RE/DEV Glossary

RE/DEV Glossary2019-01-30T03:21:33+00:00
    • Abatement

    A reduction in amount or intensity. Usually applies to decreases in taxes or rent.

    • Absorption Rate

    Absorption rate is the rate at which available homes are sold in a specific real estate market during a given time. The figure indicates how many months it will take to exhaust the current supply of homes on the market.

    • Acceleration Clause

    A clause in a contract that allows a lender to demand full repayment or partial repayment of an outstanding loan if certain requirements are not met by the borrower.

    • Accredited Investor

    An accredited investor is a term used by the U.S. Securities and Exchange Commission (SEC) under Rule 501 of Regulation D.

    • Accrue

    To accumulate or increase; generally, refers to payments owed but which have not yet been paid.

    • Active Income

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

    • Adjustable Rate Mortgage (ARM)

    A mortgage (or deed of trust) loan whose interest rate fluctuates along with another rate. The mortgage rate is usually tied (indexed) to a commonly followed rate such as the prime rate or LIBOR, plus a certain spread, or margin, such as 1 or 2%.

    • Adjusted Tax Basis

    The Adjusted Tax Basis is the proportionate value of an asset or security after adjusting for any deductions taken on, or capital improvements to the asset or security.

    • Alpha

    In investing, Alpha is a measure of the return due to active management, rather than market exposure, or beta. It is often used to refer to the value added by a manager’s skill. This definition may be extended to private real estate transactions and management.

    • 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.

    • Anchor Tenant

    The main tenant, usually in a shopping center.

    • Ancillary Tenant

    A shopping center tenant that occupies less space and is of lesser importance in generating shopping center traffic than an anchor tenant. Ancillary tenants typically pay higher rents relative to anchor tenants.

    • Annual Percentage Return (APR)

    An annual percentage rate (APR) is the annual rate charged for borrowing or earned through an investment and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction but does not take compounding into account.

    • 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) to reach a conclusion. An appraisal of a property might be made not only to determine a reasonable offering price in a sale, but also to determine an appropriate loan size of a loan, to allocate a purchase price between land and building (improvements), to determine an appropriate amount of hazard insurance, or for estate tax purposes at the owner’s death.

    • Appreciation

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

    • As Is

    Without Guarantees as to condition, as in a sale. May signal a problem in condition or may merely indicate that the seller is not able to attest as to the property’s condition (in a sheriff’s sale following a foreclosure). Premises must be accepted by a buyer or tenant as they are, including physical defects (other than hidden — or latent — defects).

    • Assumable Loan

    A mortgage loan that allows a new purchaser to undertake the obligation of the loan with no change in loan terms. This is generally true of loans without due-on-sale clauses. Most FHA and VA mortgages are assumable.

    • Balance

    The amount left over after subtracting the amount owed (on a loan) or the amount remaining already paid (in an account).

    • Balloon Payment

    The final payment on a loan, when that payment is greater than the preceding installment payments and repays the loan in full.

    • 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.

    • Basis (Tax)

    The point from which gains, losses, and depreciation deductions are computed. Generally, the cost, or purchase price, of an asset.

    • Beta

    In investing, Beta is a measure of the sensitivity of a security or portfolio to broad market movements. The beta of the market index is 1.0. A security with a beta of greater than 1.0 tends to rise or fall more than the market; a security with a beta of less than 1.0 tends to rise or fall less than the market.

    • Blind Pool

    An investment program in which funds are invested into an entity without investors knowing which properties will be purchased.

    • Bridge Loan

    Financing between the termination of one loan and the beginning of another loan, also sometimes referred to as a “gap” or “swing” loan.

    • Broker

    A state-licensed agent who, for a fee, acts for property owners in real estate transactions, within the scope of that state’s law.

    • Broker Price Opinion

    A BPO, sometimes referred to as a broker’s opinion of value, is an analysis provided by a real estate broker to assist a buyer or seller in making decisions about the listing price of real estate or a suitable bid for purchase; it’s similar, though less comprehensive, to a comparative market analysis. A fee may be charged for this service, but it may not be represented as an appraisal. While some lenders require an appraisal for mortgage lending purposes, others (particularly in the asset-based lending sector) may be content with a broker’s price opinion.

    • Buy and Hold

    Refers to longer-term equity investing, meaning that investors will take an ownership stake in a property (as opposed to be a lender or other lienholder) and hold that position for some period of years while the property is managed toward improved performance and returns. “Buy and hold” investments can be contrasted to “fix and flip” purchases, where investors seek only to make some basic repairs or improvements and then to sell the property as quickly as possible.

    • Buy-Sell Clause

    An agreement among partners, LLC members, or stockholders pursuant to which some partners / members / stockholders agree to buy the interests of others, upon some event.

    • Capital

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

    • Capital Gain

    A capital gain is any increase in value of an asset (such as stocks or real estate) that exceeds the purchase price. A capital gain is unrealized until the asset is sold.

    • Capital Gains Taxes

    A capital gains tax is a tax applied to realized capital gains upon the sale of an asset, such as stocks or real estate.

