Click a letter below to view each set of words.
In business, abatement is a reduction in owed fees including taxes or rent. For example, governments may lower taxes to attract business development.
Absorption refers to the number of homes sold in a given market relative to the total number of available homes and new homes added during that period of time. An absorption rate takes the total number of available homes and divides by average home sales per month. The resulting rate shows how long it might take for all homes to be sold in a given market. In practical terms, a high absorption rate suggests the likelihood that an owner will sell a property sooner than later.
Typically found in mortgages and real estate loans, an acceleration clause empowers the lender to demand immediate and total repayment of the outstanding principal. The acceleration clause is tied to certain loan provisions including the failure to make timely loan payments.
The specific definition is:
an individual with income exceeding $200,000 in each of the two most recent years (or joint income with his/her spouse exceeding $300,000 in each of those years) and a reasonable expectation of reaching the same income level in the current year;
an individual with a net worth (or joint net worth with his/her spouse) exceeding $1 million, excluding the person's primary residence.
A broader definition reveals that an accredited investor is a term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who have less need for the protections provided by various SEC filings. Also, in addition to individuals, accredited investors include banks, insurance companies, employee benefit plans, and trusts.
In business and finance accrue refers to the gradual increase or accumulation of funds within an account. For example, the interest paid by a bank accrues in a person's savings account.
Unlike a fixed-rate mortgage where the interest rate is fixed for the term of the loan, an adjustable-rate mortgage (ARM) features an interest rate that varies over time. An ARM mortgage starts out with a fixed rate typically for two or three years thereafter fluctuating with the market for the remainder of the term. The interest rate may reset on a monthly basis with the new rates based upon an initial benchmark plus the bank's defined margin. In practical terms, ARM's feature lower initial costs, interest, and payments, and are attractive to buyers who do not plan on staying put for very long.
Refers to the original cost of a property reduced by depreciation deductions and increased by capital expenditures. The adjusted tax basis helps determine final taxes pending sale of a given property.
In general, alternative financing refers to the growing number of funding methods and venues beyond the domain of traditional banking. This includes sub-prime lending by non-bank financial institutions. Alternative financing helps small business and individuals with poor credit obtain needed funds through peer-to-peer and crowdfunding resources.
These are investments that are not one of the three traditional asset types (stocks, bonds and cash). Alternative investments are more complex than traditional asset types, and lack the liquidity of other assets. Alternative Investments are typically held by institutional or accredited investors and include hedge funds, managed futures, real estate, commodities and derivatives contracts. Crowdfunding platforms for accredited investors are creating additional investment opportunities.
As it relates to finance, amortization is the repayment of debt with a fixed schedule of installments over a defined period of time.
The anchor tenant is the main tenant in a building or shopping center. The strength of their brand will attract other tenants and hopefully customers. A powerful anchor tenant benefits the developer in attracting additional investment.
Tenants in a building or shopping center that are smaller and less known than the anchor tenant.
An angel investor (also known as a informal investor or seed investor) is typically a high net worth individual who provides capital for a start-up business, usually in exchange for convertible debt or ownership equity. Unlike venture capitalists that manage the pooled funds of a group, angel investors typically invest their own funds. Because angel investments are high risk and subject to dilution from future rounds, angel investors receive a higher return than follow on investors.
A property's value as estimated by an authorized person. Appraisals are used to establish tax rates or the price of a property pending sale. Typically, the appraiser uses the current market value of similar properties to determine a correct value.
Refers to an increase in the real value of an asset over time. Appreciation can result from a number of factors including rising demand, decreasing supply, or changes in interest rates. As it relates to real estate, property values are influenced by changes in inflation rates, and are linked to the growth or decline of the surrounding market.
The ARV is the estimated value of a property minus the cost of all repairs.
As it relates to the sale of property, as is means that the seller offers no guarantees as to the condition of the property. The buyer is agreeing to purchase the property in its current state. The implication being, that after the sale is complete the new owner has no recourse if he should discover that the roof leaks.
Is a type of loan that allows a buyer to assume the obligations and terms without change, upon purchase of the related property.
Balance is the original loan amount minus payments made to date yields the balance of the loan.
A balloon payment is the final and largest installment paid toward a loan. Some loans feature small installments paid over a set number of years at the end of which the total balance comes due in a final balloon payment.
Tax basis is the cost of a purchased asset, which includes cash paid and any assumed liabilities. For example, if a buyer purchases a property for $50,000 in cash and assumes a mortgage for $150,000, the basis in the property is $200,000.
