GENERAL COMMERCIAL REAL ESTATE TERMS & DEFINITIONS
As defined in Rule 501 of Regulation D, of the Securities Act of 1933, accredited investors are:
A bank, insurance company, registered investment company, business development company, or small business investment company;
A payments system run by the National Automated Clearing House Association that is used to transfer funds for payroll, direct deposit, tax refunds and other services from one bank account to another. Annually it supports more than 23 Billion U.S.-based transactions, with a total worth exceeding $40 trillion.
Acquired BITs are BITs that are now in your possession, having been first purchased by you and held in escrow (Reserved BITs) until the property was fully funded, due diligence was completed and closing documents were finalized and signed. Upon closing the moneys are transferred to the seller and the BITs are flagged as Acquired.
An acquisition cost, also referred to as the cost of acquisition, is the total cost that a company recognizes on its books for any necessary expenditures associated with the process of acquisition of the property, such as third-party expenses, title and escrow charges, appraisal fees, lender fees, due diligence expenses, and other related transaction costs associated with the purchase of the property.
When there is a mortgage on a property, a portion of this debt is typically paid monthly, reducing the principal balance of the loan with each payment. Initially, most of the payment is attributed to paying interest, but over time the portion that is going toward paying down the principal balance of the loan increases.
A table which shows how much of each payment will be applied toward principal and interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero.
Annual Percentage Rate (APR)
APR refers to the rate of interest on the principal balance of a mortgage and usually excludes closing costs (even if closing costs were included into the loan balance).
An anchor tenant is the largest tenant in a retail shopping environment - the tenant with the largest “footprint” in terms of square footage. Grocery stores and “big box” stores are often referred to as anchor tenants.
An appraisal is an estimate of value of real property provided by an individual or firm that has training and licensing in this specialized field of expertise. Whereas the Buyer of a property is usually paying for the appraisal, it is the lending institution that selects the appraiser to insure an unbiased opinion of value.
An appraised value is the opinion of value on a certain date by a licensed appraiser with experience in performing valuations of properties of similar use and construction type.
An individual qualified by education, training, experience and a professional license to estimate the value of real property and personal property. Although some appraisers work directly for mortgage lenders, most are independent.
The increase in the value of a property due to changes in market conditions, inflation, or other causes.
The valuation placed on property by a public tax assessor for purposes of taxation.
A third-party, independent and qualified inspection of an individual‘s or organization‘s accounts, generally according to accepted accounting principles (GAAP). Under Title III of the JOBS Act, companies that are raising over $500,000 must have audited financial statements.
The ratio of available space to total rentable space, calculated by dividing the total available square feet by the total rentable square feet.
The total amount of space that is currently being marketed as available for lease in a given time period. It includes any space that is available, regardless of whether the space is vacant, occupied, available for sublease, or available at a future date.
Bad Actor Check
Verification that an investor is not a ―Bad Actor.‖ The SEC ruled in September 2013 that individuals labeled as bad actors cannot participate in securities offerings, or else a company will be disqualified from crowdfunding exemptions. Individuals subject to this check include people with a large degree of involvement with the founding and management of a fund, such as executive team members, investment managers and direct or indirect owners of 20 percent of more of a fund‘s outstanding equity securities.
The BB Rating is a proprietary commercial real estate rating system developed solely by and for BuildingBITs.com to help you select the buildings that best match your overall investment objectives and to provide a useful tool for comparing different properties on the Platform. It incorporates data from six key offering metrics: Capital Rate, Location, Tenant Quality, Lease Term, Building Class, and Useful Life. The BB Rating is calculated by taking a score for each of these 6 criteria and applying our unique weighting methodology to arrive at a score that is representative of a risk/return profile of a particular asset. For more on this, please look at BB Rating Section of our site.
A person who owns BITs in their portfolio.
A building that is specifically built or redeveloped for a specific purpose or a specific Tenant.
We classify our BuildingBITs Buildings into these common CRE categories Educational, Hospitality, Industrial, Medical, Multifamily, Office, Retail, and Specialty. This simply suggests the purpose for which the building is being used and will likely continue being used for in the future.
The individual, group, or legal company that has purchased a commercial real estate asset.
Capitalization Rate (Cap Rate)
Capitalization Rate defined: The ratio of Net Operating Income (NOI) to the Purchase Price of the asset, expressed as a percentage. The lower the Cap Rate, the higher the value of the asset. The higher the Cap Rate, the lower the value of the asset.
Central Business District (CBD)
The largest city within a Metropolitan Statistical Area (MSA). Usually the largest job center within a region.
