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Terminology
ACCREDITED INVESTOR
"An accredited investor, in the context of a natural person, includes anyone who: earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). On the income test, the person must satisfy the thresholds for the three years consistently either alone or with a spouse, and cannot, for example, satisfy one year based on individual income and the next two years based on joint income with a spouse. The only exception is if a person is married within this period, in which case the person may satisfy the threshold on the basis of joint income for the years during which the person was married and on the basis of individual income for the other years. In addition, entities such as banks, partnerships, corporations, nonprofits and trusts may be accredited investors. Of the entities that would be considered accredited investors and depending on your circumstances, the following may be relevant to you: n any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or any entity in which all of the equity owners are accredited investors."
(Source: https://www.sec.gov/files/ib_accreditedinvestors.pdf)
ACQUISITION FEE
A fee paid to the General Partnership at the closing of the purchase of a property for finding, evaluating, financing, organizing, and closing the investment. Depending on the size of the deal, the fee ranges from 1-5% of the purchase price.
ACTIVE INVESTING
Someone who is involved in some, if not all aspects of the investment. Examples include finding, qualifying, securing financing, closing, and managing of the investment.
AMORTIZATION
Paying off an amount owed, over a specified period of time, by making fixed payments of principal and interest.
APARTMENT SYNDICATION
When a group of individuals and/or companies pool their resources (time, expertise, money, etc.) to achieve a common goal (acquire, manage and sell an apartment(s)) that would otherwise be impossible, or very difficult to achieve alone.
APPRAISAL
An evaluation by a certified appraiser to identify the market value of a property. For apartments, the value based on three evaluations: cost, comparable sales, and income.
APPRECIATION
When the value of an asset increases over time. With respect to apartments, there are two types of appreciation: natural and forced. Natural appreciation occurs over time, and is heavily influenced by the market. Alternatively, forced appreciation is when the value increases via targeted efforts made to increase the net operating income (as the net operating income is one method used to evaluate the value of the property). The means in which one increases the net operating income is by either increasing revenue, or by decreasing the expenses.
ASSET MANAGEMENT FEE
An ongoing fee paid to the General Partnership for the ongoing asset oversight. The typical fee is 2% of the gross income, or $250 per unit per year.
BAD DEBT
Any uncollected money owed by a tenant after his/her move-out.
BREAKEVEN OCCUPANCY
The occupancy rate needed to cover all property expenses. The calculation is performed by dividing the sum of all operating expenses, including debt service, by the gross potential income.
BRIDGE LOAN
A short term mortgage loan that typically has higher interest rates, but is almost always interest only. Loan terms are normally six months to three years, with the option to purchase additional months/years. This type of loan is often used for value add apartments in which traditional financing is not an option. Bridge loans are also referred to as interim financing, gap financing, or swing loans.
CAPITAL EXPENDITURES (CAPEX)
The funds used to upgrade a property. Often referred to as CapEx, these upgrades are one time expenses, and can be either on the interior, or exterior. Examples of CapEx include new siding, roofs, pool, countertops, light fixtures, and paint. Some examples that are not CapEx are operating expenses, debt service, investor distributions.
CAPITALIZATION RATE (CAP RATE)
The rate of return the property is expected to generate based on the income it receives.
CASH FLOW
The revenue after all expenses are paid. Cash Flow is calculated by subtracting operating expenses and debt service from the actual gross income.
CASH-ON-CASH RETURN
The rate of return based on the total equity investment and the total cash flow. It is often abbreviated to CoC.
CLOSING COSTS
All expenses incurred to complete a real estate transaction. These expenses include origination fees, application fees, recording fees, attorney fees, underwriting fees, due diligence fees, credit search fees, title search fees, notary fees, and state and local municipalities fees.
CONCESSION FEES
Credits given to entice a tenant to sign a lease.
COST APPROACH
Also referred to as replacement cost, it is the method used to calculate the cost of replacing (or rebuilding) the property. This is one method used to conduct an appraisal.
DEBT SERVICE
The mortgage amount paid to the lender. Typically, this includes principal and interest, but there are loans that are interest only, in which case the debt service would only be the interest payments.
DEBT SERVICE COVERAGE RATIO (DSCR)
The ratio of cash flow to debt. This is calculated by dividing the net operating income by total debt service. A DSCR of 1.25 or higher is preferred; rates of less than 1.25 is a riskier investment.
