Glossary

Accredited Investor

An investor with a certain level of income or net worth who is thus able to participate in a private placement of securities (such as membership interests in a limited liability company) without being counted toward the maximum number of investors that are otherwise permitted in an offering exempted under Regulation D of the Securities Act of 1933.

Active Income

Active income is income earned as a direct result of a specific effort. In other words, input is correlated to output.

Alternative Investment

An alternative investment refers to any investment which does not qualify as “traditional”. Traditional investments are widely considered to be stocks, bonds and cash.

Amortization

As opposed to an interest-only loan in which each repayment installment consists only of interest payments with a single lump-sum principal repayment at the end of the loan period, each repayment installment of an amortizing loan consists of both principal and interest.

Appraisal

An estimate of value, generally made by a professional appraiser (certified to meet certain education, experience, and knowledge requirements) who uses a systematic approach or process (including the analysis of market data) in order to reach a conclusion.

Appreciation

An increase in value is referred to as “appreciation”.

Basis Point

A basis point (bps) is a unit that is equal to 1/100th of 1%, in other words one basis point is equal to 0.01%, similarly a 1% change is equal to a 100 basis point change.

Capital

Capital is any financial asset or the value of an asset.

Capitalization (Cap) Rate

The capitalization or cap rate measures a property’s yield in a one-year time frame, making it easy to compare one property’s cash flow to another on an equal basis – without taking into account any debt on the asset.  It is calculated by dividing the property’s net operating income by its purchase price (or value).

Cash-on-Cash Return

Cash-on-cash return is one of the most widely used metrics in commercial real estate. As the name implies, this metric is calculated by dividing annual before tax cash-flow by the total cash invested in a project.

Commercial Property

Property designed for uses other than personal residential purposes, often times related to business activity. Commercial property includes (among other things) retail shopping centers, multi-family apartment buildings, office buildings, hotels and motels, and self-storage facilities.

Common Equity

Common Equity means that investors have one-to-one (or equal) participation in each dollar invested and any potential profits or losses.

Crowdfunding

Funding a product, idea, or venture using small amounts of money raised from the “crowd.”

DRIP

A Dividend Reinvestment Program “DRIP” allows investors to automatically reinvest the dividends they earn from their investments directly back into offerings on the platform. Investors have the ability to choose the offerings into which they would like the dividends reinvested.

Development

Development is the process of building or adding to existing structures to increase the value of a property.

Distributions

Payments made to investors periodically, typically over the course a calendar year, either from profits or sale proceeds.

Debt

An amount of money (obligation) owed by one party (the debtor) to another party (the creditor).

Equity

As it relates to real estate, equity can be measured as the amount of capital a sponsor (property owner/developer) puts into a property.

Free Cash Flow (FCF)

Free cash flow is a measure of a property’s ability to generate cash after setting aside reserves for capital expenditures such as future development, tenant improvements, and leasing commissions.

Hard Asset

A tangible object of worth that is owned by a business or individual.

Illiquid Asset

An asset that is not readily convertible to cash.  Real estate is generally considered an illiquid asset because it may take an extended period of time to accomplish a sale, depending on market circumstances.

Inflation

A loss in the purchasing power of money; an increase in the general price level.  Generally measured by the Consumer Price Index (CPI), a statistic published by the U.S. Bureau of Labor Statistics.

Investment Property

An investment property is a real estate asset purchased with the sole purpose of earning income. Income from an investment property can be generated through leasing space within an asset or an eventual sale of the asset.

Internal Rate of Return (IRR)

In real estate, the Internal Rate of Return (IRR) is a metric used to evaluate the profitability of an investment over its lifetime and is represented as the average annual return percentage. The IRR of an investment can be calculated forward-looking to estimate potential future returns or backward looking to measure the performance of a completed investment.

Jumpstart Our Business Startups (JOBS) Act

The JOBS Act was a law passed in 2012 in the United States that eased regulations related to funding small businesses. Intended to increase American job creation and foster economic growth, the JOBS Act aims to provide easier access to public capital markets and small, growing companies.