Class A Property
Always the newest product in the market offering the latest amenities built-in. Offered at the highest rent per square foot. Differentiation is created by emphasizing being “best in class” and being the new kid on the block. Class A assets provide a sense of place, they represent an ambiance beyond just the address. They provide services in addition to merely offering a space to live or work.
Class B Property
Represents various degrees of product type regarding age, but are usually well maintained and in good condition.
Class C Property
Substantially functional but with deferred maintenance apparent. Credit quality of the tenant base is less than perfect and turnover is usually higher than for A and B assets. Class C fills up after lower tier Class B assets are already full.
A closed transaction is one where title to the property has passed from the Seller to the Buyer. The transaction is usually facilitated by a third-party to assure completion with documents memorializing the event with recording the change of ownership in public records at the county level.
The legal documentation surrounding a company‘s financing, including but not limited to a subscription agreement, purchase agreement, risk factors etc. that provide detailed information about the investment, the company and the parameters of the security being issued. Conversion Discount Usually contained in convertible securities such as convertible notes or preferred stock, this mechanism gives an investor the right to convert the face amount of the convertible security, plus interest, into common stock of the issuer at a reduced price or a discounted percentage to the purchase price paid by the investors in the subsequent equity round.
Common Area Maintenance (CAMs)
Common Area Maintenance (CAM) charges, are the charges billed to tenants in a commercial triple net (NNN) lease paid by tenants to the landlord of a commercial property. CAM fees can be narrow (such as only charges for taxes and insurance) or wide (including general and long-term maintenance, parking lot and building repairs).
Contiguous Blocks of Space
Space within a building that is already joined or can be joined together into a single contiguous space.
Pertaining to newly-signed contracts, this term refers to the period of time both parties have to release themselves from any obligations without penalty. Federal law usually requires a period of three days, but this can be different depending on the transaction. Also, not every contract has a cooling-off period.
Crowdfunding (Rewards based, donation-based, equity)
Crowdfunding essentially refers to the use of online channels and networks to raise money. The Internet enables very small amounts of money to be raised by very large numbers of people quickly and cheaply, giving rise to multiple forms of crowdfunding. With rewards-based crowdfunding, companies provide early backers with a reward, often an example of their product or service once they‘ve raised enough money to make it, in return for support. Donation-based crowdfunding funds primarily social causes, the arts and non-profits in much the same way, with backers provided with recognition, t-shirts etc. in return for their donation. In both these cases, amounts to the firm tend to relatively small and no stake in the underlying organization or company is transferred to the backer. Equity crowdfunding, on the other hand, refers to the online solicitation and sale of securities issued by a company. Backers of a firm become debt- or shareholders of the business, not just customers or users, typically resulting in a percentage ownership. Because of this distinction, equity crowdfunding comes under significantly greater regulatory oversight than other types. See debt crowdfunding.
A type of crowdfunding under the equity-crowdfunding umbrella. Under debt crowdfunding, the company raising money does not sell shares, but instead borrows money from the crowd. The individuals lending the money receive the company‘s legally binding commitment to repay the loan at certain time intervals and at a certain interest rate.
Debt financing is a type of loan provided to a business in return for an interest rate, plus a security collateral in case the loan is not repaid. These loans include promissory notes, bonds, straight loans and convertible bonds.
A physical or electronic document that enables the transfer of debt obligations. Debt instruments such as notes, bonds, mortgages and leases are a promise to repay a lender in accordance with terms of a contract between a lender and a borrower.
The legal document conveying title to a property.
Deed of Trust
Some states, like California, do not record mortgages. Instead, they record a deed of trust which is essentially the same thing.
The date a building completes construction and receives a certificate of occupancy, allowing it to be officially open to tenants.
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property (https://www.irs.gov/businesses/small-businesses-self-employed/a-brief-overview-of-depreciation)
A developer is one who owns or controls land and determines it’s highest and best use or identifies a user willing to pay more for the land with entitlements.
Distribution is an allocation of capital gains and/or income paid to investors as a pro rata share of their ownership of an income producing asset. Distribution is a payment of interest, principal or dividend by the issuer of a security to the shareholders on a regular basis.
A technique employed to manage risk by mixing a variety of investments within a single portfolio. Diversification smooths out risk because the positive performance of some investments will offset the negative performance of others, and on average, will yield higher returns at lower risk.
That part of the purchase price paid for an asset that is not debt. Down payment is usually in the form of cash. On BuildingBITs.com the funds provided by you will primarily be used to make the Down Payment on the acquisition of a property.
