Accredited Investor An accredited investor is an individual who qualifies to invest in real estate syndications by satisfying one of the requirements established by the SEC. In simple terms, one is required to have an annual income of $200,000—or $300,000 for joint income—or a net worth of at least $1 million (not including their primary residence).
Acquisition Fee Compensation earned by the sponsor in a syndication for sourcing, screening, arranging financing, and closing on an investment asset. There is both significant time and financial outlay to get a deal to the point of presenting it to passive investors.
Active Investing This is the opposite of passive investing. An active investor does all the work of finding, structuring, managing, and exiting investments. Annualized Return This is the return on an investment divided by the number of years the investment is held.
Asset Management Fee Typically a recurring fee paid from property revenues to the sponsor for managing the asset. Experienced sponsors often have their own asset management company (or companies) in order to achieve significant cost savings – having trained employees who can then manage multiple assets being managed by the same sponsor. Otherwise, this is most often contracted out. Some sponsors have the skill sets and qualifications to be their own asset managers.
Bridge Loan Typically short-term (usually “interest only, balloon note”) loans enabling investors to leverage equity in one property to finance another or access cash for a down payment on a new acquisition. Bridge loans typically have much higher rates and may or may not be “secured” by collateral. They are intended only to bridge a sponsor (and his/her passive investors) over to a refinance or sale option. Paying interest-only can have significant benefits in reducing expenses and keeping cash returns higher but comes at the expense of needing to pay the balloon balance at some point.
Capital Expenditures (CapEx) Expenses (funds) used to acquire, improve, or maintain a property. It also embodies funds used to improve the property.
Capitalization Rate (CAP, or CapRate) Calculated by dividing net operating income by current market value of a property to determine an expected rate of return. See separate post.
Cash Flow Remaining liquid profit after deducting operating expenses and any debt service payments.
Cash-on-Cash (CoC) Returns A rate of return calculated by dividing the cash flow being produced by a property by the initial cash investment.
Cost Segregation This is the process of identifying assets and costs, and their classification for tax purposes. Applies for reducing current tax liability and deferring taxes.
Closing Costs Costs required to close on a real estate or financing transaction. May include origination, application, processing, underwriting, appraisal, and recording fees.
Debt Investment A debt investment is the investment in debt. For example, a mortgage loan. Debt investors typically earn interest until the debt is fully repaid. There may be an option to convert to equity.
Debt Service The amount of loan payments required to be paid back to a lender. Also used to calculate the DSCR for qualifying for commercial real estate financing.
Debt Service Coverage Ratio The DSCR is the the ratio commercial mortgage lenders use to evaluate and qualify a deal for financing. The DSCR measures how much cash flow will be available to cover debt service. A DSCR ratio of 1 means the cash flow should cover the debt payments. Lenders typically expect a minimum DSCR of 1.2 in order to get a loan. A better ratio may qualify the borrow for better terms.
Disposition The term disposition refers to the sale of an asset (property).
Distributions These are the funds paid out to investors. These profits may be paid monthly or quarterly or upon a successful exit.
Double-net Lease A type of lease agreement whereby the lessee separately pays for their own taxes and insurance instead of it being bundled in the rent price. This enables the syndication to better control profits as changes to the taxes, insurance, and utilities are immediately absorbed by the lessee instead of having increases in rent have to wait until the lease renews. See also: Single-net lease, Triple-net lease.
Exit Strategy This is how the syndicator plans to cash investors out of their investment in the future. This may be by selling the property, purchasing their shares, or refinancing them out.
Floating Interest Rate This is the same as a variable or adjustable interest rate loan. The interest rate—and typically the payments—will float and change with the market.
Forced Appreciation This is the increase in market value through an increase in NOI, which is forced by an increase in income or a decrease in expenses.
Holding Period The holding period is the amount of time the sponsor plans to hold the property.
Hybrid Deal An investment whose performance is expected to return a combination of a yield play and a value-add type investment.
Interest Rate The cost charged by a lender for using their funds to finance a deal.
Interest-Only Payment A monthly mortgage payment that only requires interest, not the principal balance, to be paid. The balance may be due on sale, refinancing, or at the maturity of the loan.
Internal Rate of Return (IRR) The IRR is calculated based on all future anticipated cash flow, principal pay down of debt, and proceeds on the exit of a property.
K-1 Tax Form Allows a company to utilize pass-through taxation, which shifts the income tax liability from the entity earning the income to those who have a beneficial interest in it.
Key Principal A key principal in an apartment syndication is a vital person to the ongoing success of the investment. It is someone who should be insured to compensate for any interruptions if something happens to them.
Letter of Intent An LOI is a non-binding agreement drafted by the buyer proposing their purchase terms. Typically used as a faster method to make an offer, without being tied into the deal.
Limited Partner In contrast to the general partner, a limited partner’s liability is limited to the extent of their share of ownership. In a typical real estate syndication, a limited partner is a passive investor who puts in capital.
