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Glossary of REIT Terms


Whether you are new to non-traded REITs or an industry veteran, it’s always helpful to have a glossary of terms readily available. If you would like additional definitions added to this list, please let us know.

Term Definition
Capitalization Rate A percentage calculated by dividing the income the property will generate by the total value of the property. It is a good factor to consider when comparing investment opportunities. Capitalization rate = Yearly Income/Total Value
Cost of Capital The cost to a company of raising capital in the form of equity. It can also refer to the cost of debt if a company is financed solely through debt. The cost of equity capital usually includes the dividend rate as well as the expected equity growth either by higher dividends or growth in stock prices. Cost of Capital is often used in determining if a company should proceed with a project because it represents a hurdle rate that must be overcome before the company can start generating value.
DownREIT Is structured similarly to an UPREIT but it actually owns and operates real estate unlike UPREITs which own the interest in a controlled partnership that owns and operates separate properties. DownREITs aren’t used as much because the transaction is more complicated in terms of being taxed and must be structured carefully. DownREITs are a good option for those who think their property may appreciate more than other properties in a REIT. This gives the property owner greater interest than an UPREIT.
EBITDA Earnings before interest, taxes, depreciation, and amortization. Also known as Net Operating Income (NOI). It is calculated by subtracting a company’s expenses (excluding interest, tax, depreciation, and amortization) from its revenue. It can be used to compare profitability between companies because it excludes the effects of financing and accounting decisions. Companies can change what factors are included in the calculation from one reporting period to the next.
Equitization The process by which real estate is divided among multiple investors and are represented in the form of publicly-traded stock.
Equity REIT A REIT that has an equity interest in a rental property rather than making loans which are secured by real estate capital. Revenues come mainly from a properties rent.
Funds From Operations (FFO) The most commonly used method for measuring a REIT’s operating performance. It is calculated by adding a REIT’s net income (excluding gains or losses from sales of property) to real estate depreciation. This method is adopted by the National Association of Real Estate Investment Trusts (NAREIT).
Hybrid REIT REITS that invest in both mortgages and properties, thus combining the strategies of both Equity REITs and Mortgage REITs.
Implied Equity Market Cap The value of all partnership units of an UPREIT added to the market value of a company’s outstanding shares.
Leverage The amount of debt relative to either equity capital or total capital. A firm with a great deal more debt than equity is considered highly leveraged.
Liquidity The ability to turn assets into cash without affecting its price. There is not a specific liquidity formula but it is often calculated using liquidity ratios.
Modified Funds From Operations (MFFO) Adopted by the Investment Program Association (IPA) in 2010, this metric is used by many non-traded REITs. It is most often used when a REIT is in the process of actively acquiring properties
Mortgage REIT A REIT that makes or buys mortgages or other loan obligations and gathers revenue primarily from the interest. The loans are secured by real estate collateral.
Net Asset Value (NAV) the net market value of a company’s assets. It includes its properties after subtracting its liability and obligations.
Positive Spread Investing (PSI) involves a company raising equity and debt funds at a lower cost than the initial returns that can be obtained on real estate transactions. The funds that generate the PSI normally come from investment yield, capital costs, and rate of activity.
Real Estate Investment Trust (REIT) a company dedicated to owning, and often operating, real estate in the form of apartments, shopping centers, and offices, to name a few. Some REITs finance real estate.
Rotation Schedule A method used by sponsors or advisors of multiple REITs to decide which fund should be presented with an investment opportunity.
Securitization A process that finances a group of similar but unrelated financial assets and aggregates them into a security that can be marketed to investors. The security interests issued to the investor represent claims against the cash flow and other economic benefits.
Straight-lining An accounting practice that averages a tenant’s rent payments over the life of the lease.
Total Market Cap The total market value of a company’s outstanding common stock and level of debt. Market capitalization is calculated by multiplying a company’s outstanding shares by the current market price of one share.
Umbrella Partnership REIT (UPREIT) In an UPREIT, partners of an existing partnership and a newly formed REIT become partners in a new partnership called the Operating Partnership. It is often used to defer or avoid capital gains tax liability. Instead of selling property, an individual or company will contribute it to an UPREIT in exchange for Operating Partnership Units. Typically the REIT is the general partner and majority owner of the Operating Partnership Units. After a period of time, usually one year, the partners can receive the same liquidity as shareholders by getting cash or REIT shares for their units. This would be a taxable event and Unitholders may tender their units over a period of time to spread out the taxation. UPREITs are often used in estate planning because once the owner of the Units dies, his heirs may convert the Units to REIT shares or cash without incurring capital gains tax. If the UPREIT liquidates during the lifetime of the contributor, this event would be taxable.