Question 1

ACCREDITED INVESTOR

Accepted Answer

"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)

Question 2

ACQUISITION FEE

Accepted Answer

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.

Question 3

ACTIVE INVESTING

Accepted Answer

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.

Question 4

AMORTIZATION

Accepted Answer

Paying off an amount owed, over a specified period of time, by making fixed payments of principal and interest.

Question 5

APARTMENT SYNDICATION

Accepted Answer

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.

Question 6

APPRAISAL

Accepted Answer

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.

Question 7

APPRECIATION

Accepted Answer

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.

Question 8

ASSET MANAGEMENT FEE

Accepted Answer

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.

Question 9

BAD DEBT

Accepted Answer

Any uncollected money owed by a tenant after his/her move-out.

Question 10

BREAKEVEN OCCUPANCY

Accepted Answer

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.

Question 11

BRIDGE LOAN

Accepted Answer

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.

Question 12

CAPITAL EXPENDITURES (CAPEX)

Accepted Answer

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.

Question 13

CAPITALIZATION RATE (CAP RATE)

Accepted Answer

The rate of return the property is expected to generate based on the income it receives.

Question 14

CASH FLOW

Accepted Answer

The revenue after all expenses are paid.  Cash Flow is calculated by subtracting operating expenses and debt service from the actual gross income.

Question 15

CASH-ON-CASH RETURN

Accepted Answer

The rate of return based on the total equity investment and the total cash flow.  It is often abbreviated to CoC.

Question 16

CLOSING COSTS

Accepted Answer

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.

Question 17

CONCESSION FEES

Accepted Answer

Credits given to entice a tenant to sign a lease.

Question 18

COST APPROACH

Accepted Answer

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.

Question 19

DEBT SERVICE

Accepted Answer

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.

Question 20

DEBT SERVICE COVERAGE RATIO (DSCR)

Accepted Answer

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.

Question 21

DEPRECIATION

Accepted Answer

The opposite of appreciation, depreciation is a decrease in value, and can be caused by multiple factors (for example market, age, and wear).

Question 22

DISTRESSED PROPERTY

Accepted Answer

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.

Question 23

DISTRIBUTIONS

Accepted Answer

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.

Question 24

DUE DILIGENCE

Accepted Answer

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.

Question 25

EARNEST MONEY

Accepted Answer

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".

Question 26

ECONOMIC OCCUPANCY RATE

Accepted Answer

The occupancy rate of paying tenants.  This differs from physical occupancy where the occupancy rate is based on tenanted units.

Question 27

EFFECTIVE GROSS INCOME (EGI)

Accepted Answer

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).

Question 28

EMPLOYEE UNIT

Accepted Answer

An apartment unit rented to an employee at a discounted rate, or for free.

Question 29

EQUITY INVESTMENT

Accepted Answer

All upfront costs associated with purchasing a property (including down payment for mortgage loan, closing costs, financing fees, operating account funding, and acquisition fee).

Question 30

EQUITY MULTIPLIER(EM)

Accepted Answer

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.

Question 31

EXIT STRATEGY

Accepted Answer

The plan for selling the apartment as outlined in the business plan by the General Partnership.

Question 32

FINANCING FEES

Accepted Answer

Fee charged by the lender for providing the debt service.  Typical fee is approximately 1.75% of the purchase price.

Question 33

GENERAL PARTNERSHIP (GP)

Accepted Answer

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.

Question 34

GROSS POTENTIAL INCOME (GPI)

Accepted Answer

The total annual income a property is capable of receiving through 100% occupied units plus all other income.

Question 35

GROSS POTENTIAL RENT (GPR)

Accepted Answer

The total annual income a property is capable of receiving if all units were leased year round.

Question 36

GROSS RENT MULTIPLIER (GRM)

Accepted Answer

The total number of years it would take for a property to pay for itself based solely on the gross potential rent.

Question 37

GUARANTY FEE

Accepted Answer

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.

Question 38

HOLDING PERIOD

Accepted Answer

The period of time, from purchase to sale, that the General Partnership plans to hold the asset.

Question 39

INCOME APPROACH

Accepted Answer

One of the three methods for calculating an apartment's value.   The calculation is 
Value = Net Operating Income / Capitalization Rate

Question 40

INTEREST-ONLY PAYMENT (I/O)

Accepted Answer

The monthly payment that is owed to a mortgage company, where the borrower only owes the interest on the principal.

Question 41

INTEREST RATE

Accepted Answer

The rate charged by the lender to the borrower for the use of the  their funds.

Question 42

INTERNAL RATE OF RETURN (IRR)

Accepted Answer

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.

Question 43

LEASE

Accepted Answer

A legal contract between a landlord and a tenant to occupy an apartment unit for a specific time and price under certain defined terms.

Multifamily Terminology