Glossary
A
Abatement
Abatement is the decrease in amount or intensity and usually refers to decreases in taxes or rent.
Absorption
Absorption is the rate at which homes are sold in a specific real estate market during a specific time. It is calculated by dividing the number of available homes by the average number of sales per month.
Acceleration Clause
An acceleration clause is a loan provision allowing the lender the right to declare the total principal amount immediately due. It is usually exercised after the violation of a specific loan provision, such as the failure to make payments on time. Acceleration clauses make the full amount of principal due either immediately, or after a brief grace period.
Accredited Investor
An accredited investor has a consistent annual income of at least $200,000 ($300,000 if married), or a net worth of $1 million (excluding their primary residence).
Accrue
To accrue is to accumulate or increase. For our purposes, it refers to payments owed by not yet made.
Adjustable Tax Basis
Adjustable tax basis is typically the cost of the property, minus any depreciation, plus any capital expenditures. The adjusted tax basis is vital when calculating final taxes (and tax rates) upon the sale of a property.
Adjustable-Rate Mortgage
An adjustable-rate mortgage is a mortgage (or deed of trust) with an interest rate that fluctuates based on another rate. The mortgage rate is usually tied, or indexed, to a commonly followed rate such as the prime rate or LIBOR, plus a margin.
Amortization
Amortization is the process of paying debt in regular installments over a period of time.
Anchor Tenant
An anchor tenant is the main tenant, usually in a shopping center. Because the anchor tenant brings customers, it normally pays less rent per square foot than an ancillary tenant.
Ancillary Tenant
An ancillary tenant is a shopping center tenant that occupies less space and generates less traffic than an anchor tenant. Ancillary tenants usually pay higher rents per square foot than an anchor tenant.
Appraisal
An appraisal is an expert's estimate of the value of a property. An appraisal will determine both a reasonable offering price and an appropriate loan size.
As Is
As Is is used to indicate that a property's condition is without guarantees. It may mean a problem with the property, or just that the seller is not in a position to attest to the property's condition (as in a sheriff's sale following a foreclosure). The premises must be accepted by the buyer or tenant as they are.
Assumable Loan
An assumable loan is a mortgage that allows the purchaser to assume the obligation of the seller's loan without a change in terms.
B
Balance
Balance refers to either the amount left over after subtracting the amount owed on a loan or the amount already paid in an account.
Balloon Payment
A balloon payment is the final payment made when the balance of the mortgage at maturity exceeds the normal payment. They are more common in commercial real estate.
Bankruptcy Remote Structure
A bankruptcy remote structure is a company within a corporate group whose bankruptcy would have as little economic impact as possible on other companies within the group. This practice protects other companies within the group from the ramifications of the entity's bankruptcy.
Basis
Basis is the amount from which gains, losses, and depreciations are calculated. Typically, this is the purchase price of an asset.
Basis Point
A basis point is one percent of one percent.
Example: Interest rates are 6.15% this week. Last week they were 6.55%. Rates decreased 40 basis points this week. (655 - 614 = 40).
Blind Pool
A blind pool is an investment program involving funds invested without investors knowing which properties will be purchased.
Borrower
A borrower receives funds from a lender in exchange for a promise to repay the funds. In the real estate crowdfunding industry, borrowers and developers are also known as "Sponsors."
BPO
A BPO, or broker's price opinion, is an analysis made by a broker to assist a buyer or seller in making decisions about a listing price or a suitable bid for purchase.
Bridge Loan
A bridge loan is a type of short-term loan, usually spanning a period of two weeks to three years, pending the arrangement of longer-term financing. A bridge loan is also known as a bridging loan, caveat loan, or swing loan.
Broker
A broker is someone that arranges transactions between a buyer and seller in exchange for a commission when the deal is completed.
Broker Price Opinion
A broker price opinion is an analysis made by a broker to assist a buyer or seller in making decisions about a listing price or a suitable bid for purchase.
