Definitions
60/40 Portfolio
An investment portfolio that holds 60% stocks and 40% bonds.
For a more details, see Is the 60/40 Investment Portfolio Dead?
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.
Adjusted funds from operations (AFFO)
A measure of REIT performance or ability to pay dividends is used by many analysts with concerns about the quality of earnings as measured by funds from operations (FFO). The most common adjustment to FFO is an estimate of certain recurring capital expenditures needed to keep the property portfolio competitive in its marketplace.
After-Repair Value (ARV)
After repair value (ARV) is the projected value of a property after it has been repaired, renovated, or updated. ARV is commonly used in house flipping, a short-term real estate investment strategy in which a person buys a property (often a “fixer-upper” or distressed property), makes repairs and renovations, then sells it for a profit. To estimate if they’re going to have a large enough profit margin, a real estate investor will look for a property with a lower purchase price than its estimated ARV and renovation costs. ARV can also be used with any type of real estate investment in which renovations or improvements to the property would add value. (Note: Kirkland Capital Group uses "as-is" value, and does not consider ARV for loan underwriting.)
Alpha
Alpha is a risk-adjusted statistical measure of performance. Alpha takes the volatility (price risk) of a managed portfolio of equities or alternative assets and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. Alpha can be thought of as the abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM). It typically is thought of as a measure of the "value-added" (or subtracted) by the portfolio manager in selecting the individual components of and engineering the interplay between components when constructing the portfolio. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. If a CAPM analysis estimates that a portfolio should earn 12% based on the risk of the portfolio, for example, but the portfolio actually earns 14%, the portfolio's alpha would be 2%. This 2% is the excess return over what would have been predicted using the same original inputs by the CAPM model.
Alternative Investment Platforms
These are companies/websites that provide access and sometime education and due diligence on alternative investments or funds for potential investors.
Anchor Tenant
The tenant that serves as the predominant draw to a commercial property, is usually the largest tenant in a shopping center.
Annual Percentage Rate (APR)
A percentage rate that reflects the amount of interest earned or charged.
Annual Percentage Yield (APY)
Annual percentage yield is the interest you earn on your savings account (or certificate of deposit, money market account, or other deposit accounts). It's based on an interest rate and how often it's compounded (added to your original deposit, basically, so you earn interest on your interest) over a year.
As-Is Valuation
This is the process of determining the market value of a property in its current condition, without considering any potential improvements or changes. It reflects the property’s existing state, including any wear and tear or structural issues, providing a realistic assessment of its worth at the time of appraisal.
Assets Under Management (AUM)
Assets under management (AUM) is the total market value of the investments that a person or entity manages on behalf of clients.
Average Common Equity
Calculated by adding the common equity for the five most recent quarters and dividing by five.
Average LTV Ratio
Lenders use this ratio to determine how risky a loan is because a higher ratio means that the loan is riskier to the lender.
Balloon Payment
An installment payment on a promissory note - usually the final one for discharging the debt - which is significantly larger than the other installment payments provided under the terms of the promissory note.
Blind Pool
A commingled fund accepting investor capital without prior specification of property assets.
Blockchain
Blockchain is a decentralized and distributed digital ledger technology that records transactions across multiple computers in a way that ensures the security, transparency, and immutability of the data. Each block in the chain contains a list of transactions and is linked to the previous block, forming a secure chain that is resistant to modification.
Bonus Depreciation
What Is Bonus Depreciation And How Does It Work? (biggerpockets.com)
Bridge Loan
A bridge loan is a short-term loan used until a person or company secures permanent financing or pays an existing obligation. It allows the borrower to meet current obligations by providing immediate cash flow. Bridge loans have relatively high interest rates and are usually backed by some form of collateral, such as real estate or the inventory of a business.
Broker-Dealer
A financial firm that is registered with regulatory authorities to facilitate the buying and selling of securities, such as stocks, bonds, and other financial instruments, on behalf of clients or for its own account, often involving both brokerage and trading activities.
Business Development Company (BDC)
Type of closed end fund that lends money to developing and often financially distressed companies with investor capital. They often use leverage to enhance their return.