    • Capital Stack

    The capital stack refers to the legal organization of the capital invested in a project. The stack contains the most risk at the top, traveling down the stack to the position with the least risk. Higher positions in the stack expect higher returns for their capital because of the higher risk. Lenders and equity stakeholders.

    • 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 considering any debt on the asset.

    • 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 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.

    • CMBS (Commercial Mortgage Backed Security)

    A commercial mortgage-backed security (CMBS for short) is a security secured by a mortgage on a commercial property. CMBSs can be comprised of underlying loans on various kinds of properties; from multifamily to factories to hotels. Commercial mortgage backed securities are complex instruments that involve numerous market participants, and are typically available only to ultra-high-net-worth investors Period.

    • Common Equity

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

    • Comparative Market Analysis

    Sometimes called a competitive market analysis, this 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, like a broker’s price opinion, are not appraisals and do not meet the standards of appraisal as defined by regulatory bodies.

    • Compound Interest

    Interest paid on the original principal and on any accumulated (accrued) and unpaid interest.

    • Core

    In real estate, this refers to a property categorization and investment “style,” more specifically to stable income-producing properties with already high occupancy rates, market rate rents, high quality, credit tenants, and very limited deferred maintenance. Investing in “core” properties is considered a conservative investment strategy, the returns for which will generally consist of current income.

    • Core Plus

    A property categorization and investment style in real estate referring to relatively stable income-producing properties that could also use some moderate improvements, such as some limited deferred maintenance, to improve leasing rates or increase below-market rents. Investing in “core plus” properties is considered a moderately conservative investment strategy, riskier than “core” but less so than “value-add.” The returns on these properties are still driven primarily by current income but also include some expected capital appreciation relating to the moderate improvements to be made.

    • Credit Report

    An evaluation of a person’s capacity (or history) of debt repayment. Generally available for individuals from credit repayment histories and similar institutionally reported data. Some people argue that conventional credit reports are too limited in their focus because they do not include payment histories with respect to rents, utilities, and other basic household services.

    • Credit Score

    A number that purports to predict the probability that a person will repay a loan. Generally, the higher the number, the better risk the individual is. The score may determine whether the person gets the loan and how favorable the terms will be. The score is estimated from information contained in the individual’s credit report.

    • Crowdfunding

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

    • Debt

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

    • Debt Service

    The periodic payments required to cover the interest payments — and usually also including a portion of the principal amount — of a loan.

    • Debt Service Coverage Ratio (DSCR)

    The debt service coverage ratio is the ratio of cash available for debt servicing to interest, principal and lease payments. In real estate, DSCR is the primary measure to determine if a property will be able to sustain its debt based on cash flow. Senior loan documents typically impose a minimum DSCR.

    • Deed

    A written document that, when properly signed and delivered, convey title to real property. There are different types of deeds that provide different levels of assurance about the extent of the title being conveyed; some forms of deed guarantee that all aspects of ownership are being conveyed, while others make only limited promises about the ownership rights.

    • Deed of Trust

    A legal instrument used in many states in lieu of a mortgage, where legal title to a property is vested in one or more trustees to secure the repayment of a loan.

    • Default

    Failure to fulfill an obligation or promise, or to perform specific acts.

    • Deficiency

    In mortgage finance, a shortfall of funds recovered through the sale of property securing a foreclosed loan compared to the amount of debt, accrued interest, foreclosure expenses, and damages incurred by the lender.

    • Delinquent

    Past due; having an unpaid amount after the due date and any grace period has passed. Normally delinquency occurs before a default is declared.

    • Demographic

    Pertaining to the characteristics of the population, such as race, sex, age, household size, population growth, and density.

    • Depreciation

    A charge against the value of an asset relating to its estimated wear and obsolescence. The term is most often used to refer to tax code provisions that exclude from taxable income a portion (the depreciable amount) that can be attributed to “wasting assets.” In real estate, buildings and improvements constitute such assets; these things have a finite life, and thus can take a depreciation “deduction” not always available in other investment classes. The value of a property must therefore be allocated between the amount attributable to the building or other “improvements,” and that of the land. Land is deemed to have an infinite life (because it never goes away) and so is not depreciable. A tax depreciation deduction may even be claimed when the property’s value has increased. Depreciation allows an investor to gain a tax deduction without having to make any cash payment. It thus provides an important benefit to real estate investors. It results in an adjusted tax basis for the property; this adjusted basis will result in some additional tax at the time of sale, but the tax will have been deferred and may well be at a lesser rate than would have earlier applied.

    • Depreciation Recapture

    To the extent that an investor’s tax basis in an asset has been adjusted (often because of depreciation), the investor may be required to pay additional tax – depreciation recapture – on the amount of the adjustment. For real estate assets, the rate of tax will depend on whether an accelerated depreciation method had been used or whether offsetting capital expenditures have been made.