Due diligence is an investigation or audit of a potential investment to confirm all facts, such as reviewing all financial records, plus anything else deemed material. It refers to the care a reasonable person should take before entering into an agreement or a financial transaction with another party. The management team of BuildingBITs conducts a thorough due diligence process on each asset that is listed on our platform.
In commercial leases, landlords often include a provision for rent escalation over a certain period of time. Most long-term leases will contain such a clause to account for the lessor's rising operational expenses.
Since every state as well as the federal government (through the SEC) tightly regulates how equity or debt securities may be sold to the public, startups must qualify under one of several Regulation D exemptions from registration requirements if they wish to avoid the expense of a fully securities registration. Reg. D, Rule 506(b) – Companies using this exemption can raise an unlimited amount of money from accredited investors and a maximum of 35 unaccredited investors. Virtually all startup investing was conducted using this exemption until late 2013. Companies using Rule 506(b) may not advertise their fundraising, known as ―general solicitation‖. Reg. D, Rule 506(c) – Companies using this exemption are permitted to raise an unlimited amount of capital from accredited investors and are allowed to advertise their fundraising to the public as long as they verify that all their investors are accredited. 4(a)(6) – Regulation – This exemption allows companies to raise up to $1 Million per year from an unlimited number of investors. Investors do not have to be accredited, but how much they can invest into companies using this exemption is limited to either the net income or net worth of the Page 154 of 156 investor, whichever is higher. If the higher number is over $100,000, the investor is allowed to invest 10% of it each year. Otherwise, it‘s 5%.
Expected return is the profit or loss an investor anticipates on an investment that has known or expected rates of return. Expected return is calculated on a single asset or a portfolio of assets with each asset representing a percentage of the portfolio. To calculate expected return the yield from each piece of the portfolio is calculated based on its percentage representation and yield, then blended within the entire portfolio to produce an expected return.
The Financial Industry Regulatory Authority (FINRA) is the independent regulator for U.S. securities firms in the U.S, including broker/dealers and registered investment advisors.
A statement that reveals what management believes about future business conditions. The SEC requires companies to include disclaimers on these kinds of communications with investors.
Full-Service Rental Rate
Rental rates that include all operating expenses such as utilities, electricity, janitorial services, taxes and insurance.
The building Funding Goal is the amount that BuildingBITs needs to receive from potential investors in order to be able to secure debt financing from the bank and purchase the property. It is calculated as a percentage of the Purchase Price (typically about 35%) plus the Acquisition costs.
For 80 years, companies were not allowed to publicly advertise it is seeking investors. Title II of the JOBS Act, implemented on September 23, 2013, removed this ban, giving companies the ability to promote their crowdfunding campaigns on social media and online. To comply with the new rules, companies must complete and file a Form D with the SEC at least 15 days before starting their general solicitation and must file an amended Form D within 30 days of closing their fundraising round. Startups must also take reasonable steps to ensure their investors are accredited. Illiquid Assets that cannot easily be sold or exchanged for cash. Some examples of illiquid assets include houses and certain types of debt instruments – as opposed to liquid assets stocks, bonds and commodities that are easily traded on capital markets.
In the financial world, this refers to the middleman between the two parties (buyers and sellers) of a transaction. Banks, broker-dealers, mutual funds and insurance companies are examples of typical financial intermediaries.
A business entity that issues and sells securities as a way to finance its operations.
The Jumpstart Our Business Startups Act of 2012 created modified securities laws in order to support capital formation for small businesses. Titles II and III of the Act are the most important. (note: addition to this) Title II, enacted in September 2013, allows private companies to raise funds publicly by spreading the word and taking investment from accredited investors online. As of October 2015, Title III allows unaccredited investors to participate in equity crowdfunding investments as well.
All the space that has a financial lease obligation. It includes all leased space, regardless of whether the space is currently occupied by a tenant. Leased space also includes space being offered for sublease.
A term that describes how easily an asset can be converted into cash.
A market is an area where a property competes. It is defined by certain boundaries and natural barriers. A market also includes the other properties that a rental property must compete against to gain business.
A process that validates a product or business concept for a potential target market.
Any building with more than a single tenant.
Net Operating Income (NOI)
Net operating income equals all revenue from the property (including rents, reimbursements for expenses, advertising from signs, etc.) minus all reasonably necessary operating expenses, such as property taxes, insurance, maintenance, utilities, and property management.
