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Upside Avenue Glossary

1031 Exchange: A section of the IRS Code that allows an investor to exchange like-kind properties in order to defer capital gains taxes. Taxes are deferred on the money earned from the sale of a property when it is used to purchase another property, until the property is sold with no re-investment.

Absorption Rate: The rate in which available units lease up in a particular multifamily community in a given time period. It is calculated by dividing the number of available units by the average number of units leased each month. It reveals demand for a property.

Acceleration Clause: Allows a lender to demand the entire balance of a loan before the standard terms of the loan expire if certain terms are not met. It is commonly used to help mitigate the risk of default for the lender.

Accredited Investor: The SEC identifies accredited investors as individuals or business entities who are financially sophisticated and have a reduced need for protections provided by regulatory disclosure filings. These are typically banks, insurance companies, brokers, trusts, and high-net-worth individuals whose income exceeds $200,000 for each of the two most-recent years, and a reasonable expectation of similar income for the current year, OR an individual with a net worth exceeding $1 million, excluding the person's primary residence. 

Acquisition: The process of purchasing an asset.

Active Income: Income received from performing a service.

Adjustable-rate Mortgage (ARM): A type of mortgage where borrowers lock in an interest rate for a set period of time, after which rates reset to the prevailing interest rate on the remainder of the balance. Interest rates reset according to the type of ARM; for example, a 1-year ARM will see rates reset every year, while a 5-year ARM will see rates reset once every five years.

Advisory Fees: Fees paid to a financial advisor who suggests an investment that best fits the needs of the investor.

Alternative Investment: An investment other than the traditional investments of stocks, bonds, and cash. Helps diversify a portfolio and manage risk.

Anchor Tenant: A considerably larger tenant in a commercial retail space, usually a large department store or chain, that will attract a significant cross-section of people to a shopping center.

Appraisal: A process of determining and asset’s value based on a number of factors, including its cost, the income it generates, or its fair market value.

Appreciation: The increase in the value of a property over time. This can be caused by inflation, increase in demand, or a decrease in supply of properties.

As-is: A property being offered in its present condition.

Asset Management: A service provided by a financial company that manages an investment for an owner.

Basis Tax: The amount of your property investment for tax purposes.

Blind Pool: Any investment vehicle in which the sponsor has not yet located the properties to be purchased.

Bridge Loan: A short-term loan that a company can use to secure permanent financing.

Broker Dealer: A person or firm that buys and sells securities, provides investment advice to customers, operates trading activities, and publishes investment research while raising capital.

Capital: Wealth in the form of currency or assets used for investments.

Capital Raise: The technology and legal process of raising money.

Capital Gain: Gain on the sale of a capital asset, like real property, over the amount originally

invested.  Capital gain on assets held long-term (generally at least one year) are normally taxed at lower rates than earned income.

Cash Flow: The net amount of cash and cash-equivalents moving into and out of a business.

Cash Waterfall: A type of payment plan in which higher-tiered creditors receive interest and principal payments first, while the lower-tiered creditors receive interest and principal payments after the higher-tiered creditors are paid in full.

Cash-on-cash Return: A rate of return measures the annual return the investor made on the property in relation to the down payment only.

Commercial Real Estate: Commercial real estate is property that is used solely for business purposes and that are leased out to provide a workspace rather than a living space. Ranging from a single gas station to a huge shopping center, commercial real estate includes retailers of all kinds.

Common Equity: A component of Tier 1 capital that consists mostly of common stock held by a bank or other financial institution. Common Equity Tier 1 (CET1) is a capital measure that was introduced in 2014 as a precautionary measure to protect the economy from a financial crisis. It is expected that all banks should meet the minimum required CET1 ratio of 4.50% by 2019.

Core: A conservative investment strategy and property categorization in real estate where stable properties are acquired and maintained with very limited improvements to the property or to operations of the property.

Core Plus: A moderately conservative investment strategy and property categorization in real estate where relatively stable properties are acquired and maintained with some improvements to the property or to operations of the property, more than "core" but less than "value-add".

Crowdfunding: When multiple people invest in smaller amounts toward a venture.

Dividend: A payment made by a company to its shareholders. This is the distribution of the company’s profits paid to shareholders regularly (usually quarterly).

Debt: Money owed by one individual or entity to another individual or entity.

Deed: A legal document used by an asset owner to transfer his or her right of ownership (title) to another party.

Depreciation: The reduction in value of an asset over time.