Loan-to-Cost Ratio The LTC ratio shows the value of the anticipated loan amount against the total costs (acquisition and renovations).
Loan-to-Value Ratio The LTV calculates the ratio of the loan amount divided by the apartment building’s appraised value.
Gross Potential Rent The hypothetical amount of revenue if the apartment community was leased at 100 percent occupancy year-round at market rental rates. Also known as “GPR.”
Gross Potential Income The potential income a multifamily property could produce if it had no vacancies and all leases were signed at market rates—plus any other revenue.
Manufactured Home Manufactured housing (commonly known as mobile homes or modular homes in the United States) is a type of prefabricated housing that is largely assembled in factories and then transported to sites of use.
Market Rent The market rent refers to the market value of a rental unit for lease based upon comparable rental rates for similar units in close proximity to the subject. Used to calculate value, cash flow, and potential loan amounts.
Metropolitan Statistical Area (MSA) A MSA is a geographic region with a substantial population. These are cities pooled together with neighboring communities that have high degrees of integration.
Multifamily Multifamily properties are a classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. (AKA an apartment building)
Net Operating Income (NOI) The NOI of a property is calculated by adding up all of the incoming revenue from a property and subtracting the operating expenses. See separate post Net Operating Income (NOI) The NOI of a property is calculated by adding up all of the incoming revenue from a property and subtracting the operating expenses.
Non-Recourse Loan A non-recourse loan is a loan on which the borrower is not personally signing a guarantee. The lender generally has no recourse to pursue the borrower in a default, beyond the pledged real estate collateral the loan was made on.
Operating Expenses Operating expenses are what it costs to run and maintain an investment property. In apartment syndications, these operating expenses usually include payroll, maintenance, repairs, contractors, marketing, admin, utilities, management fees, property taxes, insurance, and capital reserves. Operating Expenses Operating expenses are what it costs to run and maintain an investment property. In apartment syndications, these operating expenses usually include payroll, maintenance, repairs, contractors, marketing, admin, utilities, management fees, property taxes, insurance, and capital reserves.
Offering Memorandum Also known as the private placement memorandum, this document lays out the risks, terms, and objectives of an investment, as well as documents the syndicators’ business operations and condition.
Passive Investing The strategy of placing your capital into a real estate syndication that is managed for you. Passive Investing The strategy of placing your capital into a real estate syndication that is managed for you.
Permanent Agency Loan This is a long-term mortgage loan guaranteed by government-sponsored agencies Fannie Mae or Freddie Mac. Loans may be amortized for as many as 30 years.
Preferred Return (Pref) Investors with preferred shares or preferred returns receive their distributions and returns up to an agreed upon percentage before the sponsor. This holds them accountable and ensures interests are aligned.
Prepayment Penalty A penalty for paying off a loan balance early. These clauses can be especially complicated calculations in commercial mortgage lending.
Price Per Unit The price per unit of an apartment building. For example, a 100-unit building for sale at $5,000,000 would have a price per unit of just $50,000. It is a method of comparing competing properties, assessing value, and weighing returns between investments.
Private Placement Memorandum (PPM) Sometimes referred to the offering memorandum, the PPM is a legal document that is provided to prospective investors that details the offering; the description of the company and how it will be managed, the use of proceeds, the risks of the investment, and the subscription terms, among other things.
Pro-forma A projected financial statement for estimated revenues and expenses. Often detailed for one and five years.
Property Management Fee A recurring cost for having a professional property management company manage day-to-day operations of a property.
Ratio Utility Billing System (RUBS) A RUBS system is a way to bill tenants back for utility costs. Can be based on occupancy or square footage leased. Ratio Utility Billing System (RUBS) A RUBS system is a way to bill tenants back for utility costs. Can be based on occupancy or square footage leased.
Recourse In contrast to a non-recourse loan, this is the right of a lender/creditor to pursue the debt owed to them. A full recourse loan can expose liability to personal assets beyond the collateral in the case of a default on the loan.
Refinance Replacing a debt obligation on a property with a new loan, often with different terms.
Rent Premium A rent premium can be earned upon completing upgrades and renovations.
Rent Roll The spreadsheet or document detailing each of the units in an apartment community. A good rent roll will include unit numbers, unit types, square feet, tenant names, market rents versus actual rent, deposit amounts held, move-in dates, lease-start and lease-end dates, and current status.
Reposition To reposition a property is a strategy in which the owner, or general partner, of a property aims to change the position of the asset in a market through adding value and/or rebranding the property.
Return Hurdle A return hurdle is the rate of return that, when achieved, triggers a disproportionate profit split. Common return hurdles are pref, IRR, and equity multiple.
Return On Equity (ROE) The ROE is the amount of net income returned as a percentage of shareholders equity.
Return On Investment (ROI) The ROI is the cumulative cash flow plus net resale proceeds divided by the Members’ equity contribution.
