ACCREDITED INVESTOR — an individual with income exceeding $200,000 annually (or $300,000 together with a spouse) in each of the prior two years, and who reasonably expects the same for the current year OR an individual with a net worth of over $1 million (either alone or together with a spouse), excluding the value of the individual’s primary residence. (Source: U.S. Securities and Exchange Commission)
CLASS (Of Property) — a subjective division of buildings by desirability among tenants and investors. Criteria include age, location, construction quality, attractiveness of style, level of maintenance, and so on. The class may be based on standards for market acceptance or the type of construction materials used.
- Class A: High quality, well designed, using above-average materials, workmanship, and finish. Sought by investors and prestigious tenants. Excellently maintained and very well managed, especially if the building is more than 10 years old. Attractive and efficient, these buildings are often the most desirable in their markets.
- Class B: Offers useful space without special attractions. Has functional layout and design, though not unique. Average to good maintenance and management. Typically 10 to 50 years old.
- Class C: Typically an older building that offers space without amenities. Average to below-average maintenance and management, average to poor mechanical, electrical, ventilation systems. Attracts moderate- to low-income tenants who need affordable space.
Value = annual income / capitalization rate
Example: the estimated net operating income of an office building is $12,000 per year. An appraiser decides the appropriate capitalization rate is 12%, comprised of a return of a 10% return on investment and a 2% depreciation. The estimated value of the building is $100,000.
A small building was bought for $1 million, with the following amounts paid for its capital stack/structure:
- $600,000 first mortgage
- $100,000 second mortgage
- $300,000 equity
DUE DILLIGENCE — making a reasonable effort to provide accurate, complete information. A study that often precedes the purchase of a property, which considers the physical, financial, legal, and social characteristics of the property and expected investment performance; the underwriting of a loan or investment.
EQUITY MULTIPLE (Realization Multiple) — a measurement that values the return paid to an investor. The multiple is named after the amount of equity that is realized, and is found by dividing the cumulative distributions from a project by the paid-0in capital. (Source: Investopedia)
Equity Multiple = Cumulative Distributed Returns / Paid-In Capital
FREE-MARKET (Market-Rate) — an apartment unit that is not rent-stabilized or rent-controlled. A free-market or market-rate apartment is a unit where the rental rate and lease terms are negotiated between the owner and tenant. (Source: NYC.gov)
Example: Some real estate investors prefer short holding periods (under 5 years) in an attempt to retain high levels of financial leverage. Others prefer longer to reduce frequent transaction costs and avoid depreciation recapture.
IRR (Internal Rate of Return) — the true annual rate of earnings on an investment. Equates the value of cash returns with cash invested. Considers the application of compound interest factors. Requires a trial-and-error method for solution.
Example: Abel sells for $200,000 land that he bought 4 years earlier for $100,000. There were no carrying charges or transaction costs. The internal rate of return was about 19%. That is the annual rate at which compound interest must be paid for $100,000 to become $200,000 in 4 years.
Example: Collins wishes to invest in real estate. The property costs $100,000 and produces net operating income of $10,000 per year. If purchased with all cash, Collin’s annual rate of return is 10% ($10,000 ÷ $100,000). If she leverages the investment by borrowing $75,000, her return on equity may be higher. If the debt cost is 8% ($6,000) annually, the leverage results in a return of 16% ($4,000 ÷ $25,000). However if the debt cost is 12% ($9,000), the leverage is negative because it reduces the return on equity to 4% ($1,000 ÷ $25,000).
LIBOR (London InterBank Offered Rate) — the rate that international banks dealing in Eurodollars charge each other for large loans. Some domestic banks use this rate as an index for adjustable rate mortgages.
Example: European lenders offered to finance a hotel in California at the LIBOR rate plus three percentage points, adjusted monthly.
Example: Michael Development Company planned to build an office tower for $12 million. They arranged an $8 million first mortgage and $1.5 million of mezzanine finanibg. A subordinated loan of $0.5 million and $2 million of equity completed the capital structure.
NET RENTABLE AREA (Net Leasable Area) — in a building or project, floor space that may be rented to tenants. The area upon which rental payments are based. Generally excludes common areas and space devoted to the heating, cooling, and other equipment of a building.
Example: A building with 10 floors, each containing 3,000 square feet of space, may have net leasable area of 25,00 square feet. Elevators, hallways, etc., absorb the remaining 5,000 square feet.
PRIMARY MARKET — major metro areas, including Boston, Chicago, Los Angeles, New York, San Francisco and Washington D.C. (Source: Real Capital Analytics)
QUALIFIED INTERMEDIARY — A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U.S. intermediary) that has entered into a qualified intermediary withholding agreement with the IRS.Foreign financial institutions and foreign branches of U.S. financial institutions can enter into an agreement with the IRS to be a qualified intermediary. A QI is entitled to certain simplified withholding and reporting rules. (Source: IRS.gov)
SECONDARY MARKETS — large metropolitan areas that are slightly smaller than the primary markets. Atlanta, Austin, Baltimore, Charlotte, Cincinnati, Cleveland, Columbus, Dallas, Denver, Detroit, Houston, Indianapolis, Jacksonville, Kansas City, Las Vegas, Memphis, Milwaukee, Minneapolis, Nashville, Norfolk, Orlando, Philly Metro, Phoenix, Pittsburg, Portland, Raleigh/Durham, Sacramento, Salt Lake City, San Antonio, San Diego, Seattle, South Florida, St Louis and Tampa. (Source: Real Capital Analytics)
Example: A recently built, 1,000-unit apartment complex is expected to take 2 years to lease up at market rents. At that time, extra advertising will no longer be needed to attract tenants, so expenses will become stable. The appraiser provided a report offering a stabilized value of $100 million for the building. In order to derive its as is value, the appraiser then subtracted from that value for the reduced occupancy and higher expenses expected for the first two years.
VALUE-ADD — an investment strategy that targets underperforming properties with upside potential. Physical value-add strategies aim to improve the property itself by completing deferred maintenance, renovating unit interiors or adding new amenities. Operational value-add strategies aim to improve property fundamentals by addressing managerial issues. The most successful value-add strategies often involve aspects of physical and operational value-add strategies. (Source: ArborCrowd)
WATERFALL (Distribution Waterfall) — the order in which a private investment makes distributions. A distribution waterfall is a hierarchy delineating the order in which funds will be distributed, and may ensure that different types of investors have priority of payment compared to others within the same property. (Source: Investopedia)
ZONING — a legal mechanism for local governments to regulate the use of private owned real property by specific application of police power to prevent conflicting land uses and promote orderly development. All privately owned land within the jurisdiction is placed within designated zones that limit the type and intensity of development permitted