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- Absorption Rate
Absorption rate is the rate at which available homes are sold in a specific real estate market during a given time period. 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
The federal securities laws define an accredited investor as any of the following: (i) a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; (ii) a […]
- Accrued Interest
Accrued interest is the interest on a loan accumulated over a period of time either as an expense (for the borrower) or revenue (for the lender) and paid at maturity or final payoff. In the case of some real estate debt instruments and other bridge financing, structuring accrued interest can provide the borrower with flexibility […]
- Adjustable-Rate Mortgage (ARM)
Adjustable-Rate Mortgages are mortgages whose interest rates vary according to some benchmark. Generally, the loan starts with a fixed rate for a period, then moves to one where the rate is adjusted every month.
- 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.
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 Investments
Investment categories other than traditional securities or long-only stock and bond portfolios; they include hedge funds, venture capital, private equity, and real estate. Alternative investments often employ strategies typically unavailable to long-only managers, such as the use of derivatives, the ability to short, and the ability to hold illiquid assets. Alternative investments tend to be […]
Amortization is a repayment model where the balance is repaid in multiple installments over time with each installment consisting of both principal and interest.
- Anchor Tenant
The anchor tenant of a shopping mall is a major retail or department store that is one of the larger stores in the mall. As a reward for bringing people to the mall, anchor tenants often receive discounted rents.
- Ancillary Tenant
Ancillary tenants are smaller tenants of a shopping mall which occupy less space and pay a higher rent rate.
- 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. […]
- Assets Under Management (AUM)
Assets Under Management (or “AUM”) refers to the total market value of investments that an advisor, investment management firm, real estate developer, fund, or other entity that manages invested capital on behalf of investor customers. The volume of assets under management varies substantially across the investment management space, from local RIAs who may manage hundreds […]
- Basis Point
A basis point (bps) is equal to 1/100th of 1% or .01% and is a common unit of measure for interest rate changes.
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 […]
- Bridge Loan
A bridge loan is a short term loan that is used while a person or company gets permanent financing or removes an existing financial obligation. These are short term loans backed by collateral, typically the underlying property in the context of real estate, and have relatively high interest rates while providing immediate cash flow.
- 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
Cap rate is the rate of return for a property based on its annual income. It is calculated by dividing the net operating income of the property by the total value of the property. Cap rates can provide a good initial measure to compare different investment opportunities but should not be the sole factor considered. […]
- Cash-on-Cash Return
The cash-on-cash return is the ratio of annual before-tax cash flow to the total amount of cash invested, expressed as a percentage.
- 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 […]
- Common Equity
The riskiest but highest-upside component of investment for a commercial real estate project. Since all other parties are entitled to payment first, common equity investments carry the highest attendant risk. However, common equity investments typically have uncapped upside on profits if the deal performs well. For more on how common equity figures into the broader picture […]
Core investments in real estate are investments into properties that are stable and income producing. Core properties are characterized by high occupancy rates, market rate rents, high quality, credit tenants, and very limited deferred maintenance. A core investment strategy is low-risk with low returns usually consisting of current income on the property.
- Core Plus
Core-plus investments in real estate are investments in properties that are relatively stable and income-producing, but also can be improved upon with hopes of creating greater future cash-flow by increasing leasing rates or raising rents to market rate. A core-plus strategy is moderate-risk with greater returns and greater risk than core investments.
Crowdfunding means financing a business venture, product, idea, or property using funds pooled from a large number of potential investors (“”the crowd””). Crowdfunding is typically associated with raising funds through an online platform, which utilizes technology to present information and manage the transaction. Crowdfunding began as a new means to finance business or artistic ventures […]
- 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. For much more […]
- Deed of Trust
A Deed of Trust is a deed where the legal title to the property is transferred to a trustee which holds it as security for a loan between a borrower and a lender. The equitable title remains with the borrower but the deed is held in trust until the loan for the property is paid.
- Depreciation Recapture
Depreciation recapture is taxable income that is earned when the sale price of capital property exceeds the depreciated price of the property.
