Glossary

REIT
Real estate investment trust--an entity designed for the purpose of investing in real estate assets including direct equity ownership of real estate and debt secured by real estate. If certain requirements are met, including pass-through to investors of 95 percent of the REIT's taxable income, the entity need pay no federal tax.

UPREIT
A REIT IPO where the entity is created through the contribution of property to an operating partnership which is jointly owned by the REIT and the contributing entity. The contributing entity receives partnership units which are convertible into REIT shares at the contributor's option. No capital gains tax liability is incurred when the property is contributed--only when the partnership units are converted.

Paired-shared REIT
A REIT and a companion taxable operating company which are owned simultaneously by all shareholders. This permits the operating company to carry on activities the REIT is precluded from undertaking. Usually, as many expenses as possible are shifted to the operating company so as to minimize overall tax liability.

Paper-clip REIT
A REIT and a companion taxable operating company which operates symbiotically. The related operating company may carry on activities that a REIT is precluded from doing. The shares of the REIT and the operating company trade separately.

CMBS
Commercial mortgage-backed securities--securities which are collateralized by mortgages on commercial properties defined to include any income-producing real estate (e.g., office, industrial, retail, hotel, multi-family and special use).

Conduit
The process by which mortgages underwritten to pre-determined specifications are originated in the primary market by mortgage brokers or bankers and then find their way to the secondary market facilitated by an investment bank. The investment bank funds the pipeline, pools the loans and underwrites a mortgage-backed security collateralized by the loan pool.

Senior/subordinated structure
Classes of a CMBS issue. Investors in the senior-rated classes are usually protected by the subordinated piece as well as the underlying mortgage collateral and property. The investors in the subordinated class will experience the first loss if there is a default. That class would have to be depleted before any loss is experienced by the investors in the senior classes.

Tranche or class
Mortgage-backed securities often are split into several classes based on the priority in which investors receive cash flows from the underlying mortgage collateral. These classes are often called tranches or 'slices,' derived from the French verb 'trancher' which means 'to slice.'

First loss
In the event of a default by a mortgage holder, the structure of a mortgage-backed security may require that investors in a particular class, the 'first loss' class, bear the burden of any loss associated with the default. This protects the more senior classes allowing them to be rated by a rating agency.

Asset/liability mismatch
If a financial institution owns interest-bearing assets and liabilities of different maturities or interest rate adjustment periods, an asset/liability mismatch exists. This usually results in the institution taking on interest rate risk as the interest rate on assets (e.g., loans) adjusts at a different speed than the interest rate on borrowing (e.g., deposits).