DEPRECIATION
The opposite of appreciation, depreciation is a decrease in value, and can be caused by multiple factors (for example market, age, and wear).
DISTRESSED PROPERTY
A property that has below 85% economic occupancy due to one or more of the following reasons: poor operations, tenant problems, outdated interiors, exteriors, and amenities, mismanagement, and/or deferred maintenance.
DISTRIBUTIONS
The portion of the profits that are distributed to the Limited Partners on a monthly, quarterly, or annual basis, at refinance (if applicable), and at sale, as defined by the General Partnership.
DUE DILIGENCE
The process in which the General Partnership investigates a property, audits the seller's claims of the subject property, and confirms their underwriting assumptions and business plan.
EARNEST MONEY
A deposit the buyers pay which is part of the purchase price. There is typically a short period when the deposit can be refunded, but after this period the money is not refundable, otherwise known as "going hard".
ECONOMIC OCCUPANCY RATE
The occupancy rate of paying tenants. This differs from physical occupancy where the occupancy rate is based on tenanted units.
EFFECTIVE GROSS INCOME (EGI)
Also referred to as total income, or total revenue, it is calculated by subtracting the loss-to-lease, concessions, vacancy, bad debt, from the gross potential income (gross potential rent plus other income).
EMPLOYEE UNIT
An apartment unit rented to an employee at a discounted rate, or for free.
EQUITY INVESTMENT
All upfront costs associated with purchasing a property (including down payment for mortgage loan, closing costs, financing fees, operating account funding, and acquisition fee).
EQUITY MULTIPLIER(EM)
The projected rate of return based on the investment verses the return over the course of the hold. A multiplier of 1.0 means you are not getting back more than you invested.
EXIT STRATEGY
The plan for selling the apartment as outlined in the business plan by the General Partnership.
FINANCING FEES
Fee charged by the lender for providing the debt service. Typical fee is approximately 1.75% of the purchase price.
GENERAL PARTNERSHIP (GP)
The owner of the partnership that has unlimited liability, and is responsible for the entire apartment project. The GP is also referred to as the sponsor, or syndicator.
GROSS POTENTIAL INCOME (GPI)
The total annual income a property is capable of receiving through 100% occupied units plus all other income.
GROSS POTENTIAL RENT (GPR)
The total annual income a property is capable of receiving if all units were leased year round.
GROSS RENT MULTIPLIER (GRM)
The total number of years it would take for a property to pay for itself based solely on the gross potential rent.
GUARANTY FEE
A fee paid at closing to a loan guarantor for guaranteeing the loan. A standard fee is between .5% to 5% of the principal balance of the loan paid at closing and/or 5%-30% of the General Partnership.
HOLDING PERIOD
The period of time, from purchase to sale, that the General Partnership plans to hold the asset.
INCOME APPROACH
One of the three methods for calculating an apartment's value. The calculation is
Value = Net Operating Income / Capitalization Rate
INTEREST-ONLY PAYMENT (I/O)
The monthly payment that is owed to a mortgage company, where the borrower only owes the interest on the principal.
INTEREST RATE
The rate charged by the lender to the borrower for the use of the their funds.
INTERNAL RATE OF RETURN (IRR)
The most common term for assessing profitability of a potential investment. IRR is a calculation used to measure your return on investment, while factoring the time it takes to return your initial investment.
LEASE
A legal contract between a landlord and a tenant to occupy an apartment unit for a specific time and price under certain defined terms.
LETTER OF INTENT (LOI)
A non-binding agreement written by a buyer disclosing his/her interest to purchase a property for a specified price, and under specified terms.
LIMITED PARTNER (LP)
A partner whose liability is limited to their share of ownership. The LP is often referred to as a passive investor.
LOAN-TO-COST RATIO (LTC)
Used by the lender to assess maximum debt coverage, it is the ratio of the value of the total project costs (loan amount + capital expenditure costs) divided by the apartment's appraised value.
LOAN-TO-VALUE RATION (LTV)
The ratio of the loan divided by the apartment's appraised value.
LONDON INTERBANK OFFERED RATE (LIBOR)
The rate that the world's top banks charge for short-term loans. The rate is used to calculate interest rates on various types of loans.
