Glossary

Under IRC Section 1031, an exchanger or taxpayer executing a delayed exchange has 45 calendar days from the closing date of the sale of their relinquished property to formally identify a potential replacement property or properties. Closing on one or more replacement properties must occur within the 180-Day Exchange Period.

Adjusted basis is the original purchase price of an asset plus its acquisition costs plus any capital improvements less the cumulative depreciation deductions the owner has claimed during the time of ownership less any previously deferred capital gains.

Any consideration other than “like-kind” property received by the investor. Boot is subject to taxation to the extent there is capital gain. Boot can accumulate over each exchange and is retroactive back to the original relinquished property. Boot can refer to cash boot, mortgage boot and personal property.

A C-corp is a legal entity separate from its owners and shareholders. For this reason, owners and shareholders are not liable for the C-corp. C-corps create a double taxation situation because the corporation is taxed on its income, and owners/shareholders are taxed on their income at the personal level.

Exercising control over your exchange funds or other property including having money or property from the exchange credited to your bank account or property or funds reserved for you. Being in constructive receipt of exchange funds or property may result in the disallowance of the tax-deferred, like-kind exchange transaction thereby creating a taxable sale. An example of constructive receipt would be the investor selling his relinquished property and having a closing officer hold the proceeds in an escrow or trust account on his behalf.

This type of exchange enables you to any remaining funds not consumed in a new like-kind purchase to build or improve on the property you wish to buy.

A deed of trust, like a mortgage, is a security instrument used to finance real estate. A deed of trust transfers legal title in real property to a trustee, which holds it as security for a loan between a borrower and lender. The trustee is typically a title company.

The most common type of 1031 exchange is the delayed like-kind exchange. This type of exchange gives investors a maximum 180 days after the sale of their property to identify replacement property.

Either the relinquished property or the replacement property can be deeded directly from seller to buyer without deeding the property to the Qualified Intermediary. Direct deeding may eliminate paying transfer taxes twice on the sale of the relinquished property and purchase of the replacement property.

Easement is a non-possessory right that allows the holder to occupy or use real property that he or she may not actually own. Easement rights are limited in nature, and are restricted to whatever is “convenient or necessary” to satisfy the purposes of the easement. There are two main types of easements that are common in real property: easements appurtenant and easements in gross. Easements appurtenant are characterized by benefiting a particular parcel of land, the dominant estate, to the detriment of another, the servient estate. This type of easement is tied to the land, and transfers automatically with the sale of either estate. For example, an easement used to access remote land through another property may hold its integrity upon the sale of either parcel. Easements in gross differ in that they benefit a person or entity, rather than the land itself. Although the easement may transfer with the sale of the land, the beneficiary of the easement may not transfer the easement to another entity or person. To provide an example, if a utility company holds an easement to construct power lines across a property, the utility company maintains this right if the property were to be sold to a third party, although cannot transfer its easement to another utility company.Exchange Agreement: The written agreement defining the transfer of the relinquished property, the subsequent receipt of the replacement property and the restrictions on the exchange proceeds during the exchange period. The exchange agreement specifies all the terms of the relationship between the investor and the qualified intermediary.

Net rental income received by the landlord from a lease after deducting the value of concessions and costs incurred to secure the lease such as leasing commissions and tenant improvements. For instance, if a tenant signed a 5 year lease for $20/sf per year, but received a $10/sf tenant improvement allowance and five months free rent, the effective rent would be $16.33/sf ($20 / 12 months = $1.67/month x 5 months free = $8.33 plus $10/sf tenant improvement allowance = $18.33/sf total cost to landlord. $18.33 / 5 year lease = $3.67 per year deduction from the face rate of $20/sf = $16.33/sf effective rent). Effective rent is also called net effective rent. Net effective rent (also called net effective rate or NER) is commonly used in landlords’ marketing materials rather than stated in the actual lease. NER is the average rent that a tenant pays during their lease term. If the gross rent is $1,000 per month for a 12-month term, the tenant pays $12,000. NER comes into play when a promotion is offered to the tenant. For example, a tenant may receive one month free for a 12-month term. The gross rent is $1,000 per month. Using the formula: [Total rent payable] / [number of months in lease] = $11,000/12 = $916.67. The NER is $916.67. That’s the average rent the tenant will pay over the term. Instead of advertising $1,000/mo, the landlord can choose to advertise $916.67/mo net effective rent, a more attractive number to potential renters. When a renter is offered a free month, it lowers their average (i.e., net effective) rent. However, for the renter, they are still paying the full gross rent minus the one free month. As a side note, broker fees are usually based on gross rent instead of net effective rent.Exchange Period: The period of time during which an investor must complete the acquisition of the replacement property in a like-kind exchange transaction. The exchange period is 180 calendar days from the transfer of the investor’s relinquished property, or the due date (including extensions) of the investor’s income tax return for the year in which the tax-deferred, like-kind exchange transaction took place (whichever is earlier), and is not extended due to holidays or weekends.

Encumbrance is any limitation on the ownership of real property. Similar to a lien, an encumbrance can restrict both the free use and the transferability of the property until removed. Encumbrances include leases and mortgages, but are not always financially related. Encumbrances are non-possessory, holding no interest in the title of real property. Encumbrances not only affect the usage of real property, but could also affect the marketability of the property. Although encumbrances do not necessarily keep a buy-sell transaction from occurring, it will remain on the property until satisfied and is said to “run with the land.” An example would be air rights, which may restrict how high you may be able to construct improvements on a parcel of land located in a central business district.