State laws enacted throughout the United States regulating the offering and sale of securities are called blue sky laws. Though the regulations vary from state to state the common purpose is to protect investors from fraud. The term derives from a statement uttered by Supreme Court Justice Joseph McKenna while commenting on fraudulent financial ventures of the day: speculative schemes which have no more basis than so many feet of blue sky. Prior to the passage of the Securities Act of 1933, 47 states had enacted their own blue sky laws. Today 40 out of 50 states base their laws upon the Uniform Securities Act of 1956.
A basis point is a unit of measure equal to 1/100 of 1% or 0.01%. In business and finance, basis points relate to interest rates where percentage differences of less than 1% are encountered. For example, if an interest rate of 3.25% rises 10 basis points, the new interest rate is 3.35%.
In business bootstrapping is the process of funding a business without outside investment. The founder or founders use their own capital to start the business and thus avoid diluting their ownership.
A bridge loan is a short-term loan taken out by a business or individual until the next round or permanent financing can be secured. Bridge loans are more costly than standard financing due to the higher risk. In commercial real estate, bridge loans enable a buyer to quickly close on a property or to exploit some short-term opportunity subsequent to securing long-term financing.
A broker is an individual or group (brokerage firm) that facilitates transactions between the buyers and sellers of an asset. In real estate, a broker is a licensed agent who represents property owners in real estate transactions.
Typically associated with the dot-com era and start up businesses, burn rate measures the speed with which a company uses up its shareholder capital before achieving profitability. The burn rate foretells the date when, in lieu of profitability, a company will need to secure additional funding or close the business.
A concept more than a quantifiable measure, business traction is a snapshot of how a business is generally proceeding. It addresses the question of whether a businesses' product or service is catching on in the marketplace or is a company's brand gaining strength or being eclipsed by the competition?
A buy-sell clause refers to a legally binding agreement between members of a company (co-owners, partners, or stockholders) that govern those situations where a member dies or otherwise leaves the business. The buy-sell clause stipulates how the departing member's interests are to be managed.
In business, a calculated risk is a decision carefully based on all available information, pro and con, to start a business or take a new direction like introducing a new product or expanding geographically.
A capitalization table (cap table) is a table listing the percentage of ownership within a company among its founders and investors.
In real estate, the Capitalization Rate (Cap Rate) measures the relative value of a given property. It illustrates a given property's potential or risk as compared to similar properties in the market. Cap rate is calculated by dividing annual net operating income by the original cost of the property or by its current estimated market value.
Capital is cash or other assets owned by a person or organization that is available to invest in a business or property.
In one context a capital call is simply a request for additional money from existing investors. It can also refer to a situation in which a fund manager, having waited for certain right conditions, issues a capital call (or draw down, capital commitment) to retrieve money promised by investors.
Profit gained from the sale of a capital asset including stocks, bonds, or property is called capital gain. For example, a buyer acquires a property for $200,000 and for a few years earns ordinary income. The buyer then sells the property for $250,000 due to its appreciation and earns a capital gain of $50,000.
The movement of money into and out of a business is known as cash flow. It is a strong indicator of a business' health. Being in arrears with rent, taxes, creditors; difficulty in paying salaries; negative working capital; and overall lack of profitability indicate negative cash flow. In real estate investment, cash flow refers to funds available to investors following deduction of expenses related to rental income.
For tax purposes a C Corporation refers to a company that files its own tax return separate from its owners. An S Corporation does not file a tax return but its shareholders pay taxes based upon their percent ownership. Most large companies are C Corporation.
Refers to property that is intended to generate profit as opposed to personal residential property. Commercial properties include office buildings, hotels, apartment buildings, shopping centers and others.
The total amount invested by the common shareholders is called common equity. This includes the value of the common shares as well as retained earnings and paid-in capital.
A property estimate based on the sales figures of similar properties is a comparative market analysis. It is not the same as a detailed appraisal conducted by an authorized agent. Real estate brokers or agents perform a comparative (competitive) analysis to assist sellers in determining reasonable listing prices.
Compound interest is the amount of earned interest added to the outstanding principal of a deposit or loan so it will be included in the next calculation of interest due. For example, a $20,000 deposit earning 5% interest compounded annually will earn $1000 dollars in interest the first year. When the earned interest is added to the principle, the next calculation is for a deposit of $21,000 at 5% yielding $1,050.
An investment in a company structured as a loan but that will be repaid to the investor as equity in the company.
In real estate, core refers to core properties, which are successful, income-producing properties. Core properties have solid tenants, high occupancy, and often higher market rent rates.
In real estate, a type of property that could benefit from some improvements for the purpose of rationalizing higher rents.
Based on data amassed by the three national credit bureaus (Experian, Equifax, and TransUnion) credit reports are generated automatically for each consumer along with a credit score that represents their creditworthiness or the probability that they will pay their bills. Banks, credit cards, and other lenders base their lending decisions on credit scores. The scores range from 300 to 850 with 850 being an excellent rating.
