An accredited investor is a person who qualifies to invest in real estate syndications by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000, or $300,000 for joint income with a spouse, for the last two years with the expectation of earning the same or higher in the future, or a net worth exceeding $1 million, either individually or jointly with a spouse (not including the equity in a primary residence).
The upfront fee paid by the new buying partnership to the general partner for funding, evaluating, financing, and closing the investment. Fees range from 1 to 5% of the purchase price, depending on the size of the deal.
An increase in the value of an asset over time. Natural appreciation occurs when the market cap decreases over time, which isn’t always a given. Forced appreciation occurs when the net operating income by increasing revenue and/or decreases expenses. It also occurs by adding value to the asset through renovations and operational improvements.
The management of one or more investment assets by an institution or an individual on behalf of others. This includes working on appreciating assets over time while minimizing risk.
An ongoing fee from the property operations paid to the general partner for property oversight. Generally, the fee is 1-5% of the collected income, depending in part on the asset’s size.
The amount of uncollected money owed by a tenant after move-out.
A statement of a business or other organization's assets, liabilities, and capital at a particular point in time, detailing the balance of income and expenditure over the preceding period.
A tax incentive that allows a business to immediately deduct a large percentage of the purchase price of eligible assets, such as machinery, rather than write them off over the “useful life” of the asset. Bonus depreciation is also known as the additional first-year depreciation deduction.
The occupancy rate required to cover all the expenses on a property, including debt service.
A rise in the value of a capital asset that gives it a higher value than the purchase price and is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income tax returns. Short-term capital gains are taxed at ordinary income tax rates, while long-term capital gains are taxed separately.
Capital expenditures, or CapEx, are the funds used by a company to acquire, upgrade, and maintain a property. An expense is considered CapEx when it improves the useful life of a property and is capitalized – spreading the cost of the expenditure over the asset's useful life. CapEx is part of a property’s non-operating expenses. It does not reduce a property’s net operating income or overall value. CapEx includes interior and exterior upgrades and items such as replacing a parking lot or landscaping renovations.
The rate of return based on the net operating income the property is expected to generate. The cap rate is equal to the net operating income divided by the current market value of a property. For example, a multifamily apartment complex purchased for $5 million with a net operating income of $250,000 has a cap rate of 5.0%.
Also referred to as sponsorship equity. The general partners of private equity funds or projects receive a share of any profits as compensation, regardless of whether they contribute any initial funds. Because carried interest acts as a performance fee, it motivates the fund’s or project’s overall performance. When used in a preferred return structure, carried interest is only paid from residual funds available above the threshold of the preferred return paid to passive investors.
A property’s revenue remains after paying all expenses, including debt service.
The process of identifying property components that are considered “personal property” or “land improvements” under the federal tax code for tax reporting purposes. A cost segregation study on a property accelerates the depreciation schedule and saves investors more money on taxes.
The ratio measures the cash flow available to pay the debt obligation. The DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 means enough net operating income to cover 100% of the debt service. Ideally, the DSCR is 1.25 or higher. The lower a property’s DSCR is, the more vulnerable it is—a minor decline in revenue or a minor increase in expenses could result in the inability to service the debt.
Tax depreciation is the depreciation that can be listed as an expense on a tax return for a given reporting period under the applicable tax laws. It reduces the taxable income.
The limited partners’ portion of the profits (i.e., cash flow), which are typically sent on a quarterly basis.
The process of confirming that a property is represented by the seller and is not subject to environmental or other problems. The general partners perform them to verify their underwriting.
The rate of paying tenants based on the total possible revenue and the actual revenue collected. The economic occupancy equals the effective gross income divided by the gross potential income.
The proper positive cash flow, also referred to as EGI, total income, or total revenue. EGI equals the gross potential income minus the loss due to vacancy, loss to lease, concessions, non-operable units, and bad debt.
The rate of return based on the total net profit and the equity investment. The equity multiple is calculated by dividing the sum of the total net profit (cash flow plus sales proceeds) and the equity investment by the equity investment. For example, an equity multiple of 1.0 means the investor gets their initial investment back with no profit, while an equity multiple of 1.9 means the investor gets their initial investment back plus a 90% profit.
A person generally reaches this condition when their passive income or cash flow from non-work sources is equal to their total expenses and is expected to continue at that level or increase. At this point, the person does not “need” employment (i.e., W-2 or 1099 job, or self-employment) income to support themselves, and work becomes a choice, not a necessity.
A general partnership owner with unlimited liability. A general partner is usually a managing partner and is active in the business's day-to-day operations. In syndications, the general partner is also referred to as the sponsor or syndicator and manages the entire project. It can refer collectively to the sponsorship/management team or each sponsor/manager.
The amount of revenue an apartment community could produce if it were 100% leased year-round at market rental rates plus additional income.
The amount of revenue an apartment community could produce if it was 100% leased year-round at market rental rates.
The amount of time the general partner plans on owning the apartment from purchase to sale.
The rate needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds, and principal paydown on the mortgage loan) to equal the equity investment. As a straightforward example, let’s say you invest $50. The investment has a cash flow of $5 in year 1 and $20 in year 2. At the end of year 2, the investment is liquidated, and the $50 is returned. The total profit is $25 ($5 year 1 + $20 year 2). The simple division would say the return is 50% ($25/50). But since the time value of money (two years in this example) impacts return, the IRR is only 23.43%. If we had received the $25 cash flow and $50 investment returned all in year 1, the IRR would indeed be 50%. But because we had to “spread” the cash flow over two years, the return percentage is negatively impacted. The timing of when cash flow is received significantly and directly impacts the calculated return. The sooner you receive the cash, the higher the IRR will be.