- Distribution Waterfall
A distribution waterfall is the order in which an investment vehicle makes payment distributions.
- 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, particularly investments with […]
An agreement between two or more parties providing that funds, property or documents be placed with a third party for safekeeping, pending the fulfillment of specified conditions.
- 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.
- Gateway Market
A Gateway Market is a city, metro, or DMA (designated market area) that is considered in the top tier by real estate investors as far as population, economic health, economic diversity, density, and desirability for residents (particularly young professionals). As a consequence of these factors, gateway markets are also considered the most stable, safe, and […]
- GP Investor
The GP (or “general partner”) investor refers to the managing party on an investment. “GP Investor” is typically synonymous with “the Sponsor” with respect to real estate investments like those offered via EQUITYMULTIPLE – the party responsible for originating the investment, sourcing debt and equity financing, and managing the project through to completion. As such, […]
- 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
As you may have guessed, a ground lease – otherwise known as a “land lease” is simply a lease on a plot undeveloped commercial land, with the tenant on the ground lease responsible for the development and use of property on the premises. Ground leases are typically the longest in the industry: sometimes decades long, […]
- Ground Up Development
A real estate investment that requires all stages of construction, literally from the ground, up. Ground up development is the most opportunistic real estate investment strategy (aside from land speculation) generally entails the greatest level of complexity and often the longest-dated projected hold periods. In other words, ground up development is typically thought of as […]
- Hold Period
The length of ownership of an asset, usually for investment real estate.
- Income Property
Income property is property that is bought or developed specifically for the purpose of generating income for its owner through leasing, renting, or price appreciation. These properties can be commercial or residential.
- Industrial Property
Industrial properties range from smaller properties, often called “Flex” or “R&D” properties, to larger office service or office warehouse properties to the very large “big box” industrial properties. Industrial properties frequently have long term leases and can sometimes be build-to-suit buildings that have difficulty changing tenants without extensive modification.
- Interest Reserve
Interest reserves are a common devise within real estate debt financing instruments, and are most often used in debt structures. Borrowers fund interest reserves as capital that the lender holds in a collateral account, providing another layer of security for lenders. These reserve accounts may be funded in several different ways, but are typically funded […]
- Internal Rate of Return (“IRR”)
The rate of discount on an investment that equates the present value of the investment’s cash outflows with the present value of the investment’s cash inflows. You can think of IRR as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating […]
- Jumpstart Our Business Startups (JOBS) Act
The Jumpstart Our Business Startups (JOBS) Act is a law, passed in April 2012, intended to ease SEC regulations on small businesses. Two of the major components of the law, Title II and Title III, have allowed massive growth of the crowdfunding industry. Title II has been in effect since September 2013 and allows mass […]
- Loan to Cost Ratio (LTC)
A ratio used in commercial real estate construction to compare the amount of the loan used to finance a project to the cost to build the project. If the project costs $1 million to complete and the borrower borrows $700,000, the loan-to-cost (LTC) ratio would be 70%. The costs included in the $1 million cost […]
- Loan-to-Value Ratio (LTV)
The Loan-to-Value Ratio is commonly used by banks and building societies to represent the ratio of the first mortgage lien as a percentage of the total appraised value of real property. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost […]
- 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 […]
- Mezzanine Debt
Mezzanine debt is a hybrid lending vehicle, commonly used by real estate developers, to secure supplementary financing. Mezzanine debt gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by […]
- Modern Portfolio Theory
Modern portfolio theory refers to the quantitative practice of asset allocation that maximizes projected (ex ante) return for a portfolio while holding constant its overall exposure to risk. Or, inversely, minimizing overall risk for a given target portfolio return. The theory considers the covariance of constituent assets or asset classes within a portfolio, and the […]
- Multifamily Real Estate
Now considered one of the four major commercial real estate asset classes, multifamily refers to properties with more than one distinct unit, suitable for multiple tenants or groups of tenants to occupy. The term may refer to apartments, condo complexes, or even co-living spaces. For much more on multifamily real estate investing, please see our […]
- Net Operating Income (NOI)
The income stream generated by the operation of the property, independent of external factors such as financing and income taxes. A property’s yearly gross income less operating expenses.