Refers to the growing practice of soliciting funds from the public or crowd, typically online. Initially a not-for-profit model, contributors were either donating money or receiving repayment in full without interest. Since the implementation of the JOBS act, new regulations enable accredited investors to earn equity from crowdfunding opportunities.
Also known as Peer-to-Peer lending, crowdlending is a relatively recent practice of borrowing money from unrelated individuals through an online intermediary. It is a way for individuals to obtain financing in lieu of bank loans. The model is for profit with borrowers paying interest based on their creditworthiness and other factors. The loans are unsecured.
A day count convention refers to the standard (or convention) a company utilizes in determining interest accrual. For example, a 30/360 day count convention bases calculations on uniform 30-day months and 360-day years as opposed to the actual numbers of days in our months and 365 days in a year.
A term common to venture capital, deal flow is the rate new proposals are received at a funding firm.
The amount of money owed by a debtor to a creditor.
To start or expand a business funds must be obtained from investors like angel investors, venture capitalists or banks. A bank loan most always is a secured loan, meaning that it is based on some form of collateral that is forfeited if the borrower defaults. Unsecured loans from banks are difficult to obtain and present less favorable terms. Debt financing refers to the various methods, provisions, sources, and collateral associated with obtaining funds to finance a business.
Debt service is a measure of loan repayments over a period of time. It includes the principle and the interest. For example, a loan being repaid with monthly installments of $1000 has an annual debt service of $12,000.
A metric used by lenders to determine a potential borrower's ability to cover their debts.
DSCR = Net Operating Cost / Total Debt Service
A deed is a written document that conveys title or ownership to real property.
Unlike a mortgage where a property owner repays a loan to a lender, a deed of trust involves a third party. In lieu of a mortgage, the borrower provides the lender with a promissory note that stipulates the terms for repaying the loan while a third party (or parties) approved by the lender is assigned as trustee. In the event the borrower defaults on the loan, the trustee assumes control of the property and liability for the debt pending final resolution.
Generally speaking default is the failure to satisfy established terms or obligations. When a borrower fails to make a certain number of monthly mortgage payments they are found in default.
In the event of a mortgage loan foreclosure the lender assumes control of the property and may conduct a foreclosure sale. If the sale amount is less than the outstanding balance and accrued interest owed by the former borrower, the lender can claim a deficiency and seek a judgment for the difference plus filing expenses.
A borrower is delinquent after missing a payment due date and grace period. Successive delinquencies lead to a declaration of default after which the lender may initiate foreclosure proceedings.
Demography is the statistical study of populations. A demographic analysis of a given region, city, or neighborhood will yield statistics as to racial, economic, ethnic, religious, birth rate, mortality rate, and many other possible parameters. As it relates to business and finance, the demographics of a given area will help lenders better predict the potential success of proposed investment projects.
In general terms, depreciation is the gradual reduction in the value of an asset over time as a result of depletion or obsolescence. In real estate, buildings and structural improvements made to buildings are subject to depreciation. A property owner can calculate the amount of depreciation and submit a depreciation deduction on the property tax. However, the property owner may be required to pay additional tax - "depreciation recapture" - on the amount that was deducted.
In real estate, development is the process of acquiring land, creating infrastructure like roads and utilities, and erecting housing, apartments, office buildings or shopping centers.
Discounted cash flow is a method used to calculate the value of a potential investment. The formula takes future free cash flow projections (operating cash flow minus capital expenses) and reduces the projections by an estimated discount rate to arrive at a present value estimate (the current value of the projected future free cash flow).
Distributions are periodic payments made to investors that derive from a given investments? profits or interest payments. The payment amounts and frequencies vary according to the terms of specific deals.
Usually associated with social causes, charitable endeavors, artistic projects, or non-profit companies, donation-based crowdfunding is the solicitation of donations from donors who will receive no monetary profit.
The term due diligence entered the vernacular with The Securities Act of 1933. The Act postulated a Due Diligence defense for broker-dealers accused of inadequate disclosure relative to the sale of securities. Due diligence is an investigation into all aspects of a potential investment, purchase, or acquisition. As it relates to crowdfunding, an investor will be supplied with all the information required to fulfill due diligence prior to executing an agreement.
As applied to securities earnings yield is the quotient of earnings per share divided by the share price. The earnings yield is used to compare the performance of a stock, a sector or the whole stock market against bond yields.
The Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) is an online database that collects, validates, indexes, accepts, and forwards company filings required the Securities and Exchange Commission (SEC). The SEC allocated $30 million in 1984 to implement the EDGAR pilot program. The mission was to create a more efficient and less costly means for the investing public to access securities information. A gradual phase-in was created requiring companies to file with EDGAR. By the fall of 1995, 92% of all public companies were filing with EDGAR. Today, all public companies are required to submit their filings.
