721 UPREIT

A tax-deferred transaction that allows a real estate owner to contribute property into a Real Estate Investment Trust (REIT) in exchange for operating partnership units (effectively owning shares in the REIT). This is generally a non-taxable event and is often utilized as an “exit strategy” for DST investors.

§1031 Exchange

Named for the section of the Internal Revenue Code that provides the applicable rules, a §1031 exchange is a real estate transaction that allows investors to postpone capital gains taxes, depreciation recapture, and other taxes upon the sale of a property if they promptly reinvest the proceeds into other “like-kind” real estate.

Accredited Investor

Someone who has the financial sophistication and ability to bear the risk of private investments, such as private real estate syndications, funds, or DST (Delaware Statutory Trust) offerings commonly used in 1031 exchanges. An accredited investor is generally defined as someone with a net worth of at least $1 million (excluding their primary residence) or someone who has earned more than $200,000 annually for the past two years individually, or $300,000 jointly with a spouse.

Asset

The property you own as an investment to generate income, including the land, buildings, and contract rights such as leases with tenants.

Asset Management

Often the same as the sponsor; a company responsible for managing the asset. This can include hiring property managers and making strategic decisions regarding financing, selling, and the general oversight of a property.

Bonus Depreciation

A U.S. tax rule that allows investors to immediately deduct a large percentage of the cost of certain assets in the year they are placed in service, rather than depreciating them over many years. This can boost passive losses for investors and enhance tax planning.

Boot

Any “non-like-kind” property received by an investor in a 1031 exchange, such as excess cash proceeds or a reduction in mortgage debt (mortgage boot). Boot is generally taxable to the extent of the gain.

Broker

A licensed real estate professional who helps buyers and sellers complete commercial property transactions.

Cap Rate (Capitalization Rate)

A real estate metric used to estimate the annual return of a property based on its income relative to its price, assuming the property is purchased all cash (no debt). Think of it as a yield. For example, $60,000 of net income on a $1 million property represents a 6% cap rate.

Cash Flow (sometimes referred to as Cash-on-Cash)

The money left over after paying all property expenses and any loan payments that is available for distribution to investors.

Closing

The final step of a transaction when a deed is signed, funds are transferred, and ownership officially changes hands.

Cost Segregation (Cost Seg)

Often required for bonus depreciation, this is a tax strategy used in real estate that breaks a property into different components so certain parts can be depreciated much faster than the standard 27.5- or 39-year schedule. By accelerating depreciation, investors can take larger tax deductions earlier, which often creates paper losses that reduce taxable income.

Debt Replacement

To fully defer taxes in a 1031 exchange, an investor must generally reinvest a value equal to or greater than the sale price of their relinquished property. This includes replacing the value of the mortgage debt that was held on the previous asset.

Delaware Statutory Trust (DST)

A Delaware Statutory Trust (DST) is a form of ownership that allows multiple unrelated investors to acquire a fractional interest in a larger investment managed by a professional real estate company, including investors completing a tax-deferred 1031 exchange. A DST is considered a “bankruptcy-remote” entity.

Downleg
In a 1031 exchange, the downleg refers to the sale of the investor’s existing property (the relinquished property) that starts the exchange process.

Due Diligence

The inspection and review period when a prospective buyer examines the property’s financials, leases, tenants, market conditions, and physical condition before finalizing the purchase.

Equity

Your ownership stake in a property—essentially how much of it you would own if the property were sold today. Equity may be expressed as either a dollar amount or a percentage interest.

Equity Multiple (EM)

Equity multiple is a measure of the success of an investment that compares the dollars invested to the dollars returned, without regard to time. Equity multiple includes cash flow distributed, proceeds from any refinance, and the net proceeds returned to investors upon sale.

Grantor Statement
A Grantor Statement is a tax reporting document used when an investment is held in a grantor trust. It reports the income, expenses, and other tax items attributable to the trust so the grantor (the individual who created the trust) can report them on their personal tax return.

Identification Rules

In a Section 1031 Like-Kind Exchange, identification rules determine how many replacement properties an investor can identify within the 45-day identification period after selling their original property. They consist of:

• Three-Property Rule: Identify up to three replacement properties, regardless of value.
• 200% Rule: Identify more than three properties as long as the total value of all identified properties does not exceed 200% of the value of the property sold.
• 95% Rule: You can identify an unlimited number of properties, but you must purchase at least 95% of the total value of everything identified.