    • Development

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

    • Discounted Cash Flow

    A method of investment analysis in which anticipated future cash income from an investment is estimated and converted into a rate of return (generally the internal rate of return, or IRR) based on the time value of money. Alternatively, when a rate of return is specified, a net present value of an investment can be estimated.

    • Distributions

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

    • Distribution Waterfall

    A distribution waterfall is the order in which an investment vehicle makes payment distributions.

    • Due Diligence

    A reasonable effort to obtain accurate and complete information in advance of a major decision; in real estate, this usually refers to the inquiries made in advance of a purchase or investment in a property. Due diligence considers the physical, financial, legal, and social characteristics of a property and its expected investment performance. The underwriting of a loan or investment is a form of due diligence, in the sense that it constitutes a relatively detailed risk assessment of that loan or investment.

    • Encumbrance

    Any right to, or interest in, land that affects its value. Includes outstanding mortgage loans, unpaid taxes, easements, and deed restrictions.

    • Entity

    The legal form under which property is owned.

    • 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.

    • Equity Multiple

    The Equity Multiple of an investment is a ratio used to help understand total cash return over the life of an investment. The ratio is equity to total net profit plus the total equity invested divided by the total equity invested. Equity Multiple is one tool used to evaluate an investment opportunity.

    • Escrow

    An agreement between two or more parties providing that certain instruments or property be placed with a third party for safekeeping, pending the fulfillment or performance of a specified act or condition.

    • Fair Market Value

    The most probable price that a property should bring in a competitive and open market under all conditions needed for a fair sale, if the price is not affected by undue stimulus and that the buyer and seller are each acting prudently and knowledgeably. The fair market value is the theoretical highest price that a buyer would pay, and the lowest price a seller would accept, if both parties were willing — but not compelled — to act.

    • Fico Score

    A measure of borrower credit risk, compiled under a system originated by Fair, Isaac & Co. (i.e. FICO), that is commonly used by mortgage underwriters when originating loans on real estate. The score is based on (among other things) the applicant’s credit history and the frequency with which they use credit. Expressed as a number between 300 and 850, the score determines not only whether a loan may be approved but also what type of terms a lender might offer.

    • First Lien (Mortgage or Deed of Trust)

    A lien (often a deed of trust or a mortgage) that has priority over all other liens. In cases of foreclosure, the first mortgage will be satisfied before other mortgages.

    • Fix and Flip

    A type of business / investment strategy involving the purchase of properties requiring some immediate repairs, which when made will hopefully translate into a more valuable property that can quickly be re-sold at a profit. This strategy can be contrasted to a “buy and hold” approach where the property is held for a longer period.

    • Floor Area Ratio (FAR)

    Floor area ratio (FAR), also known as floor space ratio and floor space index, is a term for the ratio of a building’s total floor area to the size of the lot on which it is built. Higher FARs tend to indicate more dense construction.

    • Foreclosure

    The process by which a lender gains possession of mortgaged land after the borrower has defaulted on a loan. Most states require that some notice be given to a borrower after his missing a required payment before the foreclosure process can begin; during this initial period the owner still has a right to redeem the property, but failing any such redemption, the foreclosure process begins. Statutory foreclosure (such as where deeds of trust are used) can be affected without recourse to courts, although laws still regulate the process. Judicial foreclosure submits the process to court supervision.

    • 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.

    • General Partner

    In a partnership, a partner whose liability is not limited. All partners in an ordinary partnership are general partners, while in a limited partnership most members enjoy limited liability (although one partner must still be a general partner).

    • Green Building

    A building that is built or developed specifically to minimize utility costs or to maximize positive environmental considerations (i.e. to reduce damage to the environment).

    • Gross Amount

    Total before subtractions. When subtractions are taken, the amount is net.

    • Gross Potential Income

    Gross potential income is the income that will be realized if a property is fully occupied and all rents are collected.

    • Ground Lease

    A rental of only the land. When the ground lease predates the mortgage, the ground lease generally has priority (unless it is specifically subordinated).

    • Guaranty

    An assurance provided by one party that another party will perform under a contract.

    • Hard Asset

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

    • Hazardous Substance

    Any of a broad variety of environmental contaminants that are regulated under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA).

    • Hedge Inflation

    An investment that tends to maintain its value over time, even when adjusted for inflation.

    • Hold Period

    The time span of ownership, usually for investment real estate.

    • Holdback (Reserve)

    Money not paid until certain events have occurred, such as a retained amount on a loan involving construction work.

    • 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 to accomplish a sale, depending on market circumstances.

    • Improvements

    Additions to raw land that tend to increase the property’s value; like developments. Improvements include not only buildings but also public enhancements such as streets and sewers.

    • In-Fill Development

    Improvements on land adjacent to and between existing development. A way to accommodate increased population in an area without spreading the outer boundaries of development.

    • Income Property

    Real estate that generates rental income. Multi-family apartment buildings, retail shopping centers, office buildings, industrial properties, resort and recreational properties, self-storage facilities, and hotels are all considered income properties. By comparison, personal residences, schools, churches, parks, and undeveloped land not earning significant agricultural sales or extraction royalties are all not considered income properties.