As it relates to real estate, an encumbrance is any condition or circumstance that negatively affects the value of a property. Encumbrances include liens, leases, easements, security interests, subsurface rights, and numerous other examples. An encumbrance does not prohibit the sale of a property but does diminish its value relative to market norms.
In business, entity refers to the kind of organization that owns a property or business. Examples include corporation, individual ownership, partnership, limited liability company, real estate investment trust, and others.
Equity is the value of an asset minus the sum of all its liabilities. In real estate, equity is a given property's market value less the outstanding mortgage and any other liens. Equity holders have a chance to earn more than debt holders as any appreciation over the original cost reverts to the equity holder upon sale of the property.
In contrast to donation-based crowdfunding where donors will not obtain profit from their investments, equity-base crowdfunding currently allows accredited investors to obtain an equity stake (or debt-based) in an investment opportunity. The SEC has yet to finalize the rules that will allow non-accredited investors to participate in for-profit Title III Equity-Based Crowdfunding.
In general business terms, escrow entails an agreement between two or more bargaining parties to submit assets to a third party for safekeeping. During a business transaction funds may be held in an escrow account by an escrow agent pending fulfillment of certain conditions. Mortgages often include escrow provisions to insure that the borrower does not fall behind on home insurance and tax payments.
An executive summary constitutes the beginning of a business plan. It summarizes or references all the elements that will be discussed at length within the body of the plan. It is intended to provide an enticing snapshot of the business opportunity and engage the interest of investors.
The fair market value of a property is the highest price that a buyer would willingly pay and the lowest price a seller would accept, assuming both parties are properly informed and under no pressure to either buy or sell.
FICO is an acronym for the Fair Isaac Corporation. Founded in 1956 by William Fair and Earl Issac who created a method for calculating an individual's credit worthiness. The FICO credit score is widely used by lenders and consumers.
The Financial Industry Regulatory Authority (FINRA) is responsible for the regulation of securities firms throughout the United States. It was founded in 2007 through a merger between the NASD and NYSE Regulation, Inc. FINRA regulates the Nasdaq stock market and over-the-counter markets. FINRA's mandate is to ensure that its members maintain SEC standards.
The first lien is the primary lien on a property. Usually a mortgage or deed of trust, in the event of sale or foreclosure the first lien is satisfied in full before other liens.
In the event that a borrower defaults on a mortgage the lender may initiate foreclosure proceedings. Foreclosure is the legal process whereby the lender can seize the property, evict the residents, and sell the home. The lender is obliged to sell the property at fair market value, and upon paying the due amount (loan balance and expenses) any remaining money reverts to the borrower. The borrower remains liable for the due amount until the property is sold and for any shortfall if the property sells for less than the due amount.
A common method for calculating the free cash flow of a business is to take the earnings before interest and taxes, add any depreciation and amortization, and then subtract capital expenditure. This metric provides an estimate of cash that is available for distribution among securities holders without impinging on operations. In real estate it provides a measure of a property's capacity to generate cash after allowing for various expenditures.
General Partner refers to one of the co-owners of a general partnership, a type of business organization that is unincorporated. General partners share full liability for actions taken by any one partner.
As defined by the SEC:
General solicitation includes advertisements published in newspapers and magazines, public websites, communications broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising. In addition, the use of an unrestricted, and therefore publicly available, website constitutes general solicitation. The solicitation must be an offer of securities, but solicitations that condition the market for an offering of securities may be considered to be offers. (www.sec.gov)
Prior to the enactment of the JOBS Act, general solicitation was prohibited. Now, under Rule 506(c) of Regulation D issuers are allowed to generally solicit accredited investors. As a result equity-based and other for-profit crowdfunding websites engage in legal activity.
A green building is a structure that incorporates technologies that minimize utility costs, utilize alternative energy, and otherwise promote environmental considerations.
The total amount of income prior to the payment of taxes, fees or subtraction of other costs.
In real estate, ground lease entails the leasing of land only. Usually at the end of a ground (or land) lease the land and all subsequently built structures revert to the owner.
A guaranty is additional assurance that a party will fulfill a contract. For example, a lender might require a borrower and his/her spouse to sign a personal guarantee that a loan will be repaid. If the borrower is organized as a Limited Liability Company (LLC) then the protections accorded by the LLC are nullified and the borrower's personal assets essentially serve as collateral for the loan.
A hard asset is either a tangible or financial asset. Tangible assets include land, structures, inventory, and equipment. Financial assets include cash, credit, and financial instruments like stocks and bonds.
