A reduction in amount or intensity. Usually applies to decreases in taxes or rent.
An estimate of the new occupancy, or amount of inventory that is being “absorbed,” of a particular type of land use.
To accumulate or increase; generally refers to payments owed but which have not yet been paid. For example: XYZ Corporation borrowed $1 million at 6% interest, payable annually at the end of the year (i.e., $60,000 per year). Each month $5,000 of interest on the loan (1/12th of the annual total) accrues.
An alternative investment refers to any investment which does classify as “traditional”. Traditional investments are widely considered to be stocks, bonds and cash.
Active income is income earned as a direct result of a specific effort. In other words, input is correlated to output.
An investor who invests their own money into early stage companies and also provides assistance to help the company grow.
An increase in value is referred to as “appreciation”.
As opposed to an interest-only loan in which each repayment installment consists only of interest payments with a single lump-sum principal repayment at the end of the loan period, each repayment installment of an amortizing loan consists of both principal and interest.
An Accredited Investor – with a few exceptions for entities – either has over $1 million in net worth (minus their home) or earned over $200,000 for the past two years and expects the same this year ($300,000 if joint with spouse).
A seed round is the first significant money a startup receives, typically from many angel investors. While there are exceptions, most seed rounds raise between $500,000 and $2 million.
A basis point (bps) is a unit that is equal to 1/100th of 1%, in other words one basis point is equal to 0.01%, similarly a 1% change is equal to a 100 basis point change.
An investment program in which funds are invested into an entity without investors knowing which properties will be purchased.
A state-licensed agent who, for a fee, acts for property owners in real estate transactions, within the scope of that state’s law.
The capitalization rate, or “cap rate,” refers to a ratio used to convert an income stream into an estimate of value. The income stream utilized is the property’s net operating income, which takes into account expenses such as utilities, insurance, management, and repairs, but which does not include financing expenses (like debt service). At the time of acquisition, the cap rate can be figured by dividing a property’s net operating income by the property’s purchase price (its then current value).
Capital is any financial asset or the value of an asset.
Periodic payments available to an equity investor, after deducting all other expenses applicable to rental income, including operating and financing expenses. Can be contrasted with net operating income, which deducts from gross rental income the various operating expenses, but which does not also factor in the effect of financing expenses.
Cash-on-cash return is one of the most widely used metrics in commercial real estate. As the name implies, this metric is calculated by dividing annual before tax cash-flow by the total cash invested in a project.
Gain on the sale of a capital asset like real property. Capital gains enjoyed on assets held for a long term (generally at least one year) often enjoy lower tax rates than ordinary income.
Carried Interest is a share of the profits from an investment.
It’s paid by backers to investors, typically when a startup is acquired or after an IPO.
A form of debt that may convert into equity at some point in the future.
Funding a product, idea, or venture using small amounts of money raised from the “crowd.”
Capitalization (Cap) Rate
The capitalization or cap rate measures a property’s yield in a one-year time frame, making it easy to compare one property’s cash flow to another on an equal basis – without taking into account any debt on the asset.
An amount of money (obligation) owed by one party (the debtor) to another party (the creditor).
Development is the process of building or adding to existing structures to increase the value of a property.
Payments made to investors periodically, typically over the course a calendar year, either from profits or interest payments.
The discount rate is a term in a Convertible Note or SAFE that gives investors a reduced price to that paid by the Series A investors.
Let’s say you hold a convertible note with a 20% discount rate. If a venture capitalist invests in that company at $20 million valuation paying $3 per share, your note converts to equity at $2.40 per share. Note that discount rates usually are only applied when the valuation is below the Valuation Cap.
Discounted Cash Flow
A method of investment analysis in which anticipated future cash income from an investment is estimated and converted into a rate of return (generally the internal rate of return, or IRR) based on the time value of money. Alternatively, when a rate of return is specified, a net present value of an investment can be estimated.
A reasonable effort to obtain accurate and complete information in advance of a major decision; in real estate, this usually refers to the inquiries made in advance of a purchase or investment in a property. Due diligence considers the physical, financial, legal, and social characteristics of a property and its expected investment performance. The underwriting of a loan or investment is a form of due diligence, in the sense that it constitutes a relatively detailed risk assessment of that loan or investment.
The legal form under which property is owned
As it relates to real estate, equity can be measured as the amount of capital a sponsor (property owner/developer) puts into a property.
The process of raising investment capital online from multiple investors through the issuing of shares.
An agreement between two or more parties providing that certain instruments or property be placed with a third party for safekeeping, pending the fulfillment or performance of a specified act or condition.
An investment firm that manages the assets and investments of high-net-worth individuals and families.
Free Cash Flow (FCF)
Free cash flow is a measure of a property’s ability to generate cash after setting aside reserves for capital expenditures such as future development, tenant improvements, and leasing commissions.