    • Industrial Property

    Industrial properties include manufacturing facilities, warehouses, distribution centers, and research & development space. Manufacturing and R&D properties tend to be build-to-suit buildings that can be difficult to “re-tenant” without extensive modifications, while warehouses and distribution centers can be more generic buildings. As with office buildings and retail centers, industrial property leases tend to have long terms.

    • 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.

    • Institutional Lender

    Financial intermediaries that invest in loans and other securities on behalf of their depositors or customers.

    • Interest

    1. Cost of the use of money.
    2. The type and extent of ownership.

    • Interest-Only Loan

    A loan in which the interest is payable at regular intervals until the loans maturity, when the full loan balance becomes due. Does not require amortization.

    • Internal Rate of Return (IRR)

    Abbreviated as “IRR,” the internal rate of return is the true annual rate of earnings on an investment, considering the time value of money using discounted cash flow analysis (like the application of compound interest). The formula requires a trial-and-error method for solution. In real estate, the IRR figure is used in buy and hold equity investments to include any profit expected to be gained upon the property’s sale from the price appreciation of the property (as opposed to “cash-on-cash” returns, which reflect only regular cash distributions).

    • Intrastate Crowdfunding

    While the Securities and Exchange Commission regulates public securities on a national level, each state also has its own regulatory entity serving a similar function. Since the passage of the JOBS Act, advocates of equity crowdfunding have moved to legalize intrastate – or in state – crowdfunding.

    • 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.

    • Joint Venture

    An agreement between 2 or more parties that invest in a single business or property.

    • Judicial Foreclosure

    A type of foreclosure where the claim is processed by the state court system; the lender sues on the debt, obtains judgment, and executes the judgment against the property of the mortgagor (borrower). This process is to be contrasted with statutory foreclosure, used in states that allow deeds of trust and where the foreclosure process is handled outside of the court system.

    • 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.

    • Letter of Intent (LOI)

    The expression of a desire to enter into a contract without doing so.

    • 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. The lender will, however, typically require a lien on the property to assure that the borrowed funds are repaid, so a purchaser has increased his risk in this respect (the lender must be repaid before the purchaser can fully realize his profits). Moderately leveraged properties (where the debt service is not too high) can provide greater returns to equity investors, thus maximizing investment profits.

    • Lien

    A charge against property making it security for the payment of a debt, judgment, mortgage or taxes; it is a type of encumbrance.

    • Limited Liability

    The restriction of one’s potential losses to the amount invested; the absence of personal liability.

    • Limited Liability Company

    A legal organizational form offering limited liability protection for the owners and which may be treated as a partnership for federal income tax purposes. An LLC is often used to own real estate because it provides many of the legal advantages of a corporation along with the tax advantages of a partnership.

    • Limited Partnership

    A partnership structure where some partners are passive investors whose liability is limited to the amounts invested, but where at least one partner is a general partner whose liability is not so limited.

    • 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.

    • Linear Income

    Linear income is earned in direct relation to the number of hours you work.

    • 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.

    • Loan-to-Value Ratio (LTV)

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

    • LP Investor

    In this term, “LP” stands for “limited partner”. As you might guess, LP investors in equity investments assume both a limited share of risk and, consequently, a limited share of potential profits as compared with the GP investor(s) (GP investor is typically synonymous with “the Sponsor” or the “managing partner”). LP investors are not liable.

    • Market Area

    A geographic region from which one can expect the primary demand to come for a property (or any product or service provided at a fixed location). Real estate companies often refer to a submarket area, meaning a very focused region, perhaps a specific suburban area, within a larger metropolitan area.

    • Maturity

    The due date of a loan.

    • Metropolitan Statistical Area

    A geographical region with a relatively high population density at its core and close economic ties throughout the area. MSAs are defined by the Office of Management and Budget (OMB) and used by the Census Bureau and other federal government agencies for statistical purposes.

    • Mezzanine Financing

    A loan that is of lesser priority than a first mortgage or deed of trust. It may also have loans subordinate to it (hence “mezzanine”) generally has the same priority as if it were called a second mortgage.

    • Mezzanine Debt vs. Preferred Equity

    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. Preferred Equity, on the other hand, is an equity investment in the property-owning entity. It is not secured by the property but rather by an interest in the entity investing in (or owning) the property.

    • Mobile Home Park

    A subdivision of plots designed for the siting of mobile homes (manufactured dwellings designed to be transported to a site and semi-permanently attached). Plots in a mobile home park are generally leased to mobile home owners and include utilities, parking space, and access to utility roads.

    • Mortgage

    A written legal instrument that creates a lien upon real estate as security for the payment of a specified debt. The mortgage is usually a separate document from the promissory note — the note evidences the debt obligation, while the mortgage pledges the designated property as security for the debt. Mortgage law in the U.S. has traditionally been within the jurisdiction of the various states; thus, they are primarily governed by state laws, which can vary.