LOSS-TO-LEASE (LTL)
The revenue lost when calculating the difference between market rent and actual rent.
MARKET RENT
The standard reasonable rent within a given area.
METROPOLITAN STATISICAL AREA (MSA)
A geographical region containing the core and adjacent communities that have an integrated economic and social dependance. MSAs are defined by the United States Office of Management and Budget (OMB).
MODEL UNIT
An apartment unit used as a showroom to present to prospective tenants.
MORTGAGE
A legal contract by which an asset is pledged as a security for repayment of a loan until the debt is repaid in full.
NET OPERATING INCOME
A calculation that takes all of the revenue of a property minus the operating expenses. Note, CapEx is not included in determining the NOI.
OPERATING ACCOUNT FUNDING
Extra funding that is raised to account for unexpected expenses, and dips in occupancy. This is best raised prior to purchasing a property.
OPERATING AGREEMENT
A document that outlines the responsibilities and ownership percentages for all invested and/or managing parties.
OPERATING EXPENSES
All costs associated for running and maintaining a property, exclusive of Capital Expenditures.
PASSIVE INVESTING
When an investor invests capital into an apartment syndication which is entirely managed by a general partner.
PERMANENT AGENCY LOAN
A long-term mortgage from Fannie Mae, or Freddie Mac.
PHYSICAL OCCUPANCY RATE
The proportion of tenanted units divided by the total number of units.
PREFERRED RETURN
The rate of return that the limited partners are offered in advance to the general partners' returns.
PREPAYMENT PENALTY
A penalty clause in the contract for advance payments on the loan.
PRICE PER UNIT
The price per unit if you were to take the purchase price divided by the total number of units.
PRIVATE PLACEMENT MEMORANDUM (PPM)
A document which outlines all of the terms of the investment, including the risks associated with investing. PPMs typically include the introduction, basic disclosures, the legal agreement and the subscription agreement.
PRO FORMA
The projected budget for the next 12 months and for "X" amount of years, with "X" being the number of years the property is underwritten to be held.
PROFIT AND LOSS STATEMENT (T-12)
A document which contains detailed information regarding the revenue and expenses for a particular property over the last 12 months. This document assists with the Sponsorship's Team underwriting of the property.
PROPERTY MANAGEMENT FEE
A monthly fee paid to the property management company for managing the day-to-day operations of a property.
RATIO UTILITY BILLING SYSTEM (RUBS)
A billing calculation to charge back tenants for their use of utilities.
RECOURSE
The right of a lender to go after personal assets above and beyond the collateral should the borrower default on the loan.
REFINANCE
When one replaces one debt with a new debt.
REFINANCING FEE
A fee paid to the General Partnership for all work required to secure the refinancing.
RENT COMPARABLE ANALYSIS (RENT COMPS)
The process of analyzing rents of similar properties in the area to determine market rents.
RENT PREMIUM
The new rental rate after interior and/or exterior improvements are completed.
RENT ROLL
A document tracking the unit number, unit type, square footage, tenant name, market rent, actual rent, deposit amount, move-in date, lease-start and lease-end dates, and tenant balance.
SALES COMPARISON APPROACH
A method to calculate an apartment's value by using similar sold apartments.
SALES PROCEEDS
The profits collected upon sale of the apartment.
SOPHISTICATED INVESTOR
A person deemed to have sufficient investing experience and/or knowledge to assess risks and merits of investment opportunities.
SUBJECT PROPERTY
The apartment intended for purchase by the General Partnership.
SUBMARKET
A geographic subdivision of a given market.
SUBSCRIPTION AGREEMENT
A document which promises that the LLC (which owns the property) to sell a specific number of shares to a limited partner at a specified price, and a commitment by the limited partner to pay that price.
UNDERWRITING
The process of financially evaluating the property to determine the offer price, and the projected returns.
VACANCY LOSS
The loss of revenue due to unoccupied units.
VACANCY RATE
The rate of unoccupied units divided by the total number of units.
VALUE-ADD PROPERTY
A stabilized apartment community, with an occupancy of over 85% and an opportunity to add value by improvements to the property, or improving the management in order to increase the income and decrease expenses.
YIELD MAINTENANCE
A penalty paid by a borrower when the principal is paid off in advance.