Reversion Cap The reversion cap is the expected CAP rate at the end of an investment (or disposition of a property). It is the benefit that an investor expects to receive at the time of sale.
Sales Comparison Approach The typical method for estimating a property’s value based on recent similar sales in the area. Sales Comparison Approach The typical method for estimating a property’s value based on recent similar sales in the area.
Self-Directed IRA (SD-IRA) A Self-Directed IRA is technically not any different than other IRAs (or 401ks). The government created the IRA to allow investments to grow tax-free or tax-deferred compounded over time to maximize growth. The IRA can also qualify for yearly tax-deductions (depending on the account type), provide asset protection, and assets may be passed to future generations for qualifying accounts.
A self-directed IRA is unique due to the available investment options and because it puts the IRA owner in control.
Most IRA custodians only allow approved stocks, bonds, mutual funds and CDs. A truly self-directed IRA custodian allows this type of investing in addition to real estate, notes, private placements, tax lien certificates and much more. See separate post
Self-Storage Self-Storage is an industry in which storage space (such as rooms, lockers, containers, and/or outdoor space), also known as “storage units” is rented to tenants, usually on a short-term basis (often month-to-month). Self-storage tenants include businesses and individuals.
Sensitivity Analysis A sensitivity analysis, also referred to as what-if or simulation analysis, is a way to predict a certain outcome given a number of variables. This is often used to show returns in the event of a market downturn (often proving that large, value-add multifamily apartments expose investors to less risk that other traditional investments).
Single-net lease A type of lease agreement whereby the lessee separately pays for their own taxes instead of it being bundled in the rent price. This enables the syndication to better control profits as changes to the taxes, insurance, and utilities are immediately absorbed by the lessee instead of having increases in rent have to wait until the lease renews. See also: Double-net lease, Triple-net lease.
Sophisticated Investor A individual “determined” to have enough experience and knowledge to assess the risks and merits of an investment opportunity for themselves.
Split A Split is the percentage of distributions from operations and profits from capital events that are split between the limited partner (investor) and the general partner in the syndicate deal. Splits are common in the syndication business. Typical split would be 70% payout to limited partners (investors) and 30% to the general partners after the 8% preferred return is paid to investors.
Sponsor The individual or the team originating the deal. They are on the hook to find a deal, get under contract, perform due diligence, find financing, cover the bank loan (if it is a recourse loan), and ensure the property is managed to meet its performance expectation.
Syndication Apartment syndications are essentially real estate partnerships pairing passive investors, capital, and a syndicator (sponsor or active partner and promoter) who organizes the deal, puts it together, and manages it. Subscription Agreement A document that is a promise by the LLC that owns the property to sell a specific number of shares to a limited partner at a specified price—and a promise by the limited partner to pay that price.
Supplemental Loan A document that is a promise by the LLC that owns the property to sell a specific number of shares to a limited partner at a specified price—and a promise by the limited partner to pay that price.
T-12 A T12 is a profit and loss statement showing the actual reported numbers for the last 12 months. T-12 A T12 is a profit and loss statement showing the actual reported numbers for the last 12 months.
The Promote The promote refers to a ‘bonus’ of sorts used to motivate the sponsor to exceed return expectations and reward them for their work in finding, managing and adding value to the property. It is an extra, disproportionate share of returns rewarded to the sponsor.
Triple-net Lease A type of lease agreement whereby the lessee separately pays for their own taxes, insurance, and utilities instead of it being bundled in the rent price. This enables the syndication to better control profits as changes to the taxes, insurance, and utilities are immediately absorbed by the lessee instead of having increases in rent have to wait until the lease renews. See also: Single-net lease, Double-net lease.
Underwriting A process of evaluating an apartment building community to determine the status, value, risks, and potential.
Vacancy Loss How much potential revenue and cash flow is lost due to vacant units. Vacancy Loss How much potential revenue and cash flow is lost due to vacant units.
Vacancy Rate The percentage of vacant units in a multifamily community.
Value-Add An investment whose performance is expected to provide growth through increased value over time more-so than through cash flow returns. These investments may not even provide cash distributions for some time as the efforts to increase its value take place. These efforts generally involve renovations, rebranding, or increased operational efficiencies.
Waterfall The waterfall structure is a method for splitting profits among partners in a business deal that allows for said profits to follow an uneven distribution. In a waterfall model, payouts change when previously agreed upon return hurdles are met. Waterfall The waterfall structure is a method for splitting profits among partners in a business deal that allows for said profits to follow an uneven distribution. In a waterfall model, payouts change when previously agreed upon return hurdles are met.
Workforce Housing Workforce housing is a term that is being increasingly used to describe housing that is affordable for households with an earned income that is insufficient to secure quality housing within a reasonable proximity to a workplace.
Yield Play An investment whose performance is expected to provides cash flow returns over growth in value. These investments usually start distributions sooner rather than later and provide a means for investors to benefit from passive income in a more predictable means than a value-add deal.
1031 Exchange A properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.
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