    • Multi-Family Housing

    Multi-family buildings include any building that includes more than a single-family residence, but in common usage the term generally refers to apartment buildings of more than four units. Multi-family residential buildings vary by location (urban or suburban) and size of structure (high-rise or garden apartments). Economic drivers of apartment buildings include demographic trends, home ownership and household formation rates, and local employment growth. Leases are typically short-term (one to two years) and adjust quickly to market conditions. Larger apartment buildings are only minimally affected by any single vacancy. Multi-family properties are generally considered to be one of the more defensive investment types within commercial real estate, though they are still subject to competitive pressures from newer construction.

    • Market Area

    A geographic region from which one can expect the primary demand to come for a property (or any product or service provided at a fixed location). Real estate companies often refer to a submarket area, meaning a very focused region, perhaps a specific suburban area, within a larger metropolitan area.

    • Maturity

    The due date of a loan.

    • Metropolitan Statistical Area

    A geographical region with a relatively high population density at its core and close economic ties throughout the area. MSAs are defined by the Office of Management and Budget (OMB) and used by the Census Bureau and other federal government agencies for statistical purposes.

    • Mezzanine Financing

    A loan that is of lesser priority than a first mortgage or deed of trust. It may also have loans subordinate to it (hence “mezzanine”) generally has the same priority as if it were called a second mortgage.

    • Mezzanine Debt vs. Preferred Equity

    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. Preferred Equity, on the other hand, is an equity investment in the property-owning entity. It is not secured by the property but rather by an interest in the entity investing in (or owning) the property.

    • Mobile Home Park

    A subdivision of plots designed for the siting of mobile homes (manufactured dwellings designed to be transported to a site and semi-permanently attached). Plots in a mobile home park are generally leased to mobile home owners and include utilities, parking space, and access to utility roads.

    • Mortgage

    A written legal instrument that creates a lien upon real estate as security for the payment of a specified debt. The mortgage is usually a separate document from the promissory note — the note evidences the debt obligation, while the mortgage pledges the designated property as security for the debt. Mortgage law in the U.S. has traditionally been within the jurisdiction of the various states; thus, they are primarily governed by state laws, which can vary.

    • Multi-Family Housing

    Multi-family buildings include any building that includes more than a single-family residence, but in common usage the term generally refers to apartment buildings of more than four units. Multi-family residential buildings vary by location (urban or suburban) and size of structure (high-rise or garden apartments). Economic drivers of apartment buildings include demographic trends, home ownership and household formation rates, and local employment growth. Leases are typically short-term (one to two years) and adjust quickly to market conditions. Larger apartment buildings are only minimally affected by any single vacancy. Multi-family properties are generally considered to be one of the more defensive investment types within commercial real estate, though they are still subject to competitive pressures from newer construction.

    • Occupancy Rate

    The percentage of total units that are currently rented. Contrast with vacancy rate.

    • Office Building

    Office buildings range from large multi-tenant structures in city business districts to single-tenant buildings (like a hospital’s medical office building). Rents and valuations are influenced by employment growth, a region’s economic focus (finance and high-tech centers need more office space), and productivity rates. Individualized tenant improvements are usually not very involved, but credit quality of tenants is key; re-leases of office space typically require some lead time to consummate. Office properties often have longer-term leases that can lag current market lease rates, so that “step-ups” (or step-downs) of rental rates are not infrequent when leases expire. Because these buildings are often leased to businesses (not just individuals), the tenants often demand special features in the leases, including rights of first refusal to rent contiguous space, signage rights, or even building purchase options.

    • Operating Expenses

    Amounts paid to maintain a property. Excludes financing expenses, income taxes and depreciation.

    • Opportunistic

    An aggressive (or riskier) investment strategy that in real estate generally signifies investing in properties that require a high degree of rehabilitation to eventually earn “market” rental rates. Properties requiring a greater number of repairs, or rehabilitation are generally considered “high risk,” because the property has not yet proven whether it can indeed earn the rents that are forecast for it when it will be improved to the desired state.

    • Opportunity Zones

    Opportunity Zones are census tracts generally composed of economically distressed communities that qualify for a community development program called the Opportunity Zone program, which was created under the Tax Cuts and Jobs Act of 2017.

    • Ordinary Income

    Ordinary income is income that is taxed as ordinary income tax rates and does not qualify for capital gains tax treatment. It’s important to understand the difference between ordinary income and capital gain income because, generally, ordinary income tax rates are higher than capital gains tax rates.

    • Origination Fees

    Charges to a borrower to cover the lender’s costs of issuing the loan. These costs can typically include the cost of obtaining a credit report, an appraisal or broker price opinion on the property, and expenses associated with obtaining title insurance.

    • Pari Passu

    Investors are pari passu if they have the same terms of investment, including the same percentage returns and equal risk of loss to their investments.

    • Partition

    The division of real property between those who earlier owned it together with an undivided interest.

    • Partnership

    An agreement between persons or entities to invest or do business together. Unless otherwise agreed, either partner may bind the other (within the scope of the partnership) and each partner is liable for all the partnership’s debts. A partnership itself normally pays no taxes, but merely files an information return; the individual partners pay personal income tax on their share of the partnership’s income. This is contrasted with a corporation, which must pay taxes on its income, and whose shareholders must also pay taxes on any dividends or other distributions they receive from the corporation.