Development: A business process that covers a range of activities from the renovation and re-leasing of existing buildings to the purchase of land, and the sale of developed land to others.

Distributions: The disbursement of assets from a fund, account, or individual security to an investor. 

Due Diligence: A comprehensive appraisal of an investment by a prospective buyer, especially to establish its assets and liabilities to determine its earning potential.

Encumbrance: A claim against a property by a party that is not the owner which can impact the transferability of the property and restrict its use until the encumbrance is lifted.

Equity: The value of shares issued by a company.

Escrow Account: An account held by a third party during the transaction period between two parties. The funds are held by the escrow service until the service receives instructions of obligations being fulfilled.

Fair Market Value: The price that a property or other asset would achieve in a competitive environment of multiple knowledgeable participants.

First Lein (mortgage or deed of trust): When a lien takes precedence over all other liens. Normally the first lien is held by the primary mortgage holder (lender).

Free Cash Flow (FCF): The cash a company generates after supporting operations and maintenance of capital assets.

Gross Amount: Ownership, value, and rights that an individual or entity holds in an asset net of any mortgage or liens against the asset.

Illiquid Asset: An asset that cannot be immediately transformed into cash.  Real estate is generally considered illiquid due to the extended period for which to accomplish a sale.

Inflation: A reduction in value of currency causing prices to increase.  Inflation is measured by the U.S. Bureau of Labor Statistics through the Consumer Price Index (CPI).

Institutional Lender: Financial intermediaries that invest capital on behalf of their depositors or customers.  These would include commercial banks, savings and loan associations and insurance companies, among others.

Interest-only Loan: An adjustable-rate mortgage that allows borrowers to pay only the interest rate for the first few years, often a low “teaser” rate. After the introductory period of one, three, or five years, the loan converts to a conventional mortgage and the interest rate may increase.

Internal Rate of Return: An iterative discounted cash flow return calculation in which cash flows from a property through sale of the asset are discounted by the calculated rate. If one discounts the cash flow stream by the IRR, the net present value would be zero.  IRR provides a comparative tool for analyzing alternative investment properties.

Investment Property: Real estate that is acquired to primarily generate income to investors.

Investor: A person or organization that puts forth money towards a property with the expectation of gaining profit.

Jumpstart Our Business Startups (JOBS) Act: The JOBS Act was a law passed in 2012. Intended to increase job creation and foster economic growth, the JOBS Act provides easier access to public capital markets through crowdfunding (Regulation A+) and other techniques.

Leverage: Leverage is the investment strategy of using borrowed money; specifically, the use of various financial instruments or borrowed capital to increase the potential return of an investment. Leverage can also refer to the amount of debt used to finance assets.  

Lien: A security measure in the form of a charge against a property to ensure the payment of an obligation.

Limited Partnership: Exists when two or more partners join together to form a business in which one or more partners is liable up to the amount of their investment only.

Liquidity: An asset that can be quickly bought or sold in the market without affecting the asset's price.

Liquid Asset: An asset that is available to be cashed in, traded, or exchanged for services or goods.

Market Area: The geographic location that is considered the primary area that drives demand for a specific property.

Mezzanine Finance: A loan that is of lesser priority than a first mortgage or deed of trust.  It may also have loans or equity subordinate to it (hence "mezzanine").  Generally, has the same priority as if it were called a second mortgage.

Mortgage: A legal document that applies a lien as a form of security for payment of a specific real estate loan.

Multi-housing: A property that houses more than one residential unit.  Typically refers to an apartment community, but also includes multi-unit student housing and properties designated for senior adults.

Net Asset Value (NAV): An estimation of the value of an investment fund.  NAV per share represents the pro rata value of a single share in the investment fund.

Net Operating Income: The income from an investment property after deducting all operating expenses but before debt service, capital expenses and income taxes.

Net Worth: An individual's wealth using the sum of all assets minus all obligations.

Occupancy Rate: The ratio of rented units to the total amount of available units.

Passive Income: Income earned from a rental property or other enterprise in which a person is not actively involved.

Passive Investor: An investor that is not directly involved in the management of a business or property.

Personal Liability: An individual or entity that is responsible for the performance and operation of a partnership and also assumes the primary liabilities of the partnership as opposed to Limited Partners, whose control of, and liability for the partnership is limited.

Portfolio: A collection of investment assets.

Principal: The sum of money borrowed.  Principal may be reduced over time through amortization.