Leverage

The use of borrowed money — debt — to complete an investment.  Leverage can increase the size of the property a purchaser is able to afford, or reduce the investment required for a similar sized property.

Liquidity Premium

The liquidity premium represents the incrementally higher price an investor is willing to pay for a more liquid asset or security, all other factors held equal.

Liquidity

Liquidity refers to the ease with which an asset can be purchased or sold. Marketable securities that are traded in high volume tend to be the most liquid, or easy to trade without creating wild fluctuations in price.

Loan-to-Value Ratio (LTV)

A risk assessment ratio that lenders perform when considering a real estate loan.

Loan-to-Cost Ratio (LTC)

The Loan-to-Cost Ratio is the ratio of a loan used to help finance a project compared to the total cost.

Mezzanine Debt

Mezzanine Debt is generally a loan that is secured by a property and senior to any equity, but junior to the senior loan on the property.

Net Asset Value (NAV)

The Net Asset Value (NAV) per share represents the estimated value of a single share based on a variety of factors.

Net Operating Income (NOI)

In real estate, the net operating income, or NOI, represents the annual revenue (or income) generated by an investment property after annual operating expenses.

Passive Income

Passive income (also known as residual or recurring income) is commonly used to refer to income that continues to be earned even after the work is done.

Private Equity Fund

A private equity (PE) fund is a collective investment model where money from separate investors is pooled together into a single fund and then used to make investments, most often in various illiquid equity and debt assets.

Preferred Return

A Preferred Return is paid to investors before a sponsor receives any share of the cash flow.

Pro-Forma

A financial model often used in real estate to predict future cash flows and total investment returns.

Preferred Equity

Preferred Equity is an equity investment in the property-owning entity wherein the Preferred Equity investor is senior to the Common Equity. It is not secured by the property but rather by an interest in the entity investing in (or owning) the property.

Real Estate Investment Trust (REIT)

A Real Estate Investment Trust, or REIT, is a real estate mutual fund, allowed by income tax laws to avoid the corporate income tax if it limits its investments to real estate or mortgages and meets certain other requirements such as annually distributing 90% or more of its income to shareholders.  Some of these restrictions can limit the maneuverability of REITs, which also tend to focus only on “core” properties with limited capital appreciation potential.

Recurring Income

Also known as residual or passive income, recurring income is earned by creating or acquiring an asset that continues to pay of profits regardless of if there is still active work being done to the asset.

Residual Income

The term residual income (also known as passive or recurring income) is commonly used to refer to income that continues to be earned even after the work is done.

Regulation D

Regulation D permits raises of unlimited amounts from accredited investors without registering a public sale through the SEC, as it’s assumed that accredited investors are financially able to bear the burden of investment decisions without a review by the SEC.

Regulation A+

Regulation A+ is the SEC’s proposed revision of the current Regulation A, which was mandated by the JOBS Act in 2012.

Redemption

In the event of back taxes or unpaid liens, a borrower who pays off those debts may reclaim their property, preventing foreclosure or the auctioning of their property.

Real Estate

Real estate includes a parcel of land and any of its permanent structures (buildings, parking lots, etc.).

An individual or firm in charge of finding, acquiring, and managing a piece of real estate.

Senior Debt

Senior debt generally secured at the “base” of the capital stack. Because it sits at the base of the capital stack, it must be repaid first.

Term

In real estate, the term refers to the lifespan of a given asset or liability. At the end of the term, the loan is or investment is repaid.

The Capital Stack

The Capital Stack orders the seniority of claims to the collateral and cash waterfall of an entity.

Underwriting

Underwriting is the process by which real estate investments are evaluated to determine their viability.

Unaccredited Investor

An investor who does not meet the wealth requirements of an accredited investor set forth by the SEC.

Yield

In the context of commercial real estate, yield refers to the annual cash return on the investment, expressed as a percentage of the investment’s initial cost, or less frequently, its estimated current value.

 


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