A tangible object of worth that is owned by a business or individual.
The time span of ownership, usually for investment real estate.
An asset that is not readily convertible to cash. Real estate is generally considered an illiquid asset because it may take an extended period of time to accomplish a sale, depending on market circumstances.
An investment property is a real estate asset purchased with the sole purpose of earning income. Income from an investment property can be generated through leasing space within an asset or an eventual sale of the asset.
While the Securities and Exchange Commission regulates public securities on a national level, each state also has its own regulatory entity serving a similar function. Since the passage of the JOBS Act, advocates of equity crowdfunding have moved to legalize intrastate – or in state – crowdfunding.
Internal Rate of Return (IRR)
In real estate, the Internal Rate of Return (IRR) is a metric used to evaluate the profitability of an investment over its lifetime and is represented as the average annual return percentage. The IRR of an investment can be calculated forward-looking to estimate potential future returns or backward looking to measure the performance of a completed investment.
An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal.
In a Promissory Note, interest plus principle is often repaid in monthly, quarterly, or annual dispursements.
However, while Convertible Note have an interest rate, the interest and principal are rarely repaid in cash; rather, the accumulated interest entitles the investor to receive more stock if and when the note converts to equity.
Jumpstart Our Business Startups (JOBS) Act
The JOBS Act was a law passed in 2012 in the United States that eased regulations related to funding small businesses. Intended to increase American job creation and foster economic growth, the JOBS Act aims to provide easier access to public capital markets and small, growing companies.
The use of borrowed money — debt — to complete an investment. Leverage can increase the size of the property a purchaser is able to afford, or reduce the investment required for a similar sized property. The lender will, however, typically require a lien on the property to assure that the borrowed funds are repaid, so a purchaser has increased his risk in this respect (the lender must be repaid before the purchaser can fully realize his profits). Moderately leveraged properties (where the debt service is not too high) can provide greater returns to equity investors, thus maximizing investment profits.
Liquidity refers to the ease with which an asset can be purchased or sold. Marketable securities that are traded in high volume tend to be the most liquid, or easy to trade without creating wild fluctuations in price.
The liquidity premium represents the incrementally higher price an investor is willing to pay for a more liquid asset or security, all other factors held equal.
Linear income is earned in direct relation to the number of hours you work.
Loan-to-Value Ratio (LTV)
A risk assessment ratio that lenders perform when considering a real estate loan.
Loan-to-Cost Ratio (LTC)
The Loan-to-Cost Ratio is the ratio of a loan used to help finance a project compared to the total cost.
Mezzanine Debt vs. Preferred Equity
Mezzanine Debt is generally a loan that is secured by a property and senior to any equity, but junior to the senior loan on the property. Preferred Equity, on the other hand, is an equity investment in the property-owning entity. It is not secured by the property but rather by an interest in the entity investing in (or owning) the property.
Net Operating Income (NOI)
In real estate, the net operating income, or NOI, represents the annual revenue (or income) generated by an investment property after annual operating expenses.
No personal liability. Lenders may take the property pledged as collateral to satisfy a debt, but have no recourse to other assets of the borrower.
Passive income (also known as residual or recurring income) is commonly used to refer to income that continues to be earned even after the work is done.
A form of marketplace utilizing a technological infrastructure that enables distributed access to capital or, conversely, transactions. Peer-to-peer (or “P2P”) markets offer are emerging alternative to many types of more established marketplace models. There can be many variations, but a peer-to-peer marketplace typically utilizes the wide-reaching power of the internet to offer access to certain products or services to persons who might normally have had such access. They also offer providers of such products or services with a much broader “reach” to potential users or customers of such products or services.
A group of investment assets.
The post-money valuation is the valuation of the company after the investment has been made. It is equal to the pre-money valuation plus the amount of the investment.
For instance, a venture capitalist might determine a company has a pre-money valuation of $15 million. The VC then invests $5 million in exchange for a third of the company. The post-money valuation is $20 million.
The pre-money valuation is the valuation of the company before an investment has been made. It does not include the value of the cash a venture capital firm is about to invest.
Pre-money valuations are determined by supply and demand. ‘Hot’ startups often have multiple venture capitalists chasing after them, and therefore command a higher valuation.
Investments into the equity or debt of companies that are not traded on the public markets.
A rate of return (often in the 5-10% range) that is paid to investors before the sponsor gets paid any promote share of distributable cash flow. The preferred return is not a guaranteed dividend; sometimes the preferred return is not paid out because the property cash flow doesn’t allow it (for example, where the property is still under development). In such cases, the preferred return typically continues to accrue, and any unpaid amounts are ultimately recouped by the investor when the property is sold. It remains, however, a preferred (higher priority) payout as compared to other potential distributions.
Private Equity Fund
A private equity (PE) fund is a collective investment model where money from separate investors is pooled together into a single fund and then used to make investments, most often in various illiquid equity and debt assets.
