Knowing your industry terminology is important for being able to negotiate great terms on multifamily deals. It’s also important to be able with communicate with more experienced investors and brokers in the sector. Check out these common ones, and up your game.
Accredited Investor
An accredited investor is an individual who qualifies to invest in real estate syndications by satisfying one of the requirements for of an annual income of $200,000—or $300,000 for joint income—or a net worth of at least $1 million (not including primary residence).
Acquisition Fee
Compensation earned by the general partner in a syndication for sourcing, screening, arranging financing, and closing on a investment asset.
Active Investing
This is the opposite of passive investing. An active investor does all the work of finding, structuring, managing, and exiting investments.
Asset Management Fee
Typically a recurring fee paid from property revenues to the general partner for asset management.
Bridge Loan
Typically short-term loans enabling investors to leverage equity in one property to finance another or access cash for a down payment on a new acquisition.
Capital Expenditures
These expenses are funds used by the managing company or partners to acquire, improve, or maintain a property. Also referred to as CapEx. It specifically applies to when these funds improve the useful life of a property.
Capitalization Rate
The cap rate. Calculated by dividing net operating income by current market value of a property to determine an expected rate of return.
Cash Flow
Remaining liquid profit after deducting operating expenses and any debt service payments.
Cash-on-Cash 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.
Distributions
These are the funds paid out to investors. These profits may be paid monthly or quarterly or upon a successful exit.
Due Diligence
Due diligence describes a group of tasks to screen and evaluate a property and to satisfy lender underwriting requirements. May include appraisals, surveys, inspections, and title work.
Earnest Money
An earnest-money deposit is placed into escrow by the buyer of an apartment building to demonstrate their commitment to execute on the purchase contract. Will be credited toward the acquisition cost at closing.
Effective Gross Income
The EGI is the effective income derived by subtracting losses due to vacancy, concessions, employees, model units, and any bad debt.
Equity Investment
The cash put into an investment. In an apartment building syndication this capital may be used toward the down payment, closing costs, borrowing costs, funding an operating account funding, along with any compensation earned by the general partners.
Equity Multiple
The EM is a way to calculate a rate of return on commercial investment property. This is calculated by dividing the total cash distributions (cash flow and cash on exit) by the equity investment made.
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.
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.
Gross Rent Multiplier
This calculation shows the number of years it would take for the property to pay for itself based upon the gross potential rent. This is calculated by dividing the property purchase price by the annual gross potential rent.
Holding Period
The holding period is the amount of time the sponsor plans to hold the property.
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
The IRR is calculated based on all future anticipated cash flow, principal pay down of debt, and proceeds on the exit of a property.
Joint Venture
A “JV” is a partnership between two or more investment partners who collaborate on a deal.
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.
London Interbank Offered Rate
The LIBOR is a benchmark interest rate that is often used to calculate loan rates and interest rate adjustments on a variable rate loan.
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.
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
A MSA is a geographic region with a substantial population. These are cities pooled together with neighboring communities that have high degrees of integration. An example is the Miami Metropolitan Area. This MSA actually encompasses Miami, Fort Lauderdale, and West Palm Beach, three counties, dozens of cities, and even more neighborhoods.
Net Operating Income
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.
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.
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
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.
Related: The Newbie’s Real Estate Dictionary: 16 Common Investing Terms, Defined & Explained
Price Per Unit
The price per unit of in an apartment building. For example, a 100-unit building for sale at $100,000 would have a price per unit of just $1,000. It is a method of comparing competing properties, assessing value, and weighing returns between investments.
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
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.
Sales Comparison Approach
The typical method for estimating a property’s value based on recent similar sales in the area.
Sophisticated Investor
A individual “determined” to have enough experience and knowledge to assess the risks and merits of an investment opportunity for themselves.
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.
Related: 6 Highly Common Reasons Real Estate Syndicators Fail
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.
T-12
A T12 is a profit and loss statement showing the actual reported numbers for the last 12 months.
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 Rate
The percentage of vacant units in a multifamily community.
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