Person(s) who control and/or manage the borrower entity or property, are critical to the successful operation and management of the borrower entity and the property, and who may be required to guarantee the loan (i.e., sponsors/managers)—sometimes used interchangeably (but technically, incorrectly) with “guarantor” to refer to person(s) who help the general partnership team qualify for the loan through their net worth and/or liquidity, but who are not active managers of the project.
A non-binding agreement created by a buyer with their proposed purchase terms; commonly submitted as an initial purchase offer.
Leverage refers to the amount of debt used to finance assets. It means using borrowed money to increase an investment’s potential return.
A tax-deferred transaction that allows for the disposal of an asset and the acquisition of another similar asset without generating a capital gains tax liability from the sale of the first asset. Since these transactions are governed by Section 1031 of the Internal Revenue Code (IRC), these are commonly referred to as 1031 exchanges.
A partner whose liability is limited to the extent of their share of ownership. In syndications, the passive investors who fund a portion of the equity investment are LPs.
The ratio of the value of the total project costs (loan amount plus capital expenditure costs) divided by the asset’s appraised value. A loan characterized by its loan-to-cost ratio, as opposed to loan-to-value ratio, typically means the ability to include planned CapEx funds in the amount to be borrowed through the loan.
The ratio of the value of the loan amount divided by the asset’s appraised value.
The revenue lost based on the difference between the market rent and the actual rent.
The rent amount a willing owner might reasonably expect to receive and a willing tenant might reasonably expect to pay for tenancy, based on the rent charged at similar properties. The market rent is typically calculated by conducting a rent comparable analysis.
The property’s total income minus the operating expenses, including debt service.
An expense incurred by an organization that is unrelated to its core operations. The most common types of non-operating expenses are interest charges and capital expenditures.
The portion of an organization’s income that is derived from activities not related to its core business operations.
A type of loan secured by collateral (usually property). If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. In general, the borrower does not have personal liability for the loan.
A document that outlines the responsibilities and ownership percentages for the general and limited partners in the limited liability corporation (LLC) formed for a syndication.
The costs of running and maintaining the property and its grounds.
Any type of income earned by an organization or individual that is taxable at ordinary rates. It includes but is not limited to wages, salaries, tips, bonuses, rents, royalties, and interest income from bonds and commissions.
Earnings derived from a rental property, limited partnership, or other enterprises in which a person is not actively involved. As with active income, passive income is usually taxable. However, it is often treated differently by the Internal Revenue Service (IRS).
The proportion of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units at the property.
The threshold return that limited partners are offered prior to the general partners receiving payment (when this is used as part of the project’s return structure). This is commonly referred to as the “pref.”
A clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain period.
A document that outlines the terms of the investment and the primary risk factors involved with making the investment. The PPM typically has four main sections: the introductions (a brief summary of the offering), basic disclosures (general partner information, asset description, and risk factors), the legal agreement, and the subscription agreement.
The projections of the revenue, expenses, and returns for operating a property.
A document or spreadsheet containing detailed information about a business’s revenue and expenses. Also referred to as a P & L or income statement. When it includes the monthly information over the last 12 months, it is referred to as a trailing 12-month P & L, or a T-12.
A REIT is a company that owns, operates, or finances income-generating real estate. Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to earn dividends from real estate investments – without having to buy, manage, or finance any properties themselves.
A fee paid to the general partners for the work required to refinance an apartment.
The increase in rent demanded after performing renovations to the interior and/or exterior of an apartment community.
A document or spreadsheet containing detailed information on each of the units in a commercial property. For an apartment community, it may include the unit numbers, unit type, square footage, tenant name, market rent, actual rent, other recurring amounts due, deposit amount, move-in date, lease-start, and lease-end dates, and the tenant balance.
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ROI directly measures the amount of return on a particular investment relative to its cost. To calculate ROI, the investment’s return is divided by the cost of the investment. The result is expressed as a percentage or ratio. Also called total return.
A security is a financial instrument that holds some type of monetary value. Securities can be broadly categorized as either equities or debt. An investment in a real estate syndication is an equity security guided by the regulations—in the United States—of the Securities and Exchange Commission (SEC), as well as applicable state agencies. An equity security represents ownership interest and entitles the holder to some control of the company on a pro-rata basis via voting rights.
A person who does not qualify as accredited, but is deemed to have sufficient investing experience and knowledge to be able to weigh the risks and merits of an investment opportunity.
See general partner. Also referred to as general partner or syndicator.
A document that is a promise by the LLC purchasing a 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.
A temporary professional financial services alliance formed for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually, which allows them to pool their resources and share risks and returns. In regards to real estate, a syndication is typically a partnership between general partners (i.e., the syndicators) and limited partners (i.e., the passive investors) to acquire, manage, and sell a real estate asset while sharing in the profits.
See general partner. Also referred to as sponsor or syndicator.
The proportion of unoccupied units
A stabilized apartment community with an economic occupancy of about 85% and an opportunity to be improved by adding value, which means making improvements to the operations and the physical property through exterior and interior renovations in order to increase the income and/or decrease the expenses.