Buyout Private Equity
The acquisition of a controlling interest of a private company.
Capital Appreciation
The change in the market value of a property or portfolio is adjusted for capital improvements and partial sales.
Capitalization Rate (Cap Rate)
Metric used in real estate to evaluate the profitability of an investment property. It is calculated by dividing the property's net operating income (NOI) by its current market value or purchase price.
Chartered Financial Analyst (CFA)
A Chartered Financial Analyst (CFA) is a globally-recognized professional designation given by the CFA Institute, formerly the AIMR (Association for Investment Management and Research), that measures and certifies the competence and integrity of financial analysts. Candidates are required to pass three levels of exams covering areas, such as accounting, economics, ethics, money management, and security analysis.
Kirkland Capital Group CIO Chris Carsley is a CFA.
Clawback
Refers to a mechanism that may require individuals or businesses to repay or return a portion of previously received tax benefits or deductions if certain conditions are not met in the future.
Close of Escrow
The meeting between the buyer, seller, and lender (or their agents) where the property and funds legally change hands.
Commercial Mortgage-Backed Security (CMBS)
A type of fixed-income investment product that is backed by commercial real estate loans. These securities are created by pooling together various commercial mortgages, such as those for office buildings, hotels, and retail properties, and then selling the resulting cash flows to investors in the form of bonds.
Commercial real estate
Commercial properties involve tenants that are businesses or multifamily apartments with five or more units.
Conventional loan
A conventional mortgage or conventional loan is any type of loan that is not offered or secured by a government entity. Instead, conventional mortgages are available through private lenders, such as banks, credit unions, and mortgage companies. They usually do not include specialized mortgage types such as bridge loans, short-term loans, or no-doc loans.
Core Inflation Rate
Core inflation is the change in prices of goods and services, except for those from the food and energy sectors.
Credit Crunch
A sudden sharp reduction in the availability of money or credit from banks and other lenders.
Credit Spreads
The credit spread is the difference in the interest rate offered to investors by a bond versus another debt security.
Debt Service Coverage Ratio (DSCR)
The annual net operating income from a property is divided by the annual cost of debt service. A DSCR below 1 means the property is generating insufficient cash flow to cover debt payments.
DeepSeek
A Chinese AI company that claimed to develop a model they call R1 that is as powerful as any US AI model but operates at a fraction of the cost. Some of these claims have been debunked.
Dispersion
With regards to investments, it is implying greater variance in investments and between investments. The range of potential outcomes is greater. This is of importance to long-short hedge funds as they need longs and shorts in their portfolio to not all move in the same direction to create excess returns on both sides of their book.
Dry Powder
Is a slang term for cash or highly liquid cash-like investments.
Emerging Manager
This can mean many things to different allocators. In general, it is a manager that is early on in their growth cycle and has a shorter track record and smaller assets under management.
Excess Return
A return achieved above and beyond the return of a proxy or benchmark.
Extend and Pretend
Refers to the practice where lenders extend the terms of a loan to a struggling borrower, often without addressing the underlying financial issues, in order to avoid recognizing the loan as non-performing or impaired. This approach allows lenders to maintain the appearance of a healthy loan portfolio while postponing the need to recognize losses.
FFO (Funds From Operations)
A ratio intended to highlight the amount of cash generated by a company's real estate portfolio relative to its total operating cash flow. FFO is equal to net income, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization.
Fair Market Value (FMV)
The highest price that a willing, but not compelled, buyer would pay, and the lowest price that a willing, but not compelled, the seller would accept.
Federal Open Market Committee (FOMC)
The FOMC sets the direction of U.S. monetary policy, primarily through open market operations, which involve buying and selling government securities. These actions affect interest rates, inflation, and overall economic growth.
Fixed-Rate Mortgage (FRM)
A mortgage in which the monthly principal and interest payments remain the same throughout the life of the loan.
Foreclosure
Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of the mortgaged property and selling it.
Fund Expenses
All the expenses directly related to the fund and its operations. (Example: Administration, tax, legal, accounting, reporting, etc.)