In general terms a hazardous substance is any substance defined by one or more of the following properties:
As it relates to real estate, property sellers are obliged to disclose, and property buyers concerned to discover the presence of hazardous substances on a property.
An inflation hedge is an investment that increases in value at a greater rate than inflation. Real estate investments are considered good inflation hedges.
A geographic area characterized by a large and growing population. In terms of business, and specifically as regards real estate, population densities correlate to growth or decline in demand and thus the prospects for a successful business.
In general, hold period refers to the length of time an asset is held. In real estate some investors prefer short holds in order to remain financially flexible while other investors prefer to hold long in order to delay depreciation recapture and avoid frequent transaction costs.
Funds that are not immediately disbursed to a borrower but are withheld by a lender pending the satisfaction of certain conditions are defined as holdback.
Assets that cannot conveniently transform to cash are called illiquid assets. Unlike stocks, bonds, and cash, assets like buildings, vehicles, and private equity simply take longer in terms of finding buyers, following procedures, and abiding by investment terms that may require an investor to hold the investment for a specified time.
Improvements refers to the construction of buildings, roads, sewers and other infrastructure on a given piece of land.
In real estate, the term in-fill development refers to the practice of developing land parcels that lie adjacent to or between previously developed properties. This enables developers to utilize existing improvements without having to expand and develop the outer margins of a development.
Income properties are properties that produce rental income. Income properties include: office buildings, apartment buildings, shopping centers, industrial properties, in short any property for which the owner can exact rent. In contrast, personal residences, churches, and schools are not income properties.
A business incubator is a firm that assists young companies over the months or years of their start-up phase. Incubators provide affordable workspace, back office services, management and marketing support, as well as financial resources.
The term industrial property has two meanings. It can refer to intangible elements protected under intellectual property law including inventions, trademarks, and industrial designs. In real estate, it refers to manufacturing plants, distribution and warehouse facilities, research and development centers, and other properties requiring complex, customized features that render the property difficult to relet.
An IPO marks the transformation of a privately held company into a publicly traded company. It is the moment when the company begins selling shares of stock to the public. IPO's are typically issued by start-up companies seeking capital expansion but may also be conducted by established, older, privately held companies desirous of going public.
In economics, inflation is a continued increase in the price of goods and services. Inflation results in the reduction of a currency's purchasing power as each unit of currency buys fewer goods and services. However there are positive effects of inflation. For example, since the value of money is declining during inflationary periods, individuals have a greater incentive to purchase and invest. The increase in investing and consumer buying benefits the economy.
By general definition, institutional investors are investment intermediaries that manage investments on behalf of an organization or group of depositors. Organizations including banks, mutual funds, insurance companies, and pension funds have become the primary participants in securities trading with the largest share of stockmarket volume. Institutional lenders like commercial banks and savings & loan also originate loans directly to real estate developers.
Distinct from tangible assets, intellectual property entails unique creations of the intellect that are assigned exclusive ownership to companies or individuals through established property law. Intellectual property includes the copyright of written works, patents on discoveries and inventions, and the trademark of words, phrases, symbols and designs.
Interest is understood as the price one pays for borrowing money. A borrower accepts the obligation to repay the principal amount plus interest. The lender receives the interest as income.
With an interest-only loan the borrower's regular payments go toward the interest only and not the principal. At the end of the term the entire principle comes due.
This term relates to bonds that mature within a 3-to-10 year period or intermediate term. In recent years the intermediate term has replaced the standard 30-year Treasury Bond.
The internal rate of return (IRR) is an overall measurement of an investment's profitability. The IRR calculates property improvements, multiple year cash flows, capital appreciation, purchase price, and anticipated sale price. It provides the investor with an estimate of how much return is expected over the full term of the investment. While useful, IRR incorporates many assumptions including future interest rates.
The Securities and Exchange Commission regulates crowdfunding on a national level through the JOBS Act. Additionally, since August 2014 some states have enacted intrastate (in state) crowdfunding regulations to govern crowdfunding activities within their own states.
An example of intrastate crowdfunding regulation is Invest Georgia Exemption (IGE). The Georgia State Securities Division enacted an exemption to existing securities regulations in order to stimulate crowdfunding activity for small businesses and start-ups within its borders. The provision includes the following measures:
Another example of intrastate crowdfunding regulation, this exemption is designed to assist small businesses and other organizations formed in Kansas raise up to a total of $1,000,000 during a 12-month period. Sales to any one purchaser are limited to $5,000 unless the purchaser is an accredited investor as defined by Regulation D, Rule 501 of the Securities Act of 1933. Other stipulations include:
An issuer is a legal entity concerned with the formulation, registration, and sale of securities. Issuers may be government entities, corporations or investment trusts. With the advent of crowdfunding an issuer may be an intermediary working through a funding website to secure financing for small businesses and start-ups. An issuer is legally responsible for the obligations inherent to the issue and for fulfilling jurisdictional regulations. The issuer is required to submit reports on unfolding financial conditions and any developments relevant to the issue.
