Education Center

Real Estate Investment Glossary

Capitalization Rate

The capitalization rate (or "cap" rate) for a property is determined by dividing the property's net operating income by its purchase price. Generally, high cap rates indicate higher returns and greater perceived risk.

Cost of Capital

The cost to a company, such as a REIT, of raising capital in the form of equity (common or preferred stock) or debt. The cost of equity capital generally is considered to include both the dividend rate as well as the expected equity growth either by higher dividends or growth in stock prices. The cost of debt capital is merely the interest expense on the debt incurred.

Delaware Statutory Trust (DST)

A Delaware Statutory Trust is an unincorporated association which is created by a governing instrument ("trust agreement") under which either (a) property is held, managed, administered, invested and/or operated, or (b) business or professional activities for profit are carried on by a trustee or trustees for the benefit of a person who is entitled to a beneficial interest in the trust property. A Delaware Statutory Trust has a separate legal existence and can conduct business in its own name.

EBITDA

Earnings before interest, taxes, depreciation and amortization. This measure is sometimes referred to as Net Operating Income (NOI).

Equitization

The process by which the economic benefits of ownership of a tangible asset, such as real estate, are divided among numerous investors and represented in the form of publicly traded securities.

Funds From Operations (FFO)

The most commonly accepted and reported measure of REIT operating performance. Equal to a REIT's net income, excluding gains or losses from sales of property, and adding back real estate depreciation.

IRS §1031 Tax Deferred Exchange

An IRS §1031 exchange is a tool that typically enables investors to defer tax consequences related to the sale of real property provided that all proceeds from the sale are reinvested in "like kind" property within a specified period of time and that certain other well-established procedures are followed. The numbers "1031" refer to the section of the IRS code (Section 1031) which stipulates the rules with which the exchanger must comply to successfully complete an exchange.

Leverage

The amount of debt in relation to either equity capital or total capital.

Net Asset Value (NAV)

The net "market value" of all a company's assets, including but not limited to, its properties, after subtracting all its liabilities and obligations.

Real Estate Investment Trust Act of 1960

The federal law that authorized REITs. Its purpose was to allow small investors to pool their investments in real estate in order to get the same benefits as might be obtained by direct ownership, while also diversifying their risks and obtaining professional management.

Real Estate Investment Trust (REIT)

A REIT is a company dedicated to owning, and in most cases, operating income-producing real estate, such as apartments, shopping centers, offices and warehouses. Some REITs also engage in financing real estate.

Securitization

Securitization is the process of financing a pool of similar but unrelated financial assets (usually loans or other debt instruments) by issuing to investors security interests representing claims against the cash flow and other economic benefits generated by the pool of assets.

Tax Reform Act of 1986

Federal law that substantially altered the real estate investment landscape by permitting REITs not only to own, but also to operate and manage, most types of income-producing commercial properties. It also stopped real estate "tax shelters" that had attracted capital from investors based on the amount of losses that could be created.

Tenant-In-Common Ownership

A tenant-in-common is a form of estate in land, or ownership, whereby two or more individuals own a fractional share of a whole piece of property (e.g., if 4 people own an asset as tenants-in-common, each may own a 25% fractional interest). While a tenancy-in-common has always been a common and longstanding form of joint ownership, the release of Revenue Procedure 2002-22 in March, 2002 by the Internal Revenue Service greatly enhanced the appeal and use of the TIC structure. The Revenue Procedure set forth a series of guidelines which, if complied with by a sponsor or a TIC investment program, would allow the sponsor to seek and obtain a favorable tax ruling that the tenant-in-common interests created by the sponsor would be deemed "like kind" property for purposes of §1031 and, as such, a qualified investment as replacement property necessary to accomplish an exchange.