Glossary of Terms


Adjusted Funds From Operations (AFFO) A computation made by analysts and investors to measure a real estate company’s cash available for distribution to shareholders. AFFO is generally calculated by subtracting from Funds from Operations (FFO) (see Funds From Operations) both (1) normalized recurring expenditures that are capitalized by the REIT and then amortized, but which are necessary to maintain a REIT’s properties and its revenue stream (e.g., new carpeting and drapes in apartment units, leasing commissions and tenant improvement allowances) and (2) “straight-lining” of rents.

Amortization The liquidation of financial debt using periodic payments of principle.

Blind Pool A commingled real estate fund accepting investor capital without prior specification of property assets.

Book Value The net value of a company’s assets less its liabilities, as reflected on its balance sheet pursuant to GAAP (see Generally Accepted Accounting Principles). Book value will reflect depreciation and amortization, which are expensed for accounting purposes.

C-Corporation A typical corporation organized under the provisions of “Subchapter C” of the Internal Revenue Code which may be publicly or privately held. It is required to pay taxes on its net taxable income, at the prescribed corporate tax rates in effect, and its shareholders also are required to pay income tax on any dividends they receive.

Capital Gain The amount by which the net proceeds from resale of a capital item exceed the book value of the asset.

Capital Markets Public and/or private markets where businesses or individuals attempt to obtain debt or equity capital.

Capitalization Rate The capitalization rate (“cap rate”) is the rate at which net operating income is discounted to determine the value of a property. It is one method that is utilized to estimate property value. Generally, higher cap rates indicate higher expected returns and higher perceived risk.

Cash Available for Distribution (CAD) Another name for Adjusted Funds From Operations that is no longer widely in use.

Cash Flow With reference to a property (or group of properties), the owner’s rental revenues from the property less all property related operating expenses. The term ignores depreciation and amortization expenses, as well as interest on loans incurred to finance the property. Cash flow sometimes is referred to as “earnings before interest, taxes, depreciation and amortization” or EBITDA.

Collateralized Mortgage Obligation (CMO) A securitization structure whereby real estate mortgages are pooled and re-sold in the form of two or more participating interests.

Commercial Mortgage Backed Securities (CMBS) Securities collateralized by mortgage loans on commercial real estate.

Common Equity Market Capitalization The market value of a company’s common stock. Obtained by multiplying the number of common shares outstanding by the market value of the shares.

Cost of Capital The cost to the company of raising capital in the form of equity or debt.

Depreciation A decrease or loss in property value due to wear, age or other factors. In accounting, depreciation is a periodic allowance made for this real or implied loss.

Dividend Yield The annual current dividend rate for a security expressed as a percent of its market price.

DownREIT Structured much like an UPREIT, except in a DownREIT, the operating partnership is subordinate to the REIT itself.

EBITDA Earnings Before Interest, Taxes, Depreciation and Amortization.

Equity REIT A REIT that primarily owns, or has an equity interest in, income-producing commercial real estate.

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.

Externally Advised REIT A REIT that uses an advisor for services relating to administration or screening markets or potential properties. Fees are paid to the advisor, usually based on cash flows or assets managed.

Funds Available for Distribution (FAD) Another name for Adjusted Funds From Operations that is no longer widely in use.

Funds From Operations (FFO) FFO is the most commonly accepted and reported measure of a REIT’s operating performance. It is equal to a REIT’s net income, excluding gains or losses from sales of property, and adding back real estate depreciation.

Generally Accepted Accounting Principles (GAAP) Rules for reporting financial transactions and performance and overseen by the Financial Accounting Standards Board (FASB).

Historical Cost The total amount of equity and debt used to acquire real estate investments, including the gross purchase price, all acquisition fees and costs, plus subsequent capital improvements, less proceeds from sales and partial sales.

Hybrid REIT A REIT that both owns commercial real estate and holds mortgages secured by commercial real estate, combining the investment strategies of both Equity and Mortgage REITs.

Implied Common Equity Market Capitalization The market value of a company’s common stock plus its common operating partnership units (“OP Units”). Obtained by multiplying the number of common shares plus common OP Units outstanding by the market value of the common shares.