Private Equity Fund: A pool of money that is raised through separate investors and used to collectively invest in real estate or other assets.

Private Placement: an investment that is presented to a private group of investors that follows requirements set forth by state securities registration and the U.S. Securities and Exchange Commission.

Pro Forma: A financial statement that provides an estimate of future cash flows.

Public Offering: A general solicitation of the public for the sale of securities or other investment units.  Public offering must be approved by the U.S. Securities and Exchange Commission and/or state agencies   A public offering is usually traded through national exchanges such as the New York Stock Exchange and is considered a liquid asset.

Real Estate: Property that consists of land and/or any permanent structures such as buildings.

Real Estate Investment Trust: An entity that raises capital through the sale of shares in the trust to investors in order to acquire investment real estate.

Recourse: When a lender is legally permitted to collect money from a borrower who has defaulted on a loan in addition to any assets the borrower put up for collateral.

Refinance: To secure a new loan to replace an existing loan.  Generally, this occurs as an existing loan nears maturity or when market conditions can provide better terms than those of the existing loan.

Registered Investment Advisor: An advisor that is registered with the Securities and Exchange Commission and the state in which they work, who purchases and manages investments made for their clients.

Regulation A: An exemption from registration requirements that apply to public offerings of securities that do not exceed $50 million in a one-year period.

Regulation A+: Mandated by the JOBS Act, Regulation A+ allows both accredited and non-accredited investors access to participate SEC-qualified offerings in order to invest in private companies.

Regulation D: Allows companies to offer and sell their securities without having to register the securities with the SEC. However, many other federal and state regulatory requirements still apply.

Return on Investment (ROI): Expressed as a percentage, ROI is calculated by taking net profit, dividing by the investment, and then multiplying it by 100 to reach a percentage.

Returns: Distributions or the profits that are paid to the investors.

Risk: A probability of loss or unmet expectations of cash flow returns.

Securities and Exchange Commission (SEC): The federal agency that seeks to protect the investing public by preventing misrepresentation, fraud, market manipulation, and other abuses in the securities markets.

Senior Housing: Housing that specifically houses senior adults.  Properties include age-restricted properties (ex. Properties limited to residents aged 65+), Independent Living (age-restricted with additional services, like meal plans and organized activities), Assisted Living (nursing care provided), among others.

Sponsor: The operator that manages all aspects of the of a real estate investment project, including day-to-day operations, capital projects, and loan administration.  The sponsor typically makes some investment in the property but will also raise equity from other investors.

Student Housing: Housing that specifically targets students as residents.  Typically, student housing properties will lease "by the bed" in a similar fashion as traditional dormitories, as opposed to conventional apartments which lease each housing unit separately.

Submarket Area: Similar to market area, a submarket area is a more focused region within the market.  Any particular submarket will generally have a more homogenous character than the market as a whole.

Subordination: The act of yielding priority. Often with mortgage loans, a subordination clause will be used as a clause in an agreement stating that the current claim on any debts will take priority over any other claims formed in other agreements made in the future.  For example, if a property is foreclosed and liquidated for cash, the first mortgage lender would get first dibs on the proceeds, with any remaining proceeds going to pay down a second mortgage.

The Capital Stack: The structure that outlines the sequence of priority to collect income from an investment property.

Title lll Regulation Crowdfunding: Outlined in the 2012 JOBS Act, Title III instructed the SEC to create an exemption from registration that enables issuers to engage in crowdfunding equity offerings to the general investing public.

Trust: An agreement made under legal terms that transfers property to a trustee by and for the benefit of a grantor of the trust.

Trustee: A neutral party that holds property in trust for another.

Unaccredited Investor: Someone who does not meet the accredited investor requirements listed by the Securities Exchange Commission (see Accredited Investor).

Undivided Interest: When an ownership group cedes all rights and decisions to the collective group. No member may sell, mortgage or otherwise affect the property without the consent of the entire group. 

Value-add: Improvements that a company makes to its products, services, or property as part of a new affiliation.

Waterfall Payment: A type of payment scheme in which higher-tiered creditors receive interest and principal payments first, while the lower-tiered creditors receive interest and principal payments after the higher-tiered creditors are paid in full. Debtors typically structure these schemes to prioritize the highest principal loans first as they are likely the most expensive.

Yield: A term that refers to the return on an investment.

Zoning Ordinance: Legal action that local governments use to specify the allocation of real estate asset classes.