Buy and Hold
Buy and hold is a passive investment strategy in which an investor buys stocks and holds them for a long period of time, regardless of market fluctuations.
Buy-Sell Clause
A buy-sell clause is a legally binding agreement between co-owners dictating the circumstances if a co-owner dies or leaves the business.
C
Capital Appreciation
Capital appreciation is the rise in value of an asset based on a rise in market price. It is the current value of an investment minus the purchase price.
Capital Call
Capital call is the legal right of an investment firm to demand a portion of the money promised to it by an investor.
Capital Gain
Capital gain is the profit from the sale of a property or investment.
Capital Stack
Capital stack is the combination of all types of funding that went into the purchase and improvement of a specific project.
Capitalization Rate or Cap Rate
Capitalization rate is the ratio of net operating income (NOI) to property asset value. For example, if a property was valued at $10 million and generated an NOI of $1 million, then the cap rate would be 10%.
Cash Flow
Cash flow is the movement of money into or out of a business.
Cash on Cash Return
Cash on cash return is often used in real estate transactions. This rate is determined by dividing the annual dollar income by the total dollar investment.
Charge Off
Charge off is the declaration by a creditor that a debt is unlikely to be collected. This occurs when a consumer becomes severely delinquent on a debt, traditionally after six months without payment.
Closing
Closing is the final step in executing a real estate transaction. At closing, all agreements are finalized, documents are signed, funds go to the seller, and the title goes to the buyer.
Commercial Property
Commercial property is real estate that is used for business activities.
Common Equity
Common equity is the amount that all common shareholders have invested in a company. This includes the value of common shares, retained earnings, and additional paid-in capital.
Comparative Market Analysis
A Comparative market analysis is an evaluation of similar, recently sold properties. Comparative Market Analysis is used to determine the current market value of a property.
Compound Interest
Compound interest is the interest added to the principal so that the added interest also earns interest from then on.
Corporate Guarantee
A corporate guarantee is a guarantee in which a corporation agrees to fulfill the duties of a debtor to a lender in the event that the debtor fails to fulfill the terms of the debtor-lender contract.
Credit Report
A credit report details a person's financial history, specifically pertaining to their ability to repay borrowed money.
Credit Score
A credit score is a number representing a person's creditworthiness, and is used by lenders to determine the probability that a person will repay their debts.
Crowdfinancing
Crowdfinancing is crowdfunding for investments. It is the practice of funding an investment by raising many small amounts of money from multiple people or companies.
Crowdfunding
Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet.
D
Debt
Debt is money that is owed.
Debt Investment
Debt investment is an investment in a firm or project through the purchase of bonds or debentures instead of through the purchase of common or preferred stock.
Debt Service
Debt service is the cash that is required for a particular time period to cover the repayment of interest and principal on a debt. Mortgages and student loans are examples of obligations that require debt service.
Deed
A deed is a legal document that is signed and delivered, usually referring to ownership of property.
Deed of Trust
A deed of trust is a type of secured real estate transaction that some states use instead of mortgages. A deed of trust involves a lender, a borrower, and a trustee. The lender gives the borrower money, and the borrower gives the lender one or more promissory notes. As security, the trustee holds a claim on the property so that if the borrower defaults on the terms of the loan, the trustee can take control of the property and correct the borrower's default.
Default
Default refers to the failure to fulfill an obligation, such as repaying a loan.
Deficiency
Deficiency occurs when the funds recovered through the sale of a property fall short of the amount the borrower owes.
Delinquency History
Delinquency history is a borrower's late payment history.
Delinquent
A past due payment is referred to as delinquent.
Demographics
Demographics are statistical characteristics of a population (like age or income) used to identify markets.
Depreciation
Depreciation is the reduction in an asset's value with the passage of time.
Depreciation Recapture
Depreciation recapture is the profit received from the sale of depreciable capital property that must be reported as income. Depreciation recapture is assessed when the value of an asset exceeds the sale price. The difference between these figures is recaptured by being reported as income.
