Glossary for real estate exempt offerings
An accredited investor is anyone who earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). Refer to the SEC's Investor Bulletin on Accredited Investors.
Interest earned but not paid.
The right to control or occupy the space above a property. Air rights can be leased, sold, or donated to another property.
The repayment of a debt with a fixed payment schedule in regular installments over a period of time.
ANNUAL PERCENTAGE RATE (APR)
The effective rate of interest for a loan per year.
An appraisal is an expert assessment of the value of a piece of property.
AUTOMATED CLEARING HOUSE (ACH)
An electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit, payroll and vendor payments.
The smallest customary measure of interest rates in the financial world. Each basis point is equal to one hundredth of an interest rate point.
A short term loan made in anticipation of long term financing. It is the mortgage financing between the end of one loan and the beginning of another loan.
CAPITAL EXPENDITURES (CAPEX)
An improvement that will have a life of more than one year. Capital expenditures are usually depreciated over their useful life, as opposed to repairs which are subtracted from income in the year they are done.
Gain on the sale of a capital asset.
Capital invested in a project, including debt, hybrid debt, and equity, with the most risk at the top, moving down the stack to the position with the least risk. Higher positions in the stack deserve higher returns because of the higher risk.
CAPITALIZATION RATE (CAP RATE)
A percentage return on an investment in property. It is used to determine the value of a property by dividing the net operating income of the property by a percentage return.
Periodic amounts of money distributed to equity holders after deducting all periodic cash payments from rental income.
CASH ON CASH RETURN
Return on cash invested. Equals net operating income less debt service, divided by equity invested.
CERTIFICATE OF OCCUPANCY (C OF O)
This is issued by a local government to a developer giving permission for the structure to be occupied. This document specifies the type of use permitted.
The transfer of ownership of a property from seller to buyer according to the terms of a sales contract.
Property pledged as security for debt.
Interest paid on top of the principal plus any interest earned. Compounding grows the base upon which interest is earned.
A real estate investing tactic that focuses on fully stabilized properties with credit worthy tenants with long term leases.
Periodic payments owed to cover the interest and principal of a debt.
DEBT SERVICE COVERAGE RATIO (DSCR)
The ratio of net operating Income (NOI) to total debt service, calculated as NOI/Debt Service. A DSCR of 1 means a property has just enough money to cover its debt. Below 1 means that the property is producing negative cash flow.
A legal document, signed and delivered, conveying title.
Failure to perform an obligation such as repaying a loan.
An accounting term referring to allocating the cost of an asset over its useful life; also known as the obsolescence of an asset.
Legal entitlement to improve a parcel of land.
The interest rate used to convert expected future cash flows into a present value in a discounted cash flow analysis.
DISCOUNTED CASH FLOW (DCF)
A method of financial analysis in which a discount rate is used to convert future cash flows into a present value, which is the most widely used evaluating tactic. An investor compares the present value of these cash flows to the cost of the investment.
An investigation of a business or person prior to signing a contract. Due diligence often precedes the purchase of real estate, and considers the legal, financial, and other areas of full disclosure.
The ownership interest in real property that a person or entity has after subtracting debt.
FAIR MARKET VALUE
Market value of a property based on what a knowledgeable and willing buyer would pay to a knowledgeable and willing seller in the market.
Legal proceedings where a lender attempts to recover the balance of a loan from a borrower who has stopped making loan payments, forcing the sale of the asset used as the collateral for the loan.
FREE CASH FLOW (FCF)
The dollar amount available for distribution to all the securities holders of an ownership entity.
A general partner is a person who joins with at least one other person to form a business. A general partner can legally bind the business and is personally liable for all the business's debts and obligations.
Additions to land that should increase value; examples include buildings, streets, and sewers.
Measured by the Consumer Price Index (CPI) inflation is a sustained increase in the general price level of goods and services in an economy over a period of time. When the general price level rises, buyers buy fewer goods and services.
A banking account to cover interest.
INTERNAL RATE OF RETURN (IRR)
The annual rate of return of an investment; this reflects the value of cash returned with cash invested. The IRR is also a discount rate which, when applied to discounted cash flow analyses, makes future cash flows equal to zero.
Leverage Is the use of borrowed funds to increase purchasing power.
LIMITED LIABILITY COMPANY (LLC)
A limited liability company (LLC) is a specific form of a private entity commonly used in the U.S. It is a business structure that combines the pass-through taxation of a partnership with the limited liability of a corporation. LLCs are the most common form of real estate ownership because of the flow through tax treatment and the liability protection.
LIMITED PARTNERSHIP (LP)
This is a partnership in which there is at least one partner who has limited liability to the amount invested and at least one partner who manages the partnership and whose liability extends beyond the financial investment.
LOAN-TO-COST (LTC) RATIO
The amount the loan compared to the cost of the project. The higher the LTC, the higher the risk in the project.
LOAN-TO-VALUE (LTV) RATIO
The amount borrowed compared to the value of the purchased property. Lending institutions often have constraints on the maximum LTV ratio they will allow on loan originations.
METROPOLITAN STATISTICAL AREA (MSA)
A core urban area having a population of at least 50,000.
Any subordinated debt that represents a claim on a property. It is second to a first mortgage in priority and may have other liens subordinate to it.
The instrument securing the note as security for the loan.
NET OPERATING INCOME (NOI)
Cash flow from a property after expenses are deducted but before debt service and taxes are paid.
NOI = Gross Income - Operating Expenses
A written legal instrument that acknowledges a debt and promises repayment of the principal plus interest.
OPERATING EXPENSES (OPEX)
Money paid to maintain a property such as utilities, insurance, supplies, and taxes.
Also known as a "hurdle rate," this is the return the limited partners receive before the general partners get paid their carried interest or other payouts.
A penalty paid to a lender for retiring a loan before it is due.
PRICE PER SQUARE FOOT (PPSF)
The price of a property in square foot terms. Total price ÷ total square feet.
The total amount of money borrowed with separate from interest paid and owing.
A funding round through a private offering, usually to a small number of investors. These offerings must be done with exemptions to registration as allowed by both the SEC and state securities registration laws.
This refers to financial projections as opposed to actual performance numbers.
A written legal document that acknowledges a debt with a promise to repay principal and interest.
The ability of a lender to claim funds from a borrower.
A SEC regulation that promulgates what is necessary for a private placement. Please see the SEC's website, http://www.sec.gov/answers/regd.htm, or www.privateplacementadvisors.com.
Senior debt takes priority over unsecured or other more junior debt owed by the issuer
Soft costs are expenses not directly related to construction, including architectural, engineering, financing, legal fees, and other pre-and post-construction costs.
Whoever owns a real estate project, whether or not they manage it.
A property that has reached normal occupancy and expense levels.
A method by which a sponsor sells ownership interests in a property limited partner investors.
A form of ownership of real estate by 2 or more people all have an undivided interest without the right of survivorship.
TENNANT IMPROVEMENTS (TIS)
Changes a landlord makes to rental space in order to configure the space for the needs of a particular tenant. Can include moving interior walls, carpeting, and adding closets or shelving.
TRIPLE NET LEASE (NNN)
A type of lease which stipulates that the tenant pays all operating expenses associated with the space.
The process where a loan is approved or denied based on an assessment of the risk associated with the project and the applicant.
The rate of earnings from an investment.
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Douglas Slain can be reached directly at 415-317-6130.