- Net Present Value
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. Because of the time value of money, a dollar earned in the future won’t be worth as much as […]
Opportunistic properties in real estate investing are generally properties that require a significant amount of rehabilitation in order to eventually bring in market rental rates. Properties requiring a greater amount of repairs, or rehabilitation, are generally considered high risk because the property has not yet proven whether it can indeed earn the forecasted rents once […]
- Opportunity Fund
Opportunity Funds are qualified investments in Opportunity Zones – under-invested communities established as part of the Investing in Opportunity Act, a component of the late-2017 tax reform bill. These investment vehicles may afford investors substantial tax advantages and deferment capabilities. For more on Opportunity Zones, Opportunity Funds, and the attendant tax benefits, please visit our Opportunity Zones […]
- Opportunity Zone
Opportunity Zones are qualified census tracts across the United States where investors can receive tax-advantaged treatment for qualifying investments (referred to as Opportunity Funds) into real estate and other assets. Opportunity Zones were established as part of the Investing in Opportunity Act, a component of the late-2017 tax reform bill. There are over 8,700 qualified […]
- 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. For more on the topic, please review our long-form post on Preferred Returns.
- Passive Real Estate Investing
Passive real estate investing refers to the practice of investing in real estate assets without assuming hands-on management of physical assets, and typically with little or no voting rights. Passive real estate investors are typically taking on LP interest in the investment, as opposed to the “active” GP investor – the Sponsor or developer. In […]
- Preferred Equity
Preferred Equity is a class of ownership that has a higher claim on the assets and earnings of a property than common equity, but is subordinate to senior debt. For more on how preferred equity figured into the broader picture of commercial real estate finance, please see our longer-form blog post on the capital stack.
- Preferred Return
A preferred return is a mechanism for allocating cash flow to certain parties in a real estate transaction before others. Investors or partners entitled to a preferred return will receive cash flows returned by the investment before other equity investors receive any portion of the profit. Preferred returns signal that the Sponsor feels that the […]
- Prepayment Penalty
A prepayment penalty, also known as a prepay, is a common term between a borrower and a bank or other lender that regulates the borrower’s ability to pay their debt ahead of the pre-agreed schedule. This helps compensate lenders for the time, effort and possible rate changes associated with reallocating their lending dollars.
- 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.
- Private Real Estate Investing
Private real estate investing refers to the practice of purchasing, investing in, or developing real estate that is transacted in private markets, rather than investing in real estate through publicly held vehicles – such as real estate investment trusts (REITs). Because REITs are publicly traded, liquid assets, they tend to exhibit greater volatility and correlate […]
- Private-Market Real Estate
Private-market real estate and private real estate investing refers to the universe of non-traded real estate investments; illiquid by definition and typically characterized by investment in a discrete property. Private-market real estate investments stand in contrast to publicly-traded REITs (real estate investment trusts) which are liquid but tend to correlate with public equities markets. EquityMultiple […]
Pro Forma financial statements are financial statements prepared in advance of a planned transaction, and model the anticipated results of the transaction and business plan, with particular emphasis on the projected cash flows and net revenues. For more on the topic, please review our article on the topic from our Learning Series.
- Project Payment Dependent Note
Project payment dependent notes are special, limited debt obligations that are tied to the performance of a specific underlying real estate asset. The performance of each series of notes depends on the economic return of the corresponding real estate asset.
- Qualified Purchaser
Qualified Purchaser – Background and Definitions Like the accredited investor designation, “Qualified Purchaser” is a legal designation that may apply either to an individual investor or an entity. By offering securities exclusively to Qualified Purchasers, an investment company may exempt itself from registration of an investment fund with the Securities and Exchange Commission (SEC). The […]
- Real Estate Crowdfunding
Real estate crowdfunding colloquially refers to online platforms that offer passive real estate investments to individual investors. EQUITYMULTIPLE 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)
Real Estate Investment Trusts are tax efficient entities that own or invest in income producing real estate. There are a variety of types of REITs, some are publicly traded, some are privately traded and others are privately held. REITs must comply with specialized operating rules in order to receive special tax considerations.