Discounted Cash Flow
Discounted cash flow is a valuation method used to estimate the desirability of an investment opportunity. It uses cash flow projections and discounts them to arrive at an estimate of the present value, which is used to evaluate the potential for investment.
Due Diligence
Due diligence is the investigation of a potential investment. It confirms the facts considered relevant to a sale.
E
Encumbrance
An encumbrance is a mortgage or other charge on property or assets.
Entity
An entity is an individual (or corporation, partnership, trust, proprietorship, or association) that has legal standing in the eyes of the law.
Equity
Equity is the value an asset has over the liabilities owed. If you owe $10,000 on a $30,000 car, you have $20,000 of equity in the car.
Equity Investment
Equity investment typically refers to buying and holding shares of stock in anticipation of profiting from dividends as the stock rises.
Escrow
Escrow is money held by a third party on behalf of the parties participating in a transaction. The funds are held until the transacting parties have fulfilled their obligations.
F
Fair Market Value
Fair market value is a selling price the buyer and seller agree on.
FDIC Insured
FDIC Insured refers to a bank account that is insured by the government. The account's contents are protected up to $250,000.
FICO Score
FICO score is a type of credit score that lenders use to determine an applicant's credit risk and whether to extend a loan. FICO is an acronym for the Fair Isaac Corporation, the creators of the score.
First Lien (Mortgage or Deed of Trust)
First lien is the legal right of a creditor to sell the collateral property of a debtor who fails to meet the terms of a loan contract.
Fix and Flip
Fix and flip is a real estate investment strategy in which an investor buys properties with the goal of selling them for a profit after making improvements.
Foreclosure
Foreclosure is the process of a lender taking possession of a mortgaged property due to the borrower's failure to make payments.
G
General Partner
A general partner is a person who joins with at least one other person to form a business.
Grace Period
A grace period is the time after a payment's due date during which no late fees will be charged.
Grading System (proprietary to Loan Pie)
Loan Pie's grading system is our proprietary method of determining the value and risk inherent in a property.
Green Building
A green building is a structure that is built, maintained, and operated in an environmentally responsible and resource-efficient manner.
Gross Amount
Gross amount is total money, before taxes or any other deductions are subtracted.
Ground Lease
A ground lease is an agreement that allows a tenant to develop a piece of property during the lease period. After the lease, the land and all improvements are given to the property owner.
Ground-Up Development
Ground-up development is a construction project that starts with raw land or a complete tear down.
Guaranty
A guaranty is a formal promise to pay a debt.
H
Hard Money Loan
A hard money loan is a loan backed by the value of the property rather than the creditworthiness of the borrower.
Hazardous Substance
A hazardous substance is any toxic, pollutant, contaminant, infectious, or radioactive material.
Hedge
A hedge is an investment made to reduce the risk inherent in an asset. Buying flood insurance for a home in a floodplain is a hedge against flooding.
Hold Period
The hold period is the time during which an investor holds a particular investment. It is the time between buying and selling the investment.
Holdback (or Reserve)
The holdback is money that is held until certain conditions are met.
I
Illiquid Asset
An illiquid asset is one that cannot be easily sold or exchanged for cash.
Improvements
Improvements are any permanent structure or work that increases the value of a property.
In-Fill Development
In-fill development is the process of developing vacant or under-used properties within areas that are already largely developed.
Income Property
Income property is property bought to earn income through renting, leasing, or selling after its value increases.
Industrial Property
Industrial property is property used for manufacturing or warehousing.
Inflation
Inflation is the sustained increase in the prices for goods and services with a corresponding decrease in purchasing power.
Institutional Lender
An institutional lender is a financial intermediary who invests in loans and other securities on behalf of its customers.
Interest
Interest is money paid at a defined rate for the use of money lent.
Interest-Only Loan
An interest-only loan is a loan in which the borrower pays only the interest for a set term, usually between five and ten years. After the term, many borrowers refinance, make a lump sum payment, or begin paying off the principal.