A business arrangement in which two or more parties invest in a single investment opportunity or venture. In a joint venture each party shares responsibility for profits, loss, costs, and other consequences. A joint venture is separate from the parties other business interests.
Mortgages vary in regards to their provisions. One such provision is the "power of sale" clause, which empowers the lender, upon default, to seize a property, vacate it, and sell it. In the absence of a power of sale clause the foreclosure is processed through the state courts, hence known as a judicial foreclosure. Many states require judicial foreclosure in order to better protect debtors from unscrupulous lenders.
On April 5, 2012, President Obama signed into law the Jumpstart Our Business Startups Act (JOBS Act). The primary intent of the JOBS Act is to stimulate job creation by freeing startup and emerging growth companies from certain federal securities regulations. Specifically, those regulations governing a company's ability to raise capital that date back to the Securities Act of 1933. One key change resulting from the JOBS Act is the enablement of crowdfunding or the ability to solicit investment from accredited investors.
A letter of intent outlines the terms of a potential business transaction between two or more parties. Preliminary to a contract, it is not a binding agreement.
In general, leverage is the ability to engage an opportunity in a way that increases positive outcomes (profit) with a correspondingly lower outlay of cash or resources. For example, a investor seeks to buy a rental property for $100,000. Given a net operating income of $10,000 per year, if the borrower purchases the property outright with cash, the annual rate of return will be 10% ($10,000/$100,000). However, the invester may leverage the investment by putting down $25,000 instead of $100,000 and borrowing $75,000 with 8% interest. The borrowed amount of $75,000 at 8% results in a total annual interest payment of $6,000. The annual rate of return is now up to 16% ($10,000 operating income minus $6,000 interest = $4,000 net operating income, and $4,000/$25,000 = 16%)
In real estate a lien is an encumbrance on a property insuring that a lender is fully compensated in the event that the property owner sells. For example, a mortgage constitutes a lien against a property by establishing the property as collateral for repayment of the loan. Municipalities may place liens against properties when property owners fail to pay taxes.
A limited liability company is a type of business organization that combines the limited liability of a corporation with the efficient and flexible features of a partnership. Though not authorized in every state, LLC's are easy to establish and not subject to taxation but all profits and losses are "passed through" to each member of the LLC and reported n their individual tax returns.
A business structure that is not a legal entity separate from its owners wherein one or more partners share limited liability based on amounts invested and a general partner who assumes greater liability for the company's activity. The general partner controls and manages the company while limited partners have no role in management. Both partner types share in the benefits of the company but the general partner is also compensated for managerial duties.
Liquidity refers to assets that are easily converted to cash. The ease relates to large, open markets and procedures that enable quick transfer of ownership. Stocks, bonds, and money market funds are considered liquid.
A crowdfunding model enabling a pool of investors to earn interest on money loaned to a borrower. As with all crowdfunding operations, borrowers seeking to expand a business or start a new business can post their opportunity on a crowdfunding portal and hopefully attract investors.
Any loan or other financial obligation owed for a period exceeding twelve months is considered long term debt. Long term debt is a measure of a company's leverage. Bank loans, bonds, notes, and other financial arrangements can be long term debt.
Similar to loan-to-value ratio, loan-to-cost ratio (LTC) measures the amount of money requested by a lender to finance a project against the total cost to build the project. For example, if a borrower requests $750,000 for a project that will cost $1 million to complete, the LTC is 75%. A high LTC equates to higher risk.
In real estate the loan-to-value ratio (LTV) is an important metric used by lenders to determine the risk associated with a loan. The LTV compares the amount borrowed to the value of the property. Lenders usually use an appraisal to obtain the property value. If a borrower seeks a loan amount of $50,000 and the home is valued at $100,000, the LTV is 50%. The high LTV?s of 90% common during the 1980?s are no longer acceptable.
A geographic area relative in size for each product and service available within its boundaries. For example, the majority of viewers of a local TV station will reside in a certain area. Patrons of a supermarket will largely reside within a defined radius. The market area for a large shopping mall will be greater than the market area of a strip mall.
In general business terms, maturity is the date at which a project, program, contract, or other agreement ends. For example, in a mortgage, maturity is the date when the loan (principal and interest) is fully repaid.
A geographical area defined by the United States Office of Management and Budget for census and demographic measures.