Fund Gates
A mechanism that allows fund managers to limit or halt redemptions from the fund. This is typically used to prevent a “run on the fund,” especially when the assets held by the fund are illiquid and cannot be quickly converted to cash.
Gateway City/Market
In commercial real estate, a gateway market is a major international city with a large population, economic diversity, cultural vibrancy, and strong demand for properties. Gateway markets are often the first entry point for travelers and businesses into a country, and they have world-class transportation infrastructure. Some examples of gateway markets in the US are New York, San Francisco, Miami, and Los Angeles
Generative AI
Generative artificial intelligence or generative AI is a type of artificial intelligence (AI) system capable of generating text, images, or other media in response to prompts. Generative AI models learn the patterns and structure of their input training data, and then generate new data that has similar characteristics.
Gross Domestic Product
Value of all finished goods and services in a country for a specific time. Used as an economic snapshot in time to determine size and growth rate of the economy.
Hard Money Lender
Individuals or companies providing asset-based loans that are secured by the underlying real estate. Hard money is based on the property's value, not the borrower's creditworthiness. Therefore, there is no concern about the borrower's ability to repay the loan. These lenders do not fall under banking regulations.
High-Water Mark
A high-water mark is the highest peak in value that an investment fund or account has reached. This term is often used in the context of fund manager compensation, which is performance-based. The high-water mark ensures the manager does not get paid large sums for poor performance.
Housing Affordability Index
Measures the ability of an average family to afford a home in a specific location. It compares the median household income to the income needed to qualify for a mortgage on a median-priced home. Higher the index number the more affordable a home is in that location.
Impound
That portion of the mortgagor’s monthly payments is held by the lender to pay for property taxes or hazard insurance premiums as they become due. KCG does not impound for either property taxes or hazard insurance premiums; this is common for most private lenders.
Infrastructure Investing
An investment in a real asset that pertains to the logistics or utility services. (Examples: bridges, roads, sewage systems, water systems, and energy systems.)
Interest-Only Payment Loan
A non-amortizing loan in which the lender receives interest during the term of the loan and principal is repaid in a lump sum at maturity.
Interest Rate Spread
Simply, the net between one interest rate and another. It is used across the financial industry. For example for the Kirkland Income Fund, when a loan is sold to another fund, if the interest rate on the loan to the borrower is 11.0%, servicing costs 1.0%, and the loan is sold for an 8.0% coupon, then KIF investors would continue to receive a 2.0% interest rate spread on that loan.
Investing
Investing generally involves holding assets long-term to capitalize on continuing trends and growth of the asset.
Investment Cycle
This definition is regarding a period covering both an expanding and a contracting economic, market, or business period.
Jobs Report
Monthly report published by the US Bureau of Labor Statistics. Shows change in employment and wages in the United States in comparison to the previous month. The data is aggregated from household and employer surveys.
Junk Bond
A junk bond is debt that has been given a low credit rating by a ratings agency, below investment grade.
Labor Productivity
Is a measure of workers output per unit of time (Hour). Measured in terms of Gross Domestic Product and goods and services. (Total output of company or country/Total number of hours worked).
Levered Loans
A leveraged Loan is a loan made to borrowers with already high levels of debt and/or a low credit rating. Often these loans are syndicated to corporations.
LIBOR: London Interbank Offered Rate
A benchmark forward looking interest rate that is utilized by major global banks to determine short term lending rates between each other.
Lien Position
Lien position, also called lien priority, is the order of seniority in which the law recognizes lenders’ claims against a property. It determines the sequence of who gets paid in the event of a foreclosure. This is why it is important to have a good understanding of what the lien priority is in any real estate investment. (Note: Kirkland Capital Group only makes first lien mortgages.)
Loan Default
In finance, default is a failure to meet the legal obligations (or conditions) of a loan. This can encompass not just failing to make a payment, but also can be triggered by a borrower not adhering to loan covenants or rules in the loan agreement such as reporting, not paying property taxes, or not carrying the proper property insurance.