Income Property Real estate owned or operated to produce revenue.

Income Return In reference to investment performance, the income return is the portion of the total return derived from dividend distributions.

Interest Coverage Ratio A measure to gauge a company’s ability to meet its debt interest obligations. Usually computed as the ratio of EBITDA to interest expense.

IRS Form 1099-DIV An annual report distributed to the shareholders by all publicly traded companies detailing the tax treatment of dividend distributions in the prior year for the purpose of calculating personal income taxes.

Leverage The practice of using borrowed funds or debt capital to increase the book value of assets above the book value of equity and to boost the rate of return on the amount of invested equity capital.

Liquidity The ability to convert assets into cash without appreciable loss in value. Higher liquidity implies greater ease of transferability, whereas lower liquidity indicates greater difficulty.

Mortgage REIT A REIT that originates or acquires mortgage loans and other debt obligations that are secured by real property.

Net Asset Value (NAV) The net “market value” of a company’s assets, including but not limited to its properties, after subtracting all of its liabilities and obligations. Total net asset value often is divided by the total number of common shares outstanding to compute basic net asset value per share.

Operating Partnership Unit (OP Unit) Equity interests in an Umbrella Partnership REIT (UPREIT).

Payout Ratio The ratio of a REIT’s current annual dividend rate per share divided by its annual FFO per share.

Positive Spread Investing The acquisition of real estate assets that provide initial returns that significantly exceed the company’s marginal cost of capital.

Price Return In reference to investment performance, the price return is that portion of the total return that measures the change in share price.

Rating Agencies Independent firms which rate the financial creditworthiness of securities for the benefit of investors. The major rating agencies are Fitch IBCA Duff & Phelps, Moody’s Investor Services and Standard & Poor’s.

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 commercial real estate in order to obtain the same economic 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 corporation or business trust that combines the capital of many investors to acquire or provide financing for all forms of income-producing real estate. A REIT generally is not required to pay corporate income tax if it distributes at least 95 percent of its taxable income to shareholders each year. (The distribution requirement was reduced to 90 percent effective January 1, 2001.)

Real Estate Mortgage Investment Conduit (REMIC) A product of the Tax Reform Act of 1986, REMICs are intended to hold a pool of mortgages for the exclusive purpose of issuing multiple classes of mortgage-backed securities in a way that avoids a corporate double tax. Most CMBS transactions are structured as REMICs.

Real Estate Operating Company (REOC) A company whose primary business is the ownership and/or operation of commercial real estate properties, but which has not elected to be taxed as a REIT.

Securitization 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.

Straight-Lining Real estate companies “straight-line” rents because generally accepted accounting principles require it. Straight lining averages the tenant’s rent payments over the life of the lease.

Tax Reform Act of 1986 Federal law that substantially altered the real estate investment economy 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.

Total Market Capitalization The total value of a company’s capital, including the market value equity and all debt.

Total Return In reference to investment performance, a stock’s dividend income plus capital appreciation over a specified period as a percent of the stock price at the beginning of the period, before taxes and commissions.

Umbrella Partnership REIT (UPREIT) In the typical UPREIT, the partners of one of more existing partnerships and a newly formed REIT become partners in a new partnership termed the Operating Partnership. For their respective interests in the Operating Partnership (“OP Units”), the partners contribute the properties from the existing partnerships and the REIT contributes the cash proceeds from its public offering. The REIT typically is the general partner and the majority owner of the Operating Partnership.

After a period of time (often one year), the partners may enjoy the same liquidity of the REIT shareholders by tendering their OP Units for either cash or REIT shares (at the option of the REIT or Operating Partnership). This conversion may result in the partners incurring the tax liability deferred at the UPREIT’s formation. The Unitholders may tender their OP Units over a period of time, thereby spreading out such tax. In addition, when a partner holds the OP Units until death, the estate tax rules operate in a such a way as to provide that the beneficiaries may tender the OP Units for cash or REIT shares without paying income taxes.

Volatility The extent to which a security’s price fluctuates in the market, often measured as the standard deviation of returns.

Yield Spread The difference in yield between two different securities, usually of different credit quality.


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