Internal Rate of Return (IRR)
Internal rate of return is a metric used to measure the profitability of potential investments. It is similar to a project's growth rate.
Investment-to-Cost Ratio (ITC)
Investment-to-cost ratio represents the investment dollars divided by the total cost of the project.
J
Joint Venture
A joint venture is a business agreement in which the parties agree to develop a new entity and new assets by pooling equity. They control the project and share revenues and expenses.
Judicial Foreclosure
A judicial foreclosure occurs when a court rules that a debt is in default. The property is sold at auction in order to repay the lender.
L
Letter of Intent
A letter of intent is a document used to outline one or more agreements between parties before the agreements are finalized.
Leverage
Leverage is the use of borrowed capital with the expectation that the profits will exceed the interest payable.
LIBOR
The LIBOR, or London Interbank Offered Rate, is the interest rate that London's leading banks have estimated they would be charged were they to borrow from other banks. It is one of the most common benchmark interest rate indexes used to make adjustments to adjustable rate mortgages.
Lien
A lien is the legal right of a lender to sell the property of a borrower who doesn't meet the obligations of the loan contract.
Lien Position
Lien position determines the order in which the investors benefit from liquidation of the property that secures the loan. First lien position goes first, second lien position goes second, and so on.
Limited Liability
Limited liability is liability that does not exceed the amount invested. It protects an investor's assets from being seized to satisfy a creditor's claims.
Limited Liability Company (LLC)
Specific to the United States, a limited liability company (or LLC) is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. LLCs are not corporations, rather they are companies that provide limited liability to their owners.
Limited Partnership
A limited partnership is two or more partners conducting business together. One or more of the partners is liable for the amount of money they have invested.
Liquidity
Liquidity is the degree to which an asset can be quickly bought or sold without changing the asset's value.
Loan-to-Cost Ratio (LTC)
Loan-to-cost ratio is a ratio that compares the loan amount to the cost of building the project. (If you want to build a $20 birdhouse, and are borrowing $10, then the LTC ratio is 50%.) It is used to help lenders assess risk. As the ratio increases, so does the risk.
Loan-to-Value Ratio (LTV)
Like the loan-to-cost ratio, lenders use this to assess risk. Loan-to-value ratio is determined by dividing the mortgage amount by the appraised value of the property. The higher the ratio, the higher the risk.
M
Market Area
A market area is a geographic zone containing people likely to purchase a business's goods or services.
Marketplace Lending
Marketplace lending is a term that encompasses all forms of peer-to-peer lending. It is the practice of matching borrowers and lenders through online platforms.
Maturity
Maturity is the time frame in which the loan principal is to be paid back. A mortgage with a maturity of 20 years would be structured so that the principal is paid at the end of the 20 years.
Metropolitan Statistical Area (MSA)
A metropolitan statistical area is a geographical region with high population density at its core and close economic ties throughout.
Mezzanine Financing (or Mezzanine Loan)
Mezzanine financing is a combination of debt and equity financing typically used to finance the expansion of existing companies. It is debt capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time.
Mixed-Use Property
A mixed-use property is a property with both residential and commercial tenants.
Mobile Home Park
A mobile home park is a collection of plots designed for mobile homes.
Mortgage
A mortgage is a debt secured by real estate that the borrower is required to pay back, plus interest, with a specified payment schedule. Used by individuals and businesses to make real estate purchases without paying the entire cost up front.
Multi-Family Housing
Multi-family housing refers to a structure having several housing units contained within a building, or several buildings within a complex. An apartment building is an example of multi-family housing.
N
Net Annualized Return (NAR)
Net Annualized Return is a measure of return on investment. It includes borrower payments, service fees, charge-offs, and recoveries.
Net Operating Income (NOI)
Net operating income is the annual income generated by an income-producing property after deducting all operating expenses.
Net Worth
Net worth is total assets minus total liabilities.
New Construction
New construction, or ground-up development, is a construction project that starts with raw land or a complete tear down.