Loan Due Diligence
A comprehensive process undertaken by lenders to thoroughly investigate and verify the information provided by a borrower in a loan application. At KCG, our due diligence process involves verifying the borrower's credit history, financial statements, tax returns, and any legal issues that may affect their ability to repay the loan. We also assess the property's value, title, and any existing liens or encumbrances. This meticulous process ensures that we only approve loans that demonstrate a high probability of timely repayment, thereby protecting our investors' interests and maintaining the integrity of our loan portfolio.
Loan-to-Value (LTV)
The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, loan assessments with high LTV ratios are considered higher-risk loans.
An LTV ratio is calculated by dividing the amount borrowed by the appraised value of the property, expressed as a percentage. For example on a purchase, if a property is appraised at $1,000,000, and there is a $250,000 down payment, the loan is $750,000. This results in an LTV ratio of 75% (i.e., 750,000/1,000,000).
Loan Term Sheet
A non-binding document outlining key terms of a proposed loan agreement. It provides a framework for negotiating the loan contract, detailing aspects like loan amount, interest rate, term, collateral, and conditions. It ensures both borrower and lender agree on major terms before due diligence. KCG issues it when confident in closing the loan based on borrower/broker claims at that time.
Loan Underwriting
The analysis of risk and the decision whether to make a loan to a potential homebuyer based on credit, employment, assets, and other factors.
Monetary Policy
Set of tools/actions used by the central bank to control the supply of money and promote or hinder economic growth. These tools include changing interest rates, bank reserve requirements, buying and selling of bonds.
Net Return
The amount of money received from an investment after the management fee and all costs have been paid.
Nonfarm payroll
The nonfarm payroll measures the number of workers in the U.S. except those in farming, private households, proprietors, non-profit employees, and active military.
Non-negotiables (Due Diligence)
These are hard line factors that an investor determines are not open for discussion or reconsideration when performing due diligence on an investment.
Preferred Return
A preferred return is a profit distribution preference whereby profits, are distributed to one class of equity before another. In the case of funds, it is used in conjunction with incentive fees to define a minimum return to investors to be achieved before a carry (The unrealized share of profits to the GP that may accumulate on an annual basis) is permitted.
Price-to-Forward Earning Ratio
Also known as Forward P/E ratio (or forward price-to-earnings ratio) divides the current share price of a company by the estimated future (“forward”) earnings per share (EPS) of that company. For valuation purposes, a forward P/E ratio is typically considered more relevant than a historical P/E ratio.
Private Credit
Private credit is an asset defined by non-bank lending where the debt is not issued or traded on the public markets. Private credit can also be referred to as "direct lending" or "private lending". The private credit market has shifted away from banks in recent decades.
Private Loans
A loan made with private money to an individual or corporation. Loan sourced not from a bank.
Private non-bank Lender
Individuals or companies providing asset-based loans that are secured by the underlying real estate. These loans are based on the property's value and the borrower's creditworthiness. The ability of the borrower to repay the loan is an important part of the underwriting process. These lenders do not fall under banking regulations.
“Pump & Dump”
A manipulative scheme to boost the valuation of a security through fake recommendations or falsified valuations and then sell.
Real Assets
Real assets are physical assets that have an intrinsic worth due to their substance and properties. Real assets include precious metals, commodities, real estate, land, equipment, and natural resources.
Real Estate Investment Trust (REIT)
A REIT is a company that owns, operates, or finances real estate that generates income. A REIT will pool investor capital to make real estate investments. There are private and publicly trade versions of REITS.
Recession
A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. (At its simplest level.)
Recourse
A debt can be recourse or non-recourse. Recourse debt holds the person (or guarantor) borrowing money personally liable for the debt. If the person who signs as the guarantor for the loan defaults on a recourse loan, the lender will have license, or recourse, to go after the personal assets, including the borrower's home, wages, or bank accounts, if the collateral’s value doesn’t cover the remaining amount of the loan that is due. (Note: All Kirkland Capital Group loans are full recourse.)