Also referred to as a private offering, a private placement is an investment offered for sale to a group of investors, generally under exemptions to the registration requirements by the U.S. Securities and Exchange Commission and state securities registration laws.
A financial model often used in real estate to predict future cash flows and total investment returns.
Typically in a Preferred Equity investment, all cash flow or profits are paid back to the preferred investors (after all debt has been repaid) until they receive the agreed upon “preferred return.”
A solicitation of the general public for the sale of investment units, or securities. Generally requires approval by the U.S. Securities and Exchange Commission and/or state securities agencies. A public offering is to be contrasted to a private placement.
Real estate includes a parcel of land and any of its permanent structures (buildings, parking lots, etc.).
Real Estate Investment Trust (REIT)
A REIT (which is pronounced “reet” and stands for Real Estate Investment Trust) is a company which makes investments in and owns incoming generating real estate properties.
Also known as residual or passive income, recurring income is earned by creating or acquiring an asset that continues to pay of profits regardless of if there is still active work being done to the asset.
The ability of a lender to claim money from a borrower in default in addition to the property pledged as collateral. Contrast nonrecourse.
In the event of back taxes or unpaid liens, a borrower who pays off those debts may reclaim their property, preventing foreclosure or the auctioning of their property.
Regulation A+ is the SEC’s proposed revision of the current Regulation A, which was mandated by the JOBS Act in 2012.
Regulation A allows unaccredited investors to purchase small offerings of securities that do not exceed $5 million in a 12-month period.
Regulation D permits raises of unlimited amounts from accredited investors without registering a public sale through the SEC, as it’s assumed that accredited investors are financially able to bear the burden of investment decisions without a review by the SEC.
The term residual income (also known as passive or recurring income) is commonly used to refer to income that continues to be earned even after the work is done.
Risk vs. Return
A financial concept that attempts to compare the potential fluctuations of an investment with the projected return associated with it. Increased risks require that an investor demand increased returns in compensation; people don’t normally accept the same rate of return on a very risky investment that they can already get on a low-risk investment.
Secured vs Unsecured Position
A secured position in the Capital Stack retains the right to foreclose on a property in the event of a default, or non-performance. Unsecured creditors do not have the right to foreclose on the property, and therefore have less collateral backing their investment claim.
The “base” of the Capital Stack — Senior Debt is generally secured debt that must be repaid first.
The Series A is the first investment by a venture capitalist. In the past, startups raised between $2 and $5 million for their Series A. In recent years, some of the best startups have been receiving well over $10 million from their first venture capital investment. It’s been getting cheaper for startups to make more progress with their seed funding, increasing their price when venture capitalists finally invest.
Also referred to as an “operator” or “syndicator,” a sponsor is the managing leader of a real estate project who researches the market, identifies a property to be acquired, organizes the investors and bank financing in order to make the purchase, oversees the subsequent management of the property, and determines when it is to be sold. Sponsors are generally professional real estate companies that are accustomed to these varied tasks. Sponsors will usually themselves make some investment in the property (in addition to the other investors that make up the investing syndicate), but will also make some money from a “promote” interest in a portion of any improved cash flow enjoyed by the property under their oversight.
The lifespan of a given asset or liability.
The Capital Stack
The Capital Stack orders the seniority of claims to the collateral and cash waterfall of an entity.
Tenancy / Occupancy
Occupancy is generally referred to as a percentage of the total square feet or units leased – it is a building’s revenue source.
Title III Regulation Crowdfunding
Outlined in the 2012 JOBS Act, Title III instructed the SEC to create an exemption from registration that, when implemented, will enable issuers to engage in crowdfunding equity offerings to the general investing public.
Underwriting is the process by which real estate investments are evaluated to determine their viability.
An investor who does not meet the wealth requirements of an accredited investor set forth by the SEC.
The valuation cap is a term in a Convertible Note or SAFE that puts a ceiling on the conversion price. It rewards the first investors more appropriately for the extra risk they took by investing early.
For example, let’s say you invest in a startup with a convertible note that has an $8 million dollar valuation cap, and, one year later, the startup raises their Series A at a $20 million Pre-Money Valuation
Without the valuation cap, your note would convert into equity at the $20 million valuation. But with the cap, your note would convert as if the valuation was $8 million, giving you more equity at a much better price per share than the venture capitalists that just invested.
Investments into early-stage companies made by professional investors on behalf of an investment fund.
A contract that grants the right to purchase stock from the company at a certain price in the future.
Another term for the internal rate of return (IRR), a measure of an investment’s return rate that takes account of the time value of money.
Get Access To New Deals
Subscribe to our newsletter to stay up to date with alerts and updates on crowdfunding deals.
Better yet, join to get access to all our premium education and deal reviews and get exclusive invites to deal webinars.