A business may seek financing from various sources including venture capitalists, private investors, and banks. The combination of sources comprises a list or capital stack that reflects the seniority of the lenders. At the top are senior debt holders. Often banks or bondholders, they are the first to be repaid in the event of bankruptcy. Beneath senior debt but above common stock holders lies the mezzanine level. A combination of debt and equity financing, mezzanine financing is debt that can convert to equity interest in a company (or property in real estate) if the debt is not repaid in time or other conditions are not met. Mezzanine financing is usually structured as an unsecured note or preferred stock. Because it entails higher risk mezzanine debt holders see a higher return than senior debt holders.
In real estate a mortgage is a legal agreement used by businesses or individuals to purchase a property by using the property as collateral against a loan. The borrower repays the loan through a predetermined schedule of installments.
In general a building that accommodates more than a single family. Typically it refers to a an apartment building of more than four units. In commercial real estate, multi-family units are considered favorable investments.
A real estate term indicating the percentage of rooms or apartments that are rented in a given building. Conversely the vacancy rate indicates how many rooms are vacant.
Office buildings pose distinct advantages and disadvantages that should be understood when considering such an investment. Usually, incoming tenants require some modifications so creditworthiness is important as an indication of the tenants' potential duration, as re-leasing the space will take time and additional modification. A business tenant is likely interested in right of first refusal for additional space and the option of lease-to-buy.
Expenditures necessary to maintain a business or property excluding loans, income taxes, and depreciation are called operating expenses. Operating expenses include rent, utilities, insurance, maintenance costs, and other fees.
Income subject to regular tax rates including wages, tips, salaries, interest payments, and dividends.
In real estate the lender passes on origination fees to the borrower covering the cost of credit reports, property appraisal, broker fees, and title insurance.
Founded in 1971 by the National Association of Securities Dealers, the NASDAQ is the world's first electronic marketplace for buying and selling securities. The NASDAQ is now currently owned and operated by The NASDAQ OMX Group. Combining with the Scandinavian OMX stock exchange in 2007, The NASDAQ OMX Group is the largest exchange company in the world. NASDAQ also refers to the Nasdaq Composite, an index of over 3,000 stocks which includes many of the world's important technology firms.
In real estate net operating income is the gross income from all sources including rent, parking, and service fees minus all operating expenses like utilities, property taxes, repairs, and insurance. It excludes loan payments, capital expenditures, depreciation, and amortization.
A term used in business and economics, network effect refers to the rising value of a good or service as it is adopted by more users. A typical example is the Internet. Initially used by a small number of individuals within the military and scientific community (ARPANET). Now the Internet is ubiquitous and invaluable to individuals, society, business, and government. Also known as network externality it typically refers to positive outcomes. However, negative network effect can occur as witnessed by anyone ever stuck in a traffic jam.
A measure of personal wealth, net worth is the total value of assets minus the sum of all debts and obligations. An ongoing increase in net worth is a sign of solid financial health. The SEC uses net worth ($1 million) as an indicator of accredited investor status.
A nondisclosure agreement or NDA is a contract signed by two or more parties for the purpose of enforcing confidentiality. Typically used during the exploratory stage of a business transaction, entities sign an NDA in order to safeguard sensitive information from competitors.
The term nonrecourse refers to the limitation of liability. For example, a mortgage includes provisions that enable a lender to foreclose on a borrower?s property in the event of default but the lender has no recourse to the borrower?s other assets.
A promissory note is a legally binding document that outlines terms and conditions for the repayment of loan or the purchase of some asset. For example, a borrower wants to purchase a business but cannot obtain a bank loan. The borrower can sign a note for the business agreeing to pay the former owner monthly installments until the agreed sale price of the business is reached.
A real estate term referring to the division of a property among co-owners who previously owned the property by tenancy in common. Following partition each former cotenant will own a defined tract of land with individual rights and liability to sell or develop the land.
A type of business organization involving two or more individuals who jointly own the assets and liabilities of the company, and share in the profits and losses according to the terms of the partnership. Unlike a corporation, a partnership does not file income tax. Each partner pays personal income tax on their share of the income.
A passive investor is an individual or entity that invests money in a business opportunity without participating in its management.
The price to earnings ratio is a metric that helps shareholders and potential investors identify the growth of a company's earnings. The calculation takes the current share price of a security and divides it by per share earnings. For example, a stock currently trades at $30 per share and its per share earnings for the past year has been $1.50 per share.
The P/E is: $30 / $1.50 = 20.
The price to sales ratio is a metric used to calculate the growth potential of a company. The P/S Ratio is: Current share price of a security divided by sales revenue per share.
Also known as social lending, peer-to-peer lending (P2P) allows individuals to lend and borrow money outside of traditional financial institutions. Crowdfunding websites enable P2P transactions. Because the safeguards associated with traditional lenders do not extend to P2P lenders, the risk of default is higher. To offset that risk interest rates tend to be higher so P2P investors will garner better returns if the investment succeeds..