    • Passive Investor

    One who invests money but does not actively manage the business or property.

    • 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.

    • Peer-to-Peer Marketplace

    A form of marketplace utilizing a technological infrastructure that enables distributed access to capital or, conversely, transactions. Peer-to-peer (or “P2P”) markets offer are emerging alternative to many types of more established marketplace models. There can be many variations, but a peer-to-peer marketplace typically utilizes the wide-reaching power of the internet to offer access to certain products or services to persons who might normally have had such access. They also offer providers of such products or services with a much broader “reach” to potential users or customers of such products or services.

    • Personal Liability

    An individual’s responsibility for a debt. Most mortgage loans on real estate are recourse, meaning that the lender can look to the property and to the borrower for repayment. This can be contrasted to nonrecourse loans, where a lender can only look to the security (the pledged property) for repayment.

    • Portfolio

    A group of investment assets.

    • Preferred Equity

    Typically, in a Preferred Equity investment all cash flow or profits are paid back to the preferred investors (after all debt has been repaid) until they receive the agreed upon “preferred return.”

    • Preferred Return

    A rate of return (often in the 5-10% range) that is paid to investors before the sponsor gets paid any promote share of distributable cash flow. The preferred return is not a guaranteed dividend; sometimes the preferred return is not paid out because the property cash flow doesn’t allow it (for example, where the property is still under development). In such cases, the preferred return typically continues to accrue, and any unpaid amounts are ultimately recouped by the investor when the property is sold. It remains, however, a preferred (higher priority) payout as compared to other potential distributions.

    • Preliminary Title Report

    A report issued by a title company before a transaction, stating a willingness to insure title upon closing.

    • Prepayment

    To retire all or a portion of a loan’s principal balance before it is due under the note or related mortgage. Some mortgages or notes include a penalty for repayment, since the lender is unable to receive interest on principal that has already been repaid.

    • Prepayment Penalty

    Fees paid by borrowers for the privilege of paying off the loan in advance of its maturity date, i.e. before it becomes due. Lenders plan on loans earning interest for a set period if a borrower repays a loan early, the lender must scramble to find another use for the funds.

    • Primary Markets

    In real estate, primary markets are metropolitan areas with substantial populations, high asset liquidity, and a large volume of property transactions. Examples include New York, San Francisco, and Chicago.

    • Principal

    The amount of money raised by a mortgage or other loan that remains after some of that amount may have been amortized by earlier payments. Principal can be contrasted to the interest paid on the loan.

    • Priority

    Legal precedence; having preferred status. Generally, upon foreclosure, lenders are repaid according to priority.

    • 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.

    • Private Placement

    Also referred to as a private offering, a private placement is an investment offered for sale to a group of investors, generally under exemptions to the registration requirements by the U.S. Securities and Exchange Commission and state securities registration laws.

    • Pro-Forma

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

    • Project Payment Dependent Notes

    A Project Payment Dependent Note is a special, limited obligation of Fundraise Investments, LLC sold to investors, the proceeds of which are used to fund corresponding project investments.

    • Promissory Note

    Another term for note. A legal document that evidences a debt, specifying how much money is being borrowed and the terms and conditions under which it is to be repaid.

    • Promote

    Under an investment structure commonly used in private real estate investments, the “promote” is the share of a property’s excess distributable cash flow (the amount of income that exceeds any “preferred” payments required to be made to outside investors) to which the sponsor is entitled. The apportionment of this remaining distributable cash varies among deals, although the investors will nearly always be entitled to the lion’s share of the deal profits. The sponsors promote, or share of such profits, will depend on several factors, including the degree of difficulty of arranging the opportunity, how intensive the management of the property is expected to be, and whether the sponsor already brings a successful track record to investors. The promote can be analogized to the “carry” structure used in venture capital and hedge fund profit-sharing arrangements.

    • Public Offering

    A solicitation of the public for the sale of investment units, or securities. Generally, requires approval by the U.S. Securities and Exchange Commission and/or state securities agencies. A public offering is to be contrasted to a private placement.

    • Real Estate

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

    • Real Estate Crowdfunding

    Real estate crowdfunding colloquially refers to online platforms that offer passive real estate investments to individual investors. RE/DEV Crowd is often referred to as a real estate crowdfunding platform. Real estate crowdfunding platforms make use of JOBS Act Rule D exemptions to employ “broad solicitation”, allowing them to offer investments to individual investors at low minimums.

    • Real Estate Investment Trust (REIT)

    A REIT (which is pronounced “reet” and stands for Real Estate Investment Trust) is a company which makes investments in and owns income-generating real estate properties.

    • Recorder

    The public official (usually of the local county) who keeps records of documents concerning real property that are used to show evidence of title. Sometimes known as the registrar or county clerk.