Non Accredited Investor
An investor who does not meet the net worth requirements for an accredited investor under the Securities & Exchange Commission's Regulation D. A non-accredited individual investor is one who has a net worth of less than $1 million (including spouse) and who earned less than $200,000 annually ($300,000 with spouse) in the last two years.
Space that is physically occupied by a tenant. It does not include leased space that is not currently occupied by a tenant.
An Offering Circular (OC) is a type of prospectus for a security offering. Sometimes, this is also referred to as a prospectus, offering memorandum, or OC for short.
A type of commercial building used exclusively or primarily for office use (business), as opposed to manufacturing, warehousing, residential, retail, or other uses. Office buildings may sometimes have other associated uses within part of the building, i.e., retail sales, financial, or restaurant, usually on the ground floor.
Calculated by dividing the price of a building (or could refer to price of a lease) by the Rentable Building Area (RBA).
A principal acts on behalf of him or herself and others in a real estate transaction and has the authority to sign binding documents on behalf of all parties represented by the principal.
An individual or company responsible for the day-to-day operations of a property or set of properties.
A document an issuer must file to the SEC that provides details about an investment offering, and helps an investor make an informed decision.
Purchase and Sale Agreement (PSA)
A PSA is a formal document that defines the agreed upon sales price and terms for the acquisition of a specific property and outlines the duties and responsibilities that each party to the agreement must perform.
The final rules pertaining to the JOBS Act section that allows private companies to make exempt public offerings of up to $50 Million of securities within a 12-month period. These final rules implement Title IV of the JOBS Act and provide for two tiers of offerings:
Part of the Securities Act of 1933, Regulation D governs registration exemptions available for companies that are raising capital. Reg D allows smaller companies to raise capital through the sale of equity or debt securities without having to register them with the SEC, saving tremendous time and costs for the issuer.
The estimated amount of revenue a company will generate over a specific accounting period.
A statement that provides an accurate assessment of the potential for risk and how it may impact a business or financial transaction.
The annual costs of occupancy for a particular space quoted on a per square foot basis.
These are BITs that have been purchased and the money is held in escrow until the Funding Goal is met and the acquisition of the property takes place. Reserved BITs do not appreciate or earn dividends. Once the funding goal is met, and all due diligence and closing paperwork is complete, the money is transferred to the seller and the BITs are marked as “Acquired”.
Money set aside by property ownership or by the asset managers from rental revenue for various projected expenses such as taxes, insurance, and expected capital expenditures.
The price paid for a property on the day of sale.
The individual, group, or legal entity that sells a particular commercial real estate asset.
A Subscription Agreement is a written document and contract that outlines the promise by the company to sell a given number of shares or BITs to an investor at a certain price, and an agreement by the investor to pay that price.
A term used to indicate the type of occupancy in the building and whether or not a building is occupied by multiple tenants (See also: Multi-tenant) or a single tenant (See also: Single-tenant).
A summary of the major points in a business agreement or transaction. Term sheets are typically drawn up after the parties have agreed on the substantive elements of a deal, and are used as the basis for drawing up legal documents, contracts, etc. Term sheets include such things as form of security, amount raising, valuation, interest rate, anti-dilution provisions, etc.
Time On Market
A measure of how long a currently available building or space with a building has been marketed for lease, regardless of whether it is vacant or occupied.
Triple Net (NNN)
In United States real estate business, "net lease" is a term used for an arrangement in which the tenant or lessee is responsible for paying, in addition to base rent, some or all of the expenses related to real-estate ownership. These expenses often called the "three nets", are property taxes, insurance, and maintenance. Because the rent collected under a net lease is net of expenses, it tends to be lower than rent charged under a gross lease. Net lease types include single net, double net, and triple net leases, with the term "net lease" often being used as a shorthand expression for any of these arrangements. A triple net lease (i.e., one that is net of all three of the major expense categories) is often abbreviated in writing as "NNN lease", but is still pronounced as "triple net lease".
Types of Construction
BuildingBITs classifies the general construction types as "Concrete Tilt-Wall, Metal Shell, Wood Frame, Brick/Steel Frame, Curtain Glass Steel Frame". This is the general composition of the building.
See JOBS Act.
See Regulation A+.
The time period over which an asset is depreciated and one can expect a positive cash flow from a property.
A measurement expressed as a percentage of the total amount of physically vacant space divided by the total amount of existing inventory. Under construction space generally is not included in vacancy calculations.
The year in which a building completed construction and was issued a certificate of occupancy.
Abbreviation for Year-to-Date. Describes statistics that are cumulative from the beginning of a calendar year through whatever time period is being studied.