An individual, married couple or any other entity such as a corporation, limited liability company, partnership or trust. An investor has property and would like to exchange it for new property.

Exchange period, under IRC Section 1031, is when an exchanger or taxpayer executing a delayed exchange has 180 calendar days from the closing date of the sale of their relinquished property to complete the acquisition of the replacement property or properties. Note, however, that potential properties must be identified within 45 calendar days of sale. For instance, if an exchanger sells their relinquished property on June 1st, they would have until July 16th to formally identify potential replacement properties, but would have until November 28th to complete the acquisition of the replacement property.

FAR stands for Floor Area Ratio and is the total usable floor space in a building compared to the building’s lot size. The formula for FAR is (total floor area of building) / (gross lot area). The total building floor space may also be based on permitting. A high FAR means more density. City governments use FAR for zoning. Usable space varies across buildings. Elevator shafts, stairwells, pillars, and other occupiable spaces do not count as usable space. Developers desire a higher FAR, as it allows for more occupancy per lot. City planners must balance the desire for more usable space with the strains it can put on a city, known as a safe load factor.

Going-in-cap rate is the cap rate based on the ratio of the first year of net operating income to the property purchase price. For example, if a property is expected to generate a first year net operating income (NOI) of $100,000 and is valued at $1,250,000, it would have a cap rate of 8.0% ($100,000 / $1,250,000). For acquisitions, some firms annualize the 12-month NOI by taking one month and multiplying it by 12 or taking the forward three months and multiplying them by 4. Also, the purchase price does not include any closing costs. Development projects use a slightly different calculation. Total project costs are used in this case. These costs include land, legal, closing, financing fees, other fees, and construction debt interest. Developments may refer to the going-in cap rate as the (forward) stabilized cap rate. The calculation is also different from that of the acquisition calculation: [forward stabilized cap rate] / [total project cost]. Because development projects are new construction and start with no tenants, the stabilized cap rate doesn’t come into play until all property units are leased, and cash flow is being generated. This differs from an acquisition, which has cash flow from the time that the property is acquired.

Gross proceeds are the amount that a seller receives from the sale of an asset. These proceeds include all costs and expenses. Gross proceeds are often not the taxable amount from the sale. Instead, net proceeds are used for that calculation. Net proceeds are the amount after subtracting out fees and expenses. This is the actual amount the seller takes home. Costs and expenses can be a substantial amount of gross proceeds, leading to a smaller amount of net proceeds.

Ground lease is a lease of the land only, on which the tenant usually owns a building or is required to build as specified in the lease. Ground leases are almost always long-term net leases. For example, a landowner may allow a developer to construct a retail property on the landowner’s property. The developer would be entitled to the net income derived from the retail property but would also be responsible for paying ground rent to the landowner for use of the property. Reasons for a ground lease can be when a landowner believes that the land has long-term appreciation potential but wants to generate current income without having to sell the land or when a landowner does not possess the expertise to develop a building themselves but wishes to retain the land. A ground lease structure can also benefit the developer as the overall project cost would be reduced as there is not a need to purchase the land on which the project will be built. See leasehold interest.

The Department of Housing and Urban Development (HUD) is a government agency that enforces the Fair Housing Act. The Fair Housing Act enforces discrimination in housing based on sex, race, color, national origin, and religion for renters and homeowners alike. HUD is meant to foster community development and homeownership. HUD is most visible in its assistance to low-income people and those who are disadvantaged with disabilities. Through its enforcement of the Fair Housing Act, HUD ensures that landlords are not able to take advantage of people through false claims of availability, application denial, different terms, or (negative) conditions that are different from those of other tenants.

The period during which an investor must identify potential replacement properties for a tax-deferred, like-kind exchange. The period is 45 calendar days from the transfer of the investor’s relinquished property and is not extended due to holidays or weekends.

In the context of a Delaware Statutory Trust (DST), the lease coverage ratio is calculated by dividing the property’s NOI by the sum of the debt service payments and the master tenant’s stated lease payment to the DST. For example, if the property is generating $150,000 of NOI, debt service payments are $100,000 and the lease payment to the DST is $40,000, then the lease coverage ratio is 1.07 ($150,000 NOI divided by ($100,000 debt service plus $40,000 rent payment)). The lease coverage ratio measures the property’s ability to “cover” its debt service payments and rental payments to the DST investors. A ratio below 1.0 indicates that NOI is insufficient to meet these obligations, while a ratio above 1.0 indicates excess NOI over these obligations. In this case, a ratio of 1.07 indicates that the property’s NOI could decline by approximately 7% (amount above 1.0) and still be able to make debt service payments and pay rent to the DST. A ratio over 1.0 is needed to not only cover debt service and rent payments but also expenses related to running the property. This includes capital expenditures. If a property runs at a 1.0 ratio, that means all income is going to service debt and pay rent. In this case, nothing is remaining to pay for expenses. Additionally, the DST is not able to build up any cash reserve. Understanding all aspects of DST operations is necessary to understand how much excess after debt service and rent payments are needed for efficient operations. As with all ratios, the lease coverage ratio should not be used in isolation. It is only a small part of the larger picture.

Claim or right to enjoy the exclusive possession and use of an asset or property for a stated definite period, as created by a written lease. The concept of a leasehold interest is most applied with ground leases. A leasehold interest can be sold or traded just like any other property. There are four types of leasehold interest: Tenancy for years: The length of the lease is known at the time it is created.