets. In certain cases they may also have low property transaction volume and low asset liquidity when compared to secondary and primary markets. Tertiary markets can provide opportunities for high yields but sometimes at the expense of higher levels of liquidity risk than primary or secondary markets and lower levels of asset appreciation.
The JOBS Act: The Jumpstart Our Business Startups Act, or JOBS Act, was signed into law by President Obama on April 5 of 2012. The legislation had previously passed Congress the week prior to the signing with a 73-26 Senate vote and a 380-41 House vote approving the measure. While having many different functions, the one that has captured the most attention is the area surrounding Crowdfunding.
The Jobs Act requires the Securities and Exchange Commission to adopt rules to implement a new exemption that will allow for crowdfunding. The initial time frame was for 270 days for review. Issuers that generate any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws until such date as the regulatory groups have deemed it appropriate. Read more
Triple Net Lease: A triple net lease, sometimes abbreviated as NNN, requires the tenant to pay for net property taxes on the building, net building insurance and net common area maintenance charges. Hence, the term triple net. The triple net lease is most commonly used in commercial leases rather than residential leases.
Unleveraged IRR: The unleveraged IRR is the internal rate of return of a project applied to the entire capitalization of the project (i.e. it assumes the project has no debt). Unleveraged IRR’s are often compared against leveraged IRR’s to determine how debt enhances returns in a given project.
Vacancy Rate: The vacancy rate of a property is the average number of vacant units or square feet of space over a specified period. The vacancy rate is one factor when estimating the future effective gross income of a property given the gross potential income of the property.
Value-Added: Value-added is an investment strategy where the investor makes improvements to a property and/or brings unique operational expertise to a property to increase the net operating income of the property. Because this strategy usually involves properties with existing income, the value-added strategy involves moderate to high risk and moderate to high returns. Contrast this strategy with core, core-plus, and opportunistic.
Yield: Yield is the ratio of estimated income from an investment to the size of the investment. There are multiple forms of calculating yield. One is the cash yield, which is the amount of income expected to be generated over a given period divided by the cash amount invested. Another is the current yield, which is the amount of income expected to be generated over a given period divided by the value of the investment at the end of the period.
Waterfall: Also known as a Distribution Waterfall, it prescribes the order and amounts of cash flow distributions in a private equity investment. In the commercial reaI estate industry, waterfalls are typically used to define the hierarchy and percentage splits between a sponsor (or general partner) and passive investors (or limited partners). It may specify, for example, that an investor will receive a return of capital on his or her initial investment plus a preferred return before the general partner can participate in the profits. Waterfalls also typically allow for disproportionate sharing of profits between a general partner and limited partners once performance benchmarks are achieved. Waterfalls are often used to mitigate investor risk and align general partner and limited partner incentives.