Active investors or shareholders take a hands-on approach with the goal of “beating” the stock market’s average returns and take advantage of short-term price fluctuations by frequently buying or selling stock. Active investments often require deep analysis and expertise to successfully pinpoint which assets may produce the best returns.
Absolute performance looks at an investment’s returns, separate from other performance measures, and considers only profits and losses.
Alpha is the active return on an investment, when the investment’s performance is measured against a market index.
Annual Debt Service
Annual Debt Service is the annual periodic payment of interest and principal required to amortize a mortgage loan (sometimes referred to as the carrying charge).
Asset classes are investments grouped by similar characteristics or that are subject to the same laws and regulations. For example, stocks, bonds, futures and real estate are all different asset classes.
Beta refers to the price volatility of a stock compared to the market as a whole.
A business tax is a municipal tax that is charged directly to tenants.
Capitalization and Capitalization Rate
The capitalization rate of a sale can be calculated by dividing the net operating income by the sale price. The capitalization rate is often used an expression of expected risk and return. The market value of a property can be estimated by dividing its net operating income by an assumed capitalization rate.
Commodities, such as precious and industrial metals, energy, and agriculture products including livestock and crops fluctuate with market supply and demand but can also hedge against inflation due their low correlation to the public equity market.
Commodity investments vary in strategy some of which include index funds, ownership of a physical commodity like gold or silver, and commodity funds including future-based commodity funds.
Common areas are non-rentable areas of a building, including lobbies, hallways, elevators, stairs, loading and parking facilities, maintenance and operational areas.
Constraints are a set of rules or guidelines private and public institutions must follow in following financial funds. They can be both restricting conditions and part of a formal investment policy statement.
Core real estate properties are low-risk investments that generate stable and consistent cash flow. Core investments require very little asset management and are often acquired as an alternative to bonds. These properties usually have stable tenants on long-term leases.
Core plus investments have a low to moderate risk profile. Owners of core plus properties have the opportunity to increase cash flow through capital improvements, management efficiencies, or by increasing the quality of tenants. Like core properties, they tend to be high quality with good occupancy. They do bring with them slightly more risk, as income may be unpredictable, and they require active participation from property owners.
Debt is the amount owing to lenders, associated with the acquisition or ownership of a property.
Equity is the interest an owner of real property has in its total assets. It represents the total value of the property less the outstanding debt.
Exchange Traded Funds (ETF)
ETFs are a collection of securities that trade on an exchange, just like a stock. Unlike mutual funds, which trade only once a day, you can buy ETFs all day long, which makes their price fluctuate.
Gross rent is the total rent paid by a tenant for space.
Hedge funds use pooled funds to employ varied investment strategies that seek out market inefficiencies. Investment strategies are classified into 5 different hedge fund categories or styles: macro, event driven, arbitrage, long/short and tactical trading.
Interim financing is temporary financing required by a purchaser, when committed to completing the purchase of a property on a specific date, but not having sufficient funds until a later date.
Internal Rate of Return (IRR)
Internal rate of return is used to determine the economic feasibility of a project. Effectively, it is the discount rate that reduces the project’s net present value to zero. IRR is often used to compare two projects of different duration and size.
The purchase of assets with the expectation that what you have purchased will appreciate in value or provide cash flow resulting in an increase of future assets.
Leverage refers to a strategy that uses borrowed money to increase the return of an investment. It is the extent to which an investment is supported by debt financing.
Loan to value ratio (LTV)
Loan to value ration is the ratio of the mortgage loan to the value of the security pledged.
Investing with a long position means the purchaser expects to sell at a higher price (for a profit) in the future.
Market rent is the typical rent that a landlord would receive in the marketplace today.
Market value is the typical price that a vendor would receive for the sale of their asset.
A mortgage is a legal instrument for pledging a described property interest for the performance of the repayment of a loan under certain terms and conditions. A mortgage is, therefore, not a loan but the security for a loan. Mortgages can be classified by priority of claims, e.g. first mortgage, second mortgage, etc.
Net Operating Income
Net operating income is the difference between a property’s revenues and expenses, excluding depreciation, interest, principal payments, and income taxes.
Occupancy rate is the net rentable space in the building under contract divided by the total net rental space in the building.
The operating cost are the costs of operating the building’s common areas, including utilities and property taxes.
Passive investors or shareholders invest for the long term, limiting the amount of buying and selling within their portfolios and minimizing cost and risk.
Private Equity (PE) is a broad class of alternative investment that can be boiled down to the ownership or interest of non-publicly listed entities. It consists of funds and individuals that invest directly in privately held companies or engage in leveraged buyouts.
Property tax is a municipal tax that is directly charged to building owners and usually recouped from tenants through operating costs.
Real Estate Investment Trusts (REIT)
A real estate investment trust is a company that owns and often operates income-producing real estate. REITs often invest in commercial real estate, including office and apartment buildings, warehouses, hospitals, or shopping centers. REITs pool the capital of investors, allowing them to earn dividends from their investment without having to buy or manage the properties themselves. REITs are publicly traded like stocks, which means they’re highly liquid (unlike traditional real estate investment).
A renewal is the signing of a new lease by an existing tenant.
Return on Equity (ROE)
Return on equity is a measure of the income generating capacity of a property relative to the equity invested by the property owner. It is calculated by dividing a property’s net income by the equity invested.
Return on Investment (ROI)
Return on investment is a measure of the income generating capacity of an investment. It is calculated by dividing a property’s net income by the value of the investment.
Short-Selling or Short Position
Short-selling is a way for an investor to make money on a stock that’s falling in value. The investor borrows the stock, sells it, and then buys the stock back to return to the lender. Also known as short position.
Site area is the land area of the subject property.
Term refers either to the length of a lease; or the period within which a loan is outstanding.
Unconstrained investments do not require a portfolio or fund manager to adhere to rules or guidelines for making investments. Instead, the manager can invest across a variety of asset classes and sectors.
Vacancy is rentable space or units that are not under lease.
Vacancy rate is the building vacancy divided by Net Leasable Area or Total Unit Count.
Value-add properties are focused on growth, and as a result are considered moderate to high risk. These properties may have little to no cash flow at acquisition but have the potential to generate high income after value has been added. The property may suffer from low or unstable occupancy, inefficient management, poor maintenance – or a combination of all three. For many investors the higher risk is worth the return, thanks to the appreciation in value once improvements are made. Once improvements are complete, these properties may be held as a source of increased cash flow or sold for a large gain.