Internal Rate of Return (IRR)

Internal rate of return is a measure of the success of an investment that compares the dollars invested to the dollars returned on an annualized percentage basis, taking into account the time value of money. Like equity multiple, IRR considers cash flow distributed, proceeds from any refinance, and the net proceeds upon sale.

K-1
A Schedule K-1 is a tax document issued to investors in partnerships or LLCs. It reports each investor’s share of income, losses, deductions, and credits from a real estate investment for the year, which they use when filing their personal tax return.

Leverage

Using borrowed money (a mortgage loan) to help purchase a property and potentially increase returns.

Loan-to-Offering (LTO) / Loan-to-Cost (LTC)
These ratios measure how much of a project is financed with debt.

• Loan-to-Offering (LTO): The percentage of the total offering amount that is financed with a loan.
• Loan-to-Cost (LTC): The percentage of the total project cost (purchase price plus improvements, fees, etc.) that is funded by debt.

LTV (Loan-to-Value)

A ratio that measures how much of a property’s value is financed with debt. For example, a $500,000 loan on a $1 million property equals a 50% LTV.

Master Lease

A structure required for certain DSTs where the Trust leases the property to a “Master Tenant” (usually an affiliate of the Sponsor). This allows the DST to comply with IRS rules while still allowing the Sponsor to manage the property’s day-to-day operations.

NOI (Net Operating Income)

The annual income a property generates after operating expenses are deducted, but before debt payments, taxes, and depreciation.

NNN (Triple Net) Lease

A lease structure where the tenant pays rent plus the property’s taxes, insurance, and maintenance costs.

Oil & Gas Royalty

The right to receive a percentage of the revenue produced from oil or natural gas wells without having to pay for the drilling, operating, or maintenance costs of the wells. This type of investment can be eligible for a 1031 exchange.

Opportunity Zone (OZ)

A U.S. tax incentive program that allows investors to defer and potentially reduce capital gains taxes by reinvesting those gains into designated low-income communities through a Qualified Opportunity Fund (QOF). Often consisting of development real estate, the appreciation—and potentially the income—may be tax-free if held for at least 10 years.

PPM (Private Placement Memorandum)

A formal legal document provided to prospective investors that outlines the objectives, risks, fees, and terms of a private investment offering.

Preferred Rate of Return

This is not cash flow, but rather a return threshold that must be achieved before the sponsor begins to share in profits with investors.

Principal

The original amount of money borrowed on a loan, excluding interest.

Property Management

Handling the day-to-day operations of a property, including tenant relations and leasing, building maintenance and repairs, and financial management.

Qualified Intermediary (QI)

A neutral third party that facilitates a 1031 exchange by holding the sale proceeds from a property and using those funds to acquire a replacement property, allowing the investor to defer capital gains taxes. A QI is required under the rules governing Section 1031 Like-Kind Exchanges.

Return on Investment (ROI)

The profit you earn, including cash flow and proceeds from sale, compared to the amount of money you invested. ROI for real estate transactions is typically measured in terms of equity multiple (EM) or internal rate of return (IRR).

The Seven Deadly Sins

The seven restricted activities a DST trustee cannot perform under IRS Revenue Ruling 2004-86, which include prohibitions against renegotiating debt, reinvesting proceeds, or making structural capital improvements.

Sponsor

A company that finds, finances, and manages real estate on behalf of investors.

Syndication
Real estate syndication is when multiple investors pool their money together to purchase or develop a property that would be difficult to acquire individually. A sponsor or manager typically handles the acquisition, financing, and management while investors receive a proportional share of the profits.

Tenant in Common (TIC)

A legal ownership structure where two or more investors own a fractional interest in the same property, with each investor holding a direct deeded ownership share. This type of ownership is eligible for a 1031 exchange.

Tenant Reconciliations
Tenant reconciliations are the process of calculating the difference between the estimated operating expenses tenants paid during the year and the actual expenses incurred by the property. At the end of the year, tenants may either owe additional money if expenses were higher than estimated, or receive a credit or refund if they overpaid. This is common in leases where tenants reimburse the landlord for items like property taxes, insurance, and common area maintenance (CAM).

Upleg
In a 1031 exchange, the upleg is the purchase of the replacement property using the proceeds from the downleg sale in order to complete the tax-deferred exchange.