Refinancing is the practice of replacing an older loan with a new loan that offers better terms, such as a lower interest rate.
- Regulation A
Regulation A is an exemption from the registration requirements mandated by the Securities Act, applicable to small public offerings of securities that do not exceed $5 million in any 12-month period. A company that uses the Regulation A exemption for a securities offering must still file an offering statement with the Securities and Exchange Commission. […]
- Regulation D (“Reg D”)
Reg D is a Securities and Exchange Commission (SEC) regulation governing private placement exemptions. Reg D allows companies to raise capital from accredited investors (link to definition) by selling equity or debt securities without registering such securities with the SEC. Reg D is a widely utilized financing mechanism for a range of businesses, accounting for […]
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 particulars of the projected reversion impact the overall profitability of the investment to a very […]
RevPAR (or “revenue per available room”) is one measure of operating performance of a hotel real estate asset. RevPAR is calculated by a simple formula: Where the Average Daily Rate is the average per-room income per period of time; in other words the total room revenue divided by number of rented rooms for a given […]
- Sales Comps
Sales comps (or ‘comparables’) are prices for recently-traded assets in the immediate vicinity of a target property. Sales comps provide substantiation to the investment thesis during underwriting, serving as proof points for projected sale (or exit) price. GP investors typically present sales comps as part of an offering memorandum when seeking passive investors.
- Secondary Markets
Secondary markets are metropolitan areas with mid-sized asset liquidity and property transaction volume. Examples include Las Vegas, Portland, and Cleveland.
- 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 […]
- 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 […]
- 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. This formula is […]
A real estate Sponsor is a principal investor in a real estate project, responsible for sourcing the investment and executing on its business plan. In many cases the Sponsor has a background in asset management and construction/development, as well as real estate finance.
- Statutory Foreclosure
In a statutory foreclosure, the lender is able to sell the mortgaged property when the borrower defaults as part of a clause in the deed of trust for that property.
- 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).
- Syndicated Debt
EQUITYMULTIPLE’s chosen model of structuring and offering secured real estate debt investment opportunities. As opposed to some other platforms, who operate as the lender, EQUITYMULTIPLE “syndicates” portions of existing loans originated by experienced sponsors. For more on the topic, see this article.
- Tax Cuts & Jobs Act
The Tax Cuts & Jobs Act is a congressional revenue act of the United States originally introduced in Congress as that amended the Internal Revenue Code of 1986. Major elements of the changes include reducing tax rates for corporations and individuals, increasing the standard deduction and family tax credits, further limiting the mortgage interest deduction, and modifying protocols for itemized […]
- 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. For more on investing in tertiary markets and finding attractive basis away from gateway cities, please review this article.
- Triple Net Lease
A Triple Net Lease (Net-Net-Net or NNN) is a lease agreement where the lessee agrees to pay all real estate taxes, building insurance, and maintenance on the property in addition to the rent fee applied under the lease. This form of lease is commonly used for commercial freestanding buildings.
Underwriting is the process by which an underwriter performs due diligence on and otherwise scrutinizes a financing request made by a Sponsor seeking funding for a real estate project to determine how much risk to accept.
- Unit Measure of Risk
The unit measure of risk is an artful combination of many real estate investment attributes including borrower creditworthiness and experience, the investment’s position in the capital structure, the loan-to-value or cost (LTV or LTC) as well as performance metrics like DSCR (debt service coverage ratio) or debt yield, which compares the last dollar basis to […]
- Value Add
Value add properties are those which require improvements but have existing income. The improvements are of somewhat higher risk, such as larger rennovations or curing deferred maintenance. Investing in value-add properties is a moderate to high risk strategy (due to the nature of larger improvements to a property) with moderate to high returns.
- 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 […]