Non-Accredited Investor
A non-accredited investor is someone that does not meet the financial requirements for being an accredited investor. They do not have a net worth of $1 million (excluding their primary residence), and/or a consistent annual income of at least $200,000 ($300,000 if married).
Nonrecourse Loan
A nonrecourse loan is a loan that does not allow, in the event of an unsatisfied debt, the lender to take anything other than the collateral property.
Note or Promissory Note
A note is a legal document that confirms a debt and the terms of its repayment.
O
Occupancy Rate
Occupancy rate is the ratio of rented units compared to total units in a building. Ten units with nine renters equals a 90% occupancy rate.
Office Building
An office building is a structure used primarily for business-related activities not related to retail sales, for example, administration, clerical services, consulting, and other client services.
Operating Expenses
Operating expenses are the costs a business incurs as a result of its normal operations.
Opportunistic Investment Strategy
Opportunistic investment strategy is an aggressive strategy that involves investing in properties in need of significant rehabilitation before they are able to earn market rental rates.
Ordinary Income
Ordinary income is taxed at ordinary income tax rates. Ordinary income doesn't qualify for the capital gains tax treatment. Salaries, interest payments, and dividends are examples of ordinary income.
Origination Fees
Origination fees are costs passed to a borrower to cover the expenses of issuing a loan. Generally, origination fees include the cost of obtaining a credit report, an appraisal, and title insurance.
P
Partnership
A partnership is an arrangement in which parties agree to invest or do business together.
Passive Investor
A passive investor is someone who invests money but does not actively manage the business or property. Loan Pie investors are passive investors.
Peer-to-Peer Lending (P2P)
Peer-to-peer lending is the practice of lending money through online services that match lenders with borrowers.
Personal Guarantee
A personal guarantee is an individual's guarantee to be responsible for the financial obligations of the borrower.
Personal Liability
Personal Liability is a person's financial obligation, which may be satisfied by the claiming of their assets.
Portfolio
A portfolio is a collection of investments.
Preferred Equity
Preferred equity is a type of ownership in an investment that has a higher claim on assets than common stock has.
Preliminary Title Report
A preliminary title report is a report issued prior to the transaction expressing a willingness to insure the title.
Prepayment
Prepayment is paying all or a portion of a loan's principal balance before it's due. Some loans include a penalty for prepayment.
Prepayment Penalty
A prepayment penalty is a fee paid by a borrower who has paid off the loan before its maturity date. This is done to compensate a lender for the lack of interest payments.
Principal
Principal is the amount of money owed, not including interest or other fees.
Priority
Priority is the right to proceed before others. In a foreclosure, lenders are repaid according to priority.
Private Placement (Private Offering)
Private Placement occurs when investments are offered for sale to a group of chosen investors, rather than as a public offering.
Pro Forma Statement
A pro forma statement is a financial statement based on projections and expectations.
Projected Return
Projected return is the return on investment that is expected by the investment's issuer.
Promissory Note (Note)
A promissory note is a legal document that confirms a debt and the conditions under which it is to be repaid.
Promote
In an investment structure often used in private real estate investments, the promote is the amount of income that exceeds any payments required to be made to outside investors and to which the sponsor is entitled.
Public Offering
A public offering is the sale of equity shares to the public.
R
Real Estate Crowdfunding
Real estate crowdfunding is the financing of a real estate project from multiple investors, typically done over the internet.
Recorder (Registrar, County Clerk)
A recorder is the public official who keeps records concerning property.
Recording
Recording is the process of legally documenting changes in title for a piece of property.
Recourse
Recourse is the right of a lender to claim money from a borrower in default, in addition to the property pledged as collateral.
Refinance
To refinance is to replace an existing loan with a new loan.
Regulation A
Regulation A is an exemption from the registration requirements mandated by the Securities Act. It applies to small public offerings of securities that do not exceed $5 million in any 12-month period.
