Real Estate Terminology

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1 Real Estate Terminology Types of Legal Entities Limited Liability Company LLC - A corporate structure whereby the shareholders of the company have a limited liability to the company's actions. Basically, an LLC is a hybrid between a partnership and a corporation. For example, the shareholders who own the specific property or building 175 Water Street would create the 175 Water Street LLC. Limited Partnership LP - Two or more partners united to conduct a business jointly, and in which one or more of the partners is liable only to the extent of the amount of money that partner has invested. Limited partners do not receive dividends, but enjoy direct access to the flow of income and expenses. This term is also referred to as a "limited liability partnership" (LLP). The main advantage to this structure is that the owners are generally not liable for the debts of the company. Joint Venture JV - The cooperation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise. Forming a joint venture is a good way for companies to partner without having to merge. JVs are typically taxed as a partnership. A joint venture is an investment or financing type, but not a legal entity (under US law). Normally, a JV is structured as either an LP or LLC, but may be a C or S corp. Types of Real Estate Occupancies: Offices; Retail strip centers, malls, single locations ; Hotels, motels, lodging, time shares, resorts, casinos; Industrial manufacturing, warehouses, distribution centers; Residential apartments, condos, dwellings; Self Storage - often falling into Industrial category but having similar exposures to retail; Mixed use (all of the above or any combination) Types of real estate exposures interests: Owner(s); 3rd party managers (non owner), which includes asset managers; Real estate investment trust (REIT); Financial advisors ; Funds (investment) and Institutional Investors (i.e. insurance co s, banks, large corporations); Landlord; Tenant; Investors Types of Real Estate Risks Asset Management(er) - The management of a client's investments (real estate properties) typically by the financial services arm of by a financial services company, such as an investment bank or insurance company. The company will invest on behalf of its clients and give them access to a wide range of traditional and alternative product offerings that would not be to the average investor. Property Management(er) - The administration of residential, commercial and/or industrial real estate. Property management typically involves the managing of property that is owned by another party or entity. The property manager acts on behalf of the owner to preserve the value of the property while generating income. Managed properties include residential and vacation properties, commercial retail space or industrial warehouse space. Property managers are typically paid a fee and/or a percentage of the rent brought in for the property while under management. 1 P age

2 Real Estate Limited Partnership RELP - A direct participation program formed to build new structures and generate income from existing property, or profit from the capital appreciation of undeveloped land. Real Estate Operating Company REOC - A company that invests in real estate and who can be public or private. A real estate operating company (REOC) is similar to a real estate investment trust (REIT), except that an REOC will reinvest its earnings into the business, rather than distributing them to unit holders like REITs do. They are more likely to be involved in development or re-development of properties. Real Estate Investment Trusts and sub-categories of REIT s Real Estate Investment Trust REIT - A security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. REITs may own or invest in real estate, real estate-related loans or both. Though all REITs must meet a set of IRS conditions to qualify as REITs, they fall into three broad regulatory categories. One of these is a public listed REIT, which is registered, generally with the SEC, and publicly traded. The second is a public unlisted REIT, which is registered, but not listed or traded on an exchange. The third is a private placement REIT that is neither registered nor traded on an exchange. Private placement REITs often file an SEC Reg D form that exempts them from most disclosure documents, and thus their marketing is largely limited to wealthy or accredited investors. Equity REITs - Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties' rents. Mortgage REITs - Mortgage REITs deal in investment and ownership of property mortgages. These REITs loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. Their revenues are generated primarily by the interest that they earn on the mortgage loans. Hybrid REITs - Hybrid REITs combine the investment strategies of equity REITs and mortgage REITs by investing in both properties and mortgages. Finite-Life REIT FREIT - A real estate investment trust (REIT) that aims to sell its real estate holdings within a specified time frame so as to realize capital gains on its properties. Whereas REIT s in general can be perpetual or open-ended investment vehicles. Not a REIT but a REIF Real Estate Investment Fund - similar to a REIT, the REIF is a private market, unlevered (no debt), real estate holding operated by an institutional investor (i.e. bank) on behalf of a pension fund(s). Classifications of Real Estate Space 2 P age

