Glossary of Terms

A resource for common Real Estate Investment Trust Terms

Glossary of Terms


Capitalization Rate

Steadfast Apartment REIT III calculates the cap rate for a real property by dividing “net operating income” of the property by the purchase price of the property, excluding costs. Net operating income is calculated by deducting all operating expenses of a property, including property taxes and management fees but excluding debt service payments and capital expenditures, from gross operating revenues received from a property. For purposes of this calculation, net operating income is determined using the projected net operating income of the property for the remaining fiscal year in which the acquisition occurred based on in-place leases, potential rent increases or decreases for each unit and other revenues from late fees or services, adjusted for projected vacancies, tenant concessions, if any, and charges not collected.

Cost of Capital

The cost to a company, such as a REIT, of raising capital in the form of equity (common or preferred stock) or debt. The cost of equity capital generally is considered to include both the dividend rate as well as the expected equity growth either by higher dividends or growth in stock prices. The cost of debt capital is merely the interest expense on the debt incurred.

Distribution Reinvestment Program (DRIP)

A plan that enables existing stockholders to automatically reinvest their distributions towards the purchase of additional shares.


The process by which the economic benefits of ownership of a tangible asset, such as real estate, are divided among numerous investors and represented in the form of publicly-traded securities.

Equity Market Cap

The market value of all outstanding common stock of a company.

Equity REIT

A REIT that owns, or has an “equity interest” in, rental real estate (rather than making loans secured by real estate collateral).

Funds From Operations (FFO)

The most commonly accepted and reported supplemental measure of REIT operating performance. We define FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property but including asset impairment writedowns, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FFO is not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of performance, as an alternative to cash flows from operations as an indication of liquidity, or indicative of funds available to fund cash needs, including the ability to make distributions to our stockholders.


The amount of debt in relation to either equity capital or total capital.


The ability to convert assets into cash without an appreciable loss in value. Investments are said to have good liquidity if they can quickly and easily be converted into cash.

Modified Funds From Operations (MFFO)

This term refers to a computation made by a REIT as a supplemental non-GAAP performance measure. MFFO is usually calculated by adding the following to FFO (1) acquisition expenses and acquisition fees expensed that are related to any property, loan or other investment acquired or expected to be acquired and (2) any non-operating, non-cash charges incurred, such as impairments of property or loans, other than temporary impairments of marketable securities, or other similar charges. MFFO may be calculated differently by different companies.

Net Asset Value (NAV)

The net “market value” of all a company’s assets, including but not limited to its properties, after subtracting all its liabilities and obligations.


Net operating income (NOI) is a non-GAAP financial measure that can be used to evaluate and compare the performance of income-producing properties after taking into account all income collected from operations, and deducting all expenses incurred from operations. Calculations of NOI typically eliminate the following from net income (loss): (1) the cost of funds, (2) acquisition costs, (3) non-operating fees to affiliates, (4) the impact of depreciation and amortization expenses as well as gains or losses from the sale of operating real estate assets that are included in net income computed in accordance with GAAP or (5) general and administrative expenses and other gains and losses that are specific to the REIT. Investors may be limited in their ability to compare NOI across companies as the individual measures and calculations may vary.

Real Estate Investment Trust Act of 1960

The federal law that led to the formation of REITs by allowing small investors to pool their investments in real estate in order to get the same benefits as might be obtained by direct ownership, while also diversifying their risks and obtaining professional management.


A REIT is a company dedicated to owning and, in most cases, operating income-producing real esate, such as apartments, shopping centers, offices and warehouses. Some REITs also engage in financing real estate.

REIT Modernization Act of 1999

Federal tax law change whose provisions allow a REIT to own up to 100% of stock of a taxable REIT subsidiary that can provide services to REIT tenants and others. The law also changed the minimum distribution requirement from 95 percent to 90 percent of a REIT’s taxable income — consistent with the rules for REITs from 1960 to 1980.

Return of capital

The portion of a REIT’s distribution in excess of taxable income. For a tax-paying stockholder, a return of capital does not create taxable ordinary income but does reduce the stockholders’ tax basis in its investment in a REIT.


Real estate companies such as REITs “straight-line” rents because generally accepted accounting principles (GAAP) require it. Straight-lining averages the tenant’s rent payments over the life of the lease.

Tax Reform Act of 1986

Federal law that substantially altered the real estate investment landscape by permitting REITs not only to own, but also to operate and manage, most types of income-producing commercial properties. It also stopped real estate “tax shelters” that had attracted capital from investors based on the amount of losses that could be created.

Total Market Cap

The total market value of a REIT’s (or other company’s) outstanding common stock and indebtedness.

Total Return

A stock’s dividend income plus capital appreciation, before taxes and commissions.


In the typical UPREIT, the partners of an existing partnership and a newly-formed REIT become partners in a new partnership termed the Operating Partnership. For their respective interests in the Operating Partnership (“Units”), the partners contribute the properties from the existing partnership and the REIT contributes the cash proceeds from its public offering. The REIT typically is the general partner and the majority owner of the Units.

After a period of time (often one year), the partners may enjoy the same liquidity of the REIT shareholders by tendering their Units for either cash or REIT shares (at the option of the REIT or Operating Partnership). This conversion may result in the partners incurring the tax deferred at the UPREIT’s formation. The Unitholders may tender their Units over a period of time, thereby spreading out such tax. In addition, when a partner holds the Units until death, the estate tax rules operate in such a way as to provide that the beneficiaries may tender the Units for cash or REIT shares without paying income taxes.


Assessed value or price of an asset or company.