Residential real estate
Residential properties are those where people live, such as single-family homes, duplexes, triplexes, or apartment buildings with four or fewer units.
RIA (Registered Investment Advisor)
A licensed professional who provides personalized financial advice and investment recommendations to clients while adhering to regulatory requirements and industry standards.
Risk-Adjusted Return
A risk-adjusted return is a measure that assess returns into context based on the amount of risk involved in an investment. In general, the higher the risk, the higher return an investor should expect. The most common measure is the Sharpe Ratio. (Excess return earned for the volatility you take)
“RISK ON” Trade
Investing in an asset that generally has significant degree of price volatility in an effort to capture a greater return.
Shelter Component of CPI
Shelter is comprised of: Cost of renting a home, estimated cost of rent if a homeowners rented their home, cost of hotels, motels, and other temporary accommodations, and the cost of insurance for renters.
Shore up Balance Sheet
When banks take actions to shed unprofitable loans and increase the amount of equity they have on their balance sheet relative to debt.
Since Inception
Inception refers to when a fund is started and becomes available to investors. This is essentially the fund’s date of birth.
Small-Cap CRE
There is no defined industry definition. According to many, any deal with a value less than $25 million is “small” in real estate. Boxwood Means defines small as below $5 million. Hence why KCG had to come up with the term micro-balance, which was $1.2 million or less.
SOFR: Secured Overnight Financing Rate
A benchmark interest rate for dollar denominated overnight loans and various derivatives products that are secured by Treasury securities. SOFR has established itself as an alternative to LIBOR.
SPAC
A Special Purpose Acquisition Company is a company specifically formed to raise money to acquire or merge with an existing private company. The company's issuance will be through an initial public offering (IPO). These companies are sometimes referred to as "blank check companies." Generally, these companies have two years to complete a transaction, or they must return the capital to investors. SPACs have been around for decades but recently gained popularity in the private equity space.
Spread Over the Risk-Free Rate
Refers to the difference between the yield of a particular investment and the yield of a risk-free investment, such as a U.S. Treasury bond. This spread is often used to measure the additional return an investor expects to receive for taking on additional risk compared to a risk-free investment.
Standard Deviation
A statistic that measures how dispersed a set of data is from its mean. Low standard deviation means data are clustered around the mean, and high standard deviation indicates data are more spread out.
Style Drift
Divergence of a fund from its described investment style of objective. This can cause a change in the risk and return characteristics of the fund.
Trading
Trading involves buying and selling assets for short-term gains.
Traditional Investments
Investment in long stocks, bonds, or cash. (Could include ETFs, mutual funds.)
Trailing 12 Months (T-12)
Trailing 12 months is a term used to describe the past 12 consecutive months of a company’s performance data, that’s used for reporting financial figures.
The Magnificent 7
Companies associated with Artificial Intelligence that are driving the public equity markets. (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla)
Venture Debt
Venture debt is a loan offered by banks and private nonbank lenders that is designed specifically for early-stage, high-growth companies that have backed their company with venture capital.
Warehouse line
A warehouse line of credit is a credit line used by mortgage bankers. It is a short-term revolving credit facility extended by a financial institution to a mortgage loan originator for the funding of mortgage loans.
Weighted Average Maturity (WAM)
The weighted average maturity, or WAM, is calculated to compare portfolios comprised of mortgage-backed securities. The calculation figures the average time a loan takes to fully mature weighted by the amount of principal left to be paid on the loan. The higher the WAM figure, the longer the duration left on the maturity terms of the mortgages in the portfolios. A portfolio with a lower WAM typically contains more mortgages that are close to the loan’s maturity date.
Investors will often use WAM to determine how sensitive to interest rate risk their portfolios that contain mortgage-backed securities may be. If a portfolio has a lower WAM, investors are exposed to less interest rate risk because of the shorter duration before the mortgages in the portfolio mature.
Yield
Yield refers to the earnings generated and realized on an investment over a particular period of time. It's expressed as a percentage based on the invested amount, current market value, or face value of the security.
Yield is calculated as:
Yield = Net Realized Return / Principal Amount