    • Recording

    The act of entering in a book of public records the legal documents that affect the title to a piece of real property. Recording in this manner gives notice to the world of the facts recorded.

    • Recourse

    The ability of a lender to claim money from a borrower in default in addition to the property pledged as collateral. Contrast nonrecourse.

    • 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.

    • 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.

    • Refinance

    To replace an existing loan(s) with a new loan(s).

    • Regulation A

    Regulation A allows unaccredited investors to purchase small offerings of securities that do not exceed $5 million in a 12-month period.

    • Regulation A+

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

    • 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.

    • 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.

    • Retail Property

    The retail sector includes everything from smaller neighborhood shopping centers (encompassing, for example, a small grocery, pharmacy and a few restaurants or clothing stores) to large “super-regional” malls that have entertainment activities and can draw shoppers from a great distance. Retail properties are most broadly influenced by the state of the national economy generally, especially such indicators as employment growth and consumer confidence levels. More local factors include the property location and its traffic flow; population demographics; and local household incomes and buying patterns. Retail store leases frequently contain a base rent plus a “percentage rent” based on the tenant’s gross sales figures. Leases also often have long terms; as with office buildings, this means that after a while lease rates may lag current market rates, and step-ups may need to wait until lease expirations.

    • Reversion

    A “reversion”, “reversion event” or “exit” is the terminal event the concludes a real estate project, where the Sponsor or developer expects to exit the property or portfolio of properties via sale, partial sale, or refinance. In many cases the of the projected reversion impact the overall profitability of the investment to a very.

    • Risk

    Uncertainty or variability; the possibility that returns from an investment will be less than forecast, or that invested principal might be lost. Diversification of investments provides some protection against risk.

    • Risk vs Return

    A financial concept that attempts to compare the potential fluctuations of an investment with the projected return associated with it. Increased risks require that an investor demand increased returns in compensation; people don’t normally accept the same rate of return on a very risky investment that they can already get on a low-risk investment.

    • 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.

    • Second Market

    Secondary markets are metropolitan areas with mid-sized asset liquidity and property transaction volume. Examples include Las Vegas, Portland, and Cleveland.

    • Secondary Mortgage

    A lien created by a mortgage (or deed of trust) that is subordinate to the amount of the first-lien mortgage (or deed of trust). Second mortgages, which on residences are sometimes referred to as a home equity line of credit (HELOC), can reduce the amount of cash down payment due at the time of purchase, or in a refinancing can raise cash for other purposes.

    • Secured vs Unsecured Position

    A secured position in the Capital Stack retains the right to foreclose on a property in the event of a default, or non-performance. Unsecured creditors do not have the right to foreclose on the property, and therefore have less collateral backing their investment claim.

    • Securities Act of 1933

    The Securities Act of 1933 is federal legislation that was enacted in the wake of the market crash of 1929 and remains one of the most important pieces of legislation concerning the securities industry. The legislation was designed to restore investor confidence in the market by increasing the required transparency and establishing laws against misrepresentations

    • Securities and Exchange Commission (SEC)

    The federal agency created in the 1930s to carry out the provisions of the Securities Act of 1933, the Securities Exchange act of 1934, the Investment Company act of 1940, and many other laws related to the selling of investment securities. Generally, the agency seeks to protect the investing public by preventing misrepresentation, fraud, market manipulation, and other abuses in the securities markets.

    • Security

    1. Property that serves as collateral for a debt.
    2. An investment contract or other legal instrument (such as a stock, bond, option, future, or interest in mineral rights), whereby a person invests money in a common enterprise and is led to expect profits from the efforts of the promoter or some other third party.

    • Senior Debt

    Senior debt is the first level of a corporation’s liabilities which means it is paid out first, ahead of all other creditors. Senior debt is the safest form of financing for the party providing the funds. Should a corporation go bankrupt, any remaining funds, dissolved assets or other available sources of value must first repay.

    • Sensitivity Analysis

    A technique of investment analysis whereby different values of key variables is tested to see how sensitive the projected investment returns (results) are to changes in assumptions. It is a method of evaluating the riskiness of an investment.

    • Sharpe Ratio

    A statistical measure often used in modern portfolio theory to express risk-adjusted return or return while incorporating volatility. Calculated as follows: Sharpe Ratio = (Expected Return – Risk Free Rate of Return) / Standard Deviation Prevailing rate of return for treasury notes (or T-note) often stands in for risk-free rate of return.

    • Single Family Residence

    In real estate, generally refers to a stand-alone property intended to house one family. Individual apartment or condominium units are usually thought of as being part of a multi-family building, even though individual units are usually occupied by a single family.

    • Sponsor

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

    • Statutory Foreclosure

    A foreclosure proceeding not conducted under court supervision; contrast with judicial foreclosure.

    • Step-Up In Basis

    A step-up basis is the adjustment of a cost basis for an asset for an investor. Certain factors may initiate a step-up in an investor’s original cost basis, thereby reducing their realized capital gain and associated tax liability.