Regulation D
Regulation D is a regulation made by the Securities and Exchange Commission (SEC) that sets forth conditions to be satisfied in order to qualify for a private offering exemption from registration.
Rehab or Rehabilitation Property
A rehab property is a property with a renovation planned in order to increase its value.
REIT (Real Estate Investment Trust)
An REIT is a type of security that invests in real estate and is sold like a stock. REITs rarely participate in the smaller investments that Loan Pie has access to. They also tend to be less profitable for the investor.
Residential Property
A residential property is any property that has four or fewer residential units and no commercial units.
Retail Property
A retail property is a property with retail space.
Risk
Risk is the probability of losses relative to the expected return on an investment.
Risk vs Return
Risk vs return is a financial concept that compares the potential fluctuations of an investment with its projected return.
S
Second Mortgage
A second mortgage is a mortgage taken out on a property that is already mortgaged. It's often used as a loan for large expenditures. A second mortgage tends to have a higher interest rate and a lower amount borrowed.
Secondary Market
A secondary market is a market where investors purchase assets from other investors rather than from the issuing companies.
Securities and Exchange Commission (SEC)
The SEC is the federal agency in charge of carrying out the provisions of laws related to the selling of investment securities. The SEC seeks to protect the investing public by preventing misrepresentation, fraud, market manipulation, and other abuses in the securities market.
Security
Security is a property that serves as collateral for a debt.
Senior Loan
A senior loan is a loan issued to a party that holds the priority claim to the borrower's assets. Should the borrower file for bankruptcy, the senior bank loan is the first to be repaid.
Sensitivity Analysis
A sensitivity analysis is a method of determining how risky an investment is. It is done by assigning different values to important variables to see how they impact the returns on the investment.
Single-Family Property
A single-family property is a stand-alone property intended to house one family.
Sponsor (Borrower)
Another term for a borrower, a sponsor can be any property owner looking for funding.
SSL Protection
SSL, or Secure Sockets Layer, is the standard security technology for building an encrypted link between a web server and a browser.
Statutory Foreclosure
A statutory foreclosure is a foreclosure done without court supervision.
Sub-Market Area
A sub-market area is like a market area, but refers to a more specific region within a metropolitan area.
Subordination
Subordination is a decrease in priority. In real estate it would refer to, among other things, a lien changing from a first to a second mortgage.
Syndication
Syndication is the process of pooling funds from a group of investors to purchase real estate.
T
Tenancy in Common (TIC)
Tenancy in common refers to a shared tenancy in which each holder has a distinct and separately transferable interest. If a holder dies, his share would be determined by his will rather than being transferred to the other holder.
Title
A title is a legal document proving a party's ownership of a property.
Title Insurance
Title insurance is an insurance policy that covers the legal fees caused by a claim made against ownership of a property.
Transaction Costs
The costs associated with buying and selling real estate are known as transaction costs.
Transparency
Transparency refers to fully disclosing all activities of a business relevant to investors.
Triple Lease Agreement
A triple lease agreement is a lease agreement that makes the tenant solely responsible for all costs related to the asset being leased. The tenant must pay the real estate taxes, building insurance, and maintenance expenses.
Trust
A trust is a legal agreement in which property is transferred to a third party.
Trustee
A trustee is the party that holds property for another to ensure the completion of an obligation (like paying off a loan).
U
Underwriting
Underwriting is the process of thoroughly assessing the risks and returns of a potential investment or loan.
Undivided Interest
Undivided interest refers to ownership rights being shared by co-owners, with no co-owner having exclusive rights over another.
V
Vacancy Rate
Vacancy rate is the percentage of unoccupied units.
Value-Add Project
A value-add project is a property that has or will be renovated.
Vetting
Another term for underwriting, vetting is the process of thoroughly assessing the risk and returns of a potential loan or investment.
Y
Yield
Yield is a measure of an investment's return rate.
Z
Zoning
Zoning is the process by which the government regulates the use of privately owned property. Zoning is done to prevent conflicting land uses and foster development.