Investment Terms. Glossary

Transcription

1 Investment Terms Glossary

2 DOOR Industry term used instead of Unit. T 12 Trailing 12 P&L (Profit & Loss). T 3 Trailing 3 P&L (Profit & Loss). PRO FORMA/UNDERWRITING Industry term referring to financially analyzing investment real estate. CAP Rate A cap rate measures a property s rate of return for a single year without taking into account debt on the asset. OM Offering Memorandum broker document describing the property. RR Rent Roll lists all tenants; their lease amount and lease start/end date. 2 HARD MONEY Money that the seller keeps if you walk away from the deal. Hard money can be at time of contract, after due diligence, or any other time agreed upon.

3 RECOURSE VS. NON RECOURSE LOAN Recourse personally liable Non Recourse not personally liable SYNDICATION Sponsor raises funds from a group of people. ECONOMIC VACANCY This is the % that is not being collected against the market rents. Includes vacancy, bad debt/non-payment, actual rents vs. market rents. 3 LOI Letter of Intent (non-binding offer to purchase 1 or 2 pages with key terms). PSA Purchase and Sale Agreement Contract between the buyer and seller. NOI Net Operating Income. RUBS Ratio Utility Bills System Billing back the tenants for utilities.

4 ABP All Bills Paid property pays for all utilities. CASH FLOW Buy for cash flow and pay market price. APPRECIATION Buy for appreciation (forced through rehab and/or operations; or natural based on the market). 4 DD Due Diligence inspecting the property s exterior and interior to determine the condition and deferred maintenance (required maintenance that the current seller has not performed); also includes lease audit. KP/GUARANTOR Key Principal Signs on the loan + equity. Guarantor Signs on the loan, but no equity. PRICE TBD This is when a price is not listed on the OM. However, contract the broker and they will let you know the Strike Price/Whisper Price.

5 RE-TRADE After due diligence, the buyer goes back to the seller asking for items to be fixed and/or a credit to fix deferred maintenance items. OA Operating Agreement Most deals are created with a LLC governing how the LLC s business will be operated. DISPOSITION Disposing or selling of a property. LEVERAGE Using other money such as a loan. AMORTIZATION PERIOD Number of years it will take you to repay the loan. Typically years. SA Subscription Agreement Application by an investor to join a limited partnership (LLC) for real estate investing. PPM Private Placement Memorandum Private offering used to raise money from investors. 5

6 BOV Broker Opinion of Value Broker provides this to a seller when the broker is trying to get the listing to sell the property. BEST & FINAL Process whereby a seller downselects buyers to a smaller group and asks them to submit their best and final offer. PFS Personal Financial Statement Has your assets and liabilities; net worth. ASSET MANAGER Manages the property mgt. company. Fee is typically 1.5-2% to the asset manager. LISTING BROKER The broker that has the property listed. BUYER BROKER A broker representing the buyer. JV Joint Venture Sponsoring a deal with one or more other people. 6

7 WORKING CAPITAL Funds used for future capital items (rule of thumb = 1 month of rents) REVERSION CAP RATE Cap rate you think at time of sale for the property. MAINTENANCE EXPENSES Costs are expensed for tax purposes. For example, fix and AC unit. RISK FEE A fee charged to a tenant that has a lower credit score. DEFERRED MAINTENANCE (DM) Required maintenance that has not been performed. CAPITAL COSTS Costs can be capitalized over x# or years for tax purposes. Example, replace an AC unit. 7 PRIMARY MARKET 5 million or more people, but also need to look at the investment activity. For example Detroit has more than 5 million people, but low investments so it is considered a secondary market.

8 SECONDARY MARKET 2-5 million people, but also need to look at investment activity. For example, Austin has less than 2 million people, but is considered secondary due to investment activity. TERTIARY MARKET Less than 2 million people. YIELD MAINTENANCE A prepayment penalty that, in the event the borrower pays off a loan before maturity, allows the lender to attain the same yield as if the borrower had made all scheduled mortgage payments until maturity. 8 ALURA A Land Use Restrictions Agreement Seller bought the property and received tax credits and now there is a limit on the amount of $ a tenant can make. You will have a harder time selling this type of property. PROOF OF FUNDS Account statements (excluding retirement) showing liquidity to close the deal. PROPERTY TRADED FOR Term used to represent what a property sold for.

9 SD IRA Self Directed IRA, and investment vehicle that allows tax advantaged growth and income. CUSTODIAN A neutral third party, most often in charge of the self directed IRA account, handles the accounting of the SD IRA. ROTH IRA A Roth IRA is a special retirement account where you pay taxes on money going into your account and then all future withdrawals are tax free. ERISA The Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L , 88 Stat. 829, enacted September 2, 1974, codified in part at 29 U.S.C. ch. 18) is a federal law that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries. 9

10 SEP IRA A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. (SEP stands for Simplified Employee Pension.) Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee's name. Employees of the business cannot contribute - the employer does. Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal. One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. For 2016 business owners can contribute up to 25% of income or $53,000, whichever is less. 10 SOLO 401K (also known as a Self Employed 401(k) or Individual 401(k)), is a 401(k) qualified retirement plan for Americans that was designed specifically for employers with no fulltime employees other than the business owner(s) and their spouse(s). The general 401(k) plan gives employees an incentive to save for retirement by allowing them to designate funds as 401(k) funds and thus not have to pay taxes on them until the employee reaches retirement age. In this plan, both the employee and his/her employer may make contributions to the plan. The Solo 401(k) is unique because it only covers the business owner(s) and their spouse.

11 IMPACT INVESTING Refers to investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. ASSET CLASS A general ranking system that rates the quality of the property, its location, amenities, the surrounding area and the primary tenant occupations. PROPERTY TYPE Property Type (also often referred to as asset class, though the distinction must be made) Commercial property assets can be allocated among four major property types: Apartments/Multi-Family, Office, Retail, and Industrial. Other property types in the commercial sector include self-storage facilities, healthcare properties, hotel/lodging accommodations, and senior living centers. PROMISSORY NOTE A signed document containing a written promise to pay a stated sum to specified person or the bearer at a specified date or on demand. 11

12 PRIVATE NOTE LENDING The origination of new, or the purchase of existing real estate secured mortgages and/or trust deeds. A method that many investors create passive income. PRIVATE EQUITY INVESTING Private equity is capital made available to private companies or investors. The participant is most often a part owner in the investment and often receives additional benefits such as section 179 depreciation. 12