    • Subasset Class

    Any subset of a more broadly-construed class of investments. In real estate, “subasset class” may refer to a specific property type (e.g. multifamily or industrial) and/or a specific investing strategy (e.g. value-add).

    • Sub-Market Area

    Similar to market area but generally refers to a very focused region — perhaps a specific suburban area — within a larger metropolitan area. Like market area, it refers to a geographic region from which one can expect the primary demand to come for a property.

    • Subordination

    Moving to a lower priority, as a lien would if it changes from a first mortgage to a second mortgage.

    • Syndicated Loan

    Syndicated loan is a form of loan business in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and with different duties and sign the same loan agreement. Usually, one bank is appointed as the agency bank to manage the loan business on behalf of the syndicate members.

    • Syndication

    The formation of a group of investors, organized by a sponsor that pools the investors’ capital together to make an investment. In real estate, such pools (or syndicates) are often formed because even a single property can require substantial capital, usually beyond the means of a single investor. An investor in a syndicate’s securities can buy one or more shares (or membership or partnership interests) of a syndication entity (usually a limited liability company (LLC) or a limited partnership) and the entity — with its aggregate of investments — can then be able to make a meaningful investment in a property.

    • Tenancy / Occupancy

    Occupancy is generally referred to as a percentage of the total square feet or units leased – it is a building’s revenue source.

    • Tenancy in Common

    An ownership of real estate by 2 or more persons, each of whom has an undivided interest, without the right of survivorship. Upon the death of one of the owners, the ownership share of the decedent is inherited by those designated in the decedent’s will, not the other persons who own other shares of the property.

    • 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.

    • Tertiary Markets

    Tertiary markets are smaller metro areas that are not large enough to be primary or secondary markets. Investments in these markets can be riskier but have the potential for high returns.

    • The Capital Stack

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

    • Title

    Evidence that the owner of real property is in lawful possession thereof; it is evidence of ownership. Usually a property owner transfers his title by means of a legal document called a “deed,” which must be in writing and meet other local requirements. A deed should convey good and marketable title; “good” means that the title is valid, and “marketable” means that it is reasonably free from doubt or litigation, so that it can be readily sold.

    • Title Insurance

    An insurance policy that assures good title is transferred during a sales or financing transaction. This insurance covers the legal fees and expenses that may be necessary if a claim is made against one’s ownership of the property. Different title policies offer different extents of coverage; for example, one can purchase “standard” coverage or “extended” coverage.
    There are two common types of policies: a lender’s policy that protects a lender (or the “mortgagee”) on the property, and a buyer’s policy that protects the buyer (or the “mortgagor”).

    • Title III Regulation Crowdfunding

    Outlined in the 2012 JOBS Act, Title III instructed the SEC to create an exemption from registration that, when implemented, will enable issuers to engage in crowdfunding equity offerings to the general investing public.

    • Transaction Cost

    The costs associated with buying and selling real estate.

    • Transparency

    In finance, a manner of doing business such that activities are fully disclosed and reported to investors. Such policies make it possible for potential investors to adequately estimate the risk, and to forecast the income, from investing.

    • Triple Net Lease

    A lease in which the tenant is to pay all the operating expenses of the property, such as taxes, utilities, insurance, and repairs; the landlord receives a “net” rent. The debt service on the property and the landlord’s own income taxes are not considered operating expenses and remain payable by the landlord.

    • Trust

    A legal arrangement whereby property is transferred to a trusted third party, or trustee, by a grantor (or “trustor”). The trustee holds the property for the benefit of another (the “beneficiary”).

    • Trustee

    One who holds property in trust for another, to secure the performance of an obligation. In a deed of trust transaction, the trustee is the neutral party.

    • Underwriting

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

    • Undivided Interest

    An ownership right to use and possession of a property that may be shared among co-owners, with no single co-owner having exclusive rights to any one portion of the property.

    • Unaccredited Investor

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

    • Vacancy Rate

    The percentage of all units or space that is unoccupied or not rented. On a pro-forma income statement, a projected vacancy rate is used to estimate the vacancy allowance. This allowance is then deducted from the potential gross income to calculate the “effective” gross income.

    • Value-Add

    A real estate property categorization, or investment “style,” referring to properties requiring some degree of improvements to gain increased returns. “Value-add” generally refers to a property that is currently in less than stellar condition and in need of improvements that are of somewhat higher risk, such as performing more-than-usual renovations like upgrading exteriors and interiors and curing deferred maintenance. The “value-add” categorization implies higher risk than the category of “core plus,” but less than “opportunistic.” Returns on the properties will be driven both by current income and by expected capital appreciation.

    • Workforce Housing

    Class B or C multifamily properties that offer quality affordable housing to families at or below area median income. As opposed to Class A properties developed in urban cores and other high-demand, high-income areas – and may focus on luxury amenities like in-unit washer/dryer or rooftop patios – quality workforce housing projects seek to offer.

    • 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.

    • Zoning

    A legal mechanism for local governments to regulate the use of privately owned real property by applying their power to prevent conflicting land uses and promote orderly development. Designated zones limit the type and intensity of permitted development.