3 Class A Space - These are the most prized and sought-after spaces, which are often brand new or have been recently redeveloped to a very high standard. These spaces occupy prestigious locations in major cities such as Chicago, New York and Los Angeles, and have high rental values. You may also hear them defined as core properties. Class A spaces are fitted out to top quality standards, complete with sleek design, state-of-the-art facilities, top-notch furniture and excellent accessibility. Most Class A spaces will appeal to high-profile companies from all over the world, such as banks, investment companies and law firms. Class B Space - Spaces that fall within the Class B bracket appeal to a wide range of companies, and are typically available in less exclusive areas. As a result, the cost of occupying a Class B space is much more affordable for small or medium businesses. While Class B spaces fall below the quality of Class A spaces, they are not considered sub-standard. In fact, some Class B spaces are ex-class A properties. The facilities and overall value of the spaces are usually above average and satisfactory for standard business requirements. Class C Space - The lower grade of space, Class C, refers to a space that is functional, but is generally fitted out to a much lower quality than a Class B space. The space is usually located in out of town areas or suburbs, and as a result tenants will often pay much lower rents than those charged for Class B spaces or above. Class C spaces are often located above retail or service businesses, and despite a generally lower level of maintenance, usually maintain steady occupancy. You ll sometimes hear class B and C space referred to as tertiary properties. Common Lease Terms Gross lease - A property lease whereby the landlord pays for all property costs usually included in ownership. These include costs such as utilities, taxes, and maintenance. Triple net lease (also known as an NNN lease) - A property lease whereby the lessee pays a fixed rental charge and expenses on the property, including maintenance. Tenant improvements - These are improvements done on the interior of a space, which can be paid for by the landlord and/or the tenant, depending on the lease. Usable area - That part of an office or a building floor that can be occupied, permanent wall to permanent wall. Rentable area - The usable area within the office, including shared areas of the floor and building such as lobbies, corridors, closets, and restrooms. 3 P age

4 Common area maintenance (CAM) - This is the additional rent charged to the tenant to maintain the common areas of the property. These are the areas that are available for use by more than one person and are usually owned by all the tenants. Percentage lease - A lease in which the costs are based on the percentage of the sales volume made at the property. Letter of intent - An informal agreement between landlord and lessee indicating their intent to move forward with negotiations. Latent defect - A fault in the property that could not have been revealed through reasonable inspection before the agreement. Work letter - An agreement between a landlord and a tenant regarding all the issues related to the build-out (construction) of the interior of a space. Other Common Real Estate Terms: Capitalization (Cap) Rate - A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor's potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property. If you want to get technical, it is basically the discount rate of perpetuity. [Capitalization Rate = Yearly Income/Total Value] or $100,000 of yearly income divided by a $1,000,000 purchase price would give you a cap rate of 10%. Typically, the higher the cap rate, the higher the riskiness of the investment. Mortgage-Backed Security (MBS) - A type of asset-backed security that is secured by a mortgage or collection of mortgages. Property Derivative - A type of financial product that fluctuates in value depending on the changes in the value of a real estate asset, usually an index. Real estate owned (REO) - is simply property assumed by a bank through foreclosure, i.e. the property was pledged as collateral for an obligation that the borrower could not fulfill. Equity Market - The market in which shares are issued and traded, either through exchanges or overthe-counter markets. Also known as the stock market, it is one of the most vital areas of a market economy because it gives companies access to capital and investors a slice of ownership in a company with the potential to realize gains based on its future performance. Mezzanine Financing A hybrid of debt (loans) and equity (investor) financing that is typically used to finance the expansion of existing companies. Mezzanine financing is basically debt capital that gives the lender the rights to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It is generally subordinated to debt provided by senior lenders such as banks and venture capital companies. 4 P age

5 Since mezzanine financing is usually provided to the borrower very quickly with little due diligence on the part of the lender and little or no collateral on the part of the borrower, this type of financing is aggressively priced with the lender seeking a return in the 20-30% range. Mezzanine financing is advantageous because it is treated like equity on a company's balance sheet and may make it easier to obtain standard bank financing. To attract mezzanine financing, a company usually must demonstrate a track record in the industry with an established reputation and product, a history of profitability and a viable expansion plan for the business (e.g. expansions, acquisitions, IPO). Government-Sponsored Enterprise GSE - Privately held corporations with public purposes created by the U.S. Congress to reduce the cost of capital for certain borrowing sectors of the economy. Members of these sectors include students, farmers and homeowners. GSEs carry the implicit backing of the U.S. Government, but they are not direct obligations of the U.S. Government. For this reason, these securities will offer a yield premium over Treasuries. Some consider GSEs to be stealth recipients of corporate welfare. Examples of GSEs include: Federal Home Loan Bank, Federal Home Loan Mortgage Corporation (Freddie Mac, Fannie Mae), Federal Farm Credit Bank and the Resolution Funding Corporation Absorption rate - The rate at which rentable space is filled. Gross absorption is a measure of the total square feet leased over a specified period with no consideration given to space vacated in the same geographic area during the same time period. Net absorption is equal to the amount occupied at the end of a period minus the amount occupied at the beginning of a period and takes into consideration space vacated during the period. Funds From Operations FFO - A financial measure used by REITs to define their operating performance. FFO is calculated by adding depreciation and amortization expenses to earnings. This gives an idea of the REIT's cash performance, which is a better measure of the REIT's performance than earnings, which include (often large) non-cash items. 5 P age

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