Enabled by the Internet, peer-to-peer marketplace refers to an online platform that facilitates transactions between individuals. The transactions entail the exchange of goods and services between peers without a middleman excluding, of course, the company that owns and operates the platform. Ebay is a popular example of a peer-to-peer marketplace.
Preferred equity is the type of equity that derives from preferred stock. Within a given investment opportunity, preferred stock is senior to common stock but subordinate to bonds. Preferred stock holders enjoy preference with respect to dividend distribution and liquidation.
A private placement is a non-public offering of securities to a limited group of investors. It is not subject to the same SEC filing requirements that apply to public offerings. Private placements can entail common stock, preferred stock, promissory notes, warrants, or bonds. Typically the domain of institutional investors like banks, insurance companies, and pension funds, The JOBS ACT increases private placement accessibility to accredited investors via crowdfunding websites.
The general public's opportunity to purchase securities approved by the SEC and/or state securities agencies is known as a public offering.
The term refinance refers to the process of replacing an existing loan (usually mortgage) with a new loan using the same assets as collateral. Often initiated for the purpose of obtaining more money or a better interest rate, a refinance typically entails some fees that can be absorbed by the new loan.
The Securities Act of 1993 required issuers to register offers to sell securities with the SEC. The JOBS Act of 2012 mandated the SEC to amend some of these regulations in the interest of promoting business start-ups and small companies that were stifled by the costs related to filing. Regulation provides an exemption to previous filing requirements that include the following advantages:
Securities offerings cannot exceed $5 million in any twelve-month period.
On March 25, 2015, the SEC adopted final rules relative to Regulation A, establishing two tiers:
The A+ amendments preserve most of the Regulation A provisions but expand the earlier $5 million in a twelve-month period to $50 million However,Tier 2 issuers are required to include audited financial statements in their offering documents, and to file annual, semiannual, and current reports with the SEC.
An S Corporation is a type of business structure where income, losses, income taxes, deductions, and credits carry over to the shareholders to be filed on their personal income tax returns. The S corporation does not file an income tax return.
In real estate an investor with a secured position can initiate foreclosure proceedings as a result of a borrower's default.
Following the Stock Market crash of 1929 and the ensuing Great Depression, Congress sought to enact preventive measures. The Securities Act of 1933 ensures that buyers of securities receive complete and accurate information before completing a securities purchase. Moreover, the sale of securities via interstate commerce must be registered with the SEC. The Securities Act of 1933 was the first major federal legislation to regulate the offer and sale of securities.
The Securities and Exchange Commission (SEC) was mandated by the Securities Act of 1933 and brought into being with the Securities Exchange Act of 1934. The SEC pursues a three-part mission:
In pursuing its mission the SEC is empowered to bring legal action against companies and individuals that commit fraud, fail to provide required information, or engage in insider trading.
Part of the 2012 JOBS Act, Title II requires the SEC to amend existing regulations prohibiting the direct solicitation of accredited investors for private placements. On July 10, 2013 the SEC released new rules allowing any company, public or private, to engage accredited investors without SEC registration.
Part of the 2012 JOBS Act, Title III requires the SEC to create an exemption to established regulations (Securities Act of 1933) that will allow the general public (unaccredited investors) to participate in crowdfunding offerings. Still pending final approval, Title III is expected in 2016. Some of the provisions being considered include:
Unaccredited investors are those who do not meet the requirements for accredited status as defined by the SEC. To be accredited, an investor must demonstrate a net worth of at least $1 million or income of at least $200,000 ($300,000 with spouse) for two preceding years. It is assumed that persons who meet such criteria possess the knowledge or sophistication necessary to make informed investment decisions. Hence, unaccredited investors are not allowed to participate in many investment opportunities. The SEC is in the process of finalizing regulations that will enable their increased participation.
An unsecured loan is a loan made in the absence of collateral. Also known as a character loan or good faith loan, the borrower may sign a promissory note but is not required to back the loan with personal assets. The borrower's net worth, creditworthiness, and reputation are sufficient to secure the loan.
In general terms, valuation is the appraisal or estimation of an assets worth. The valuation of a business is necessary to establish its sale value, and to determine shares of ownership among partners.
A category of funding for a startup or growing business provided by specialized venture capital firms or private investors. Startup companies typically obtain venture funding in exchange for equity in the business. Since risk is high, venture capitalists often take an active role in the decision making of the company.
The term zoning refers to the practice of subdividing a municipality into zones within which various uses are permitted. For example, commercial and industrial activity is prohibited within a residential zone. Local governments are largely responsible for implementing and regulating zoning plans.
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