An individual or entity that can satisfy one of the following SEC’s requirements to invest in privately offered securities: 1) an annual income of $200,000 or $300,000 for joint income for the last two years with expectation of earning the same or higher. 2) a net worth exceeding $1 million either individually or jointly with a spouse excluding your residence. Click here information directly from the Securities and Exchange Commission (SEC).

The fee paid by the new buying partnership entity to the General Partner for locating, analyzing, researching, financing and closing the investment. Depending on the size of the transaction, Acquisition Fees can range from 0.5% to 5% or more of the purchase price.

Personal involvement in searching for and finding opportunities, qualifying and closing on real estate, with or without other investors capital and overseeing the business plan through its successful execution.

A formal and legally structured alliance formed to bring numerous parties together to acquire a large investment. Pooling the groups resources to accomplish a specific goal with defined roles and responsibilities for each party. Syndications are typically between ‘General Partners” (i.e. the Syndicators) and “Limited Partners” (i.e. the Investors) limiting risks and sharing in profits.

An increase in the value of an asset. Two common types of appreciation for real estate are Natural and Forced. Natural appreciation follows market cycles and occurs when the local market value for the property rises. Forced or Engineered appreciation occurs when ownership strategically increases the Net Operating Income by increasing the revenue and/or decreasing the expenses.

This term reflects the ongoing management fee for the property operations paid to the General Partner for property oversight. Generally, the fee is 1% to 2% of the collected income.

While expressed as a percentage, this calculation reflects the total net return (cash distributions and sales proceeds) of investment divided by the total number of years of the investment (Total Return ÷ # of years = AAR).

Uncollected rent money a former tenant owes due to delinquency and/or after move-out.

Reflects the minimum occupancy required to cover all ownership expenses of the property, often shown as a percentage. For this calculation we add both the operating expenses and the debt service and then divide that total by the Gross Potential Income. This calculation is a very practical since it shows us how much occupancy is required to cover expenses.

A short-term mortgage loan used until a property is repositioned sufficiently to secure permanent financing. Generally, they only require interest-only payments and are useful when acquiring distressed properties. Also known as: gap financing, interim financing, or a temporary loan.

Commonly referred to as CapEx, describes the funds used by a company to upgrade and maintain an apartment community. More specifically all monies spent to improve the useful life of the property deemed to be durable and thus depreciated over time.

For example; repairing a parking lot, repairing or replacing a roof, installing carports, exterior paint, large renovations of landscaping and the Clubhouse would be great examples of exterior CapEx expenditures. While new kitchen cabinetry, countertops, appliances, flooring etc. would be good examples of interior CapEx improvements.

A fee paid to the General Partner for the work required to refinance or sell the property. Paid at closing of the new loan or the sale and can range from 0.5% to 2% of the total amount. Also known as a Refinancing Fee.

Commonly referred to as Cap Rate, it is a calculation that best describes the percentage rate of return the NOI would generate if that property were purchased entirely with cash (NOI ÷ Purchase Price = Cap Rate).

For example; $450,000 of NOI ÷ $6,000,000 Purchase Price = 7.5% Cap Rate for an all cash investment.

The revenue remaining after paying all expenses including CapEx and debt service from the collected revenue.

Represents the return based on the cash distributed to the investor when calculated against the equity investment, expressed as a percentage (cash distributions ÷ equity investment = CoC). This measurement is another guideline that an investor should consider, especially if cash distributions are specifically desired.

Includes the expenses, over and above the purchase price of the property normally incurred to complete a real estate transaction.

Examples of closing costs are underwriting fees, due diligence expenses, pursuit costs, attorney fees, loan origination and application fees, escrow fees etc. They can also include prepaid property taxes, insurance and mortgage costs.

The credits or discounts given to a new Resident to offset rent, application fees, move-in fees and any other revenue line item, to entice new residents to move-in.

The annual mortgage (loan) payment made to the lender, which typically includes principal and interest.

A ratio that measures the Net Operating Income and its capacity to satisfy the Debt Service obligation. DSCR is calculated by dividing the NOI by the total Debt Service obligation.

For example, if a property has an NOI of $450,000 and a Debt Service of $300,000 would provide a DSCR of 1.5, while a rating as low as 1.1 is often acceptable if a renovation is intended.

Another word used for the sale of real estate but may also include an exchange or transfer of ownership.

When this description is used on real estate, it is typically representing a property that has fallen into disrepair or financial hardship. While the Distressed issues can be significant, these types of properties can provide exceptional returns to highly skilled owners.

The cash returned to the syndication that represent the profits realized by the property from operations which are paid on a quarterly basis and/or at the time of a refinance or sale.

Combines the Vacancy, Concessions, and Bad Debt losses to describe the actual revenue lost. The Economic Occupancy Rate is calculated by subtracting the Effective Rental income from the Gross Potential Rent.

Represents the truest income number of an operating property. EGI is calculated by the sum of the Effective Rental income, plus Other Income.

Represents the actual rental payments received by the current management. This should also be confirmable by bank deposit records. It is calculated by taking the Gross Potential Rent minus Vacancy, Concessions and Bad Debt.

An apartment unit rented to an employee at a discount or for free in lieu of a higher salary.

All or a portion of the capital required to purchase an apartment community, which typically includes the down payment for a loan, closing costs, operating account funding, and various fees paid to the General Partner for putting the deal together. May also be referred to as the initial cash outlay, capital raise or the down payment.

This return calculation reflects the total net return (cash flow and sales proceeds) divided by the investor’s equity (Total Return ÷ Equity = EM). Commonly used by investors to qualify an investment’s gross return.

The future plan for the sale or disposition of the subject property defined as the end of the business plan.

A managing member of a partnership who has defined liability. They are usually active in the day-to-day operations of the business and responsible for the entire apartment project business plan. The GP is also commonly referred to as the Sponsor or Syndicator.

This potential income is derived from a properties Rent Roll and represents the largest hypothetical revenue as if the apartment community was 100% leased at the properties current lease rates, while specifically ignoring any actual vacancy, concessions or delinquencies/ bad debt that may currently exist.

The number of years the apartment would take to pay for itself based on the Gross Potential Rent (GPR). GRM is calculated by dividing the purchase price by the annual GPR.

For example, a $6,000,000 property with a GPR of $1,000,000 per year has a GRM of 6.0.

Describes a monthly payment on a loan where the lender only requires the borrower to pay the interest on the principal as opposed to the typical debt service, which requires the borrower to pay principal plus interest.

Reflects the capital investments’ return over a specific period of time, expressed as a percentage. This sophisticated calculation is time sensitive and improves the earlier a portion or all of the initial investment is returned. IRR is one measurement an investor should consider on when qualifying a deal.

A summarizing document that serves to outline a specific investment. It is typically comprised of a brief description of the property, a summary of the investment pro forma depicting anticipated financial performance, basic local market area information, along with disclosures and risk factors. Also known as Offering Memorandum, Investment Offering, or a Property Package.

A member of the partnership whose liability is limited to the extent of their initial capital investment.
The LP is the passive investor and helps fund a portion of the equity needed to acquire and/or improve the property.

This role describes the party in the transaction that has the experience, financial net worth, and the liquidity to satisfy the lender’s requirements to qualify for the mortgage. They are typically parties of the General Partner and may also invest as a Limited Partner. Their compensation may be made up of fees and/ or participation in the investment.

The one-time, upfront fees charged by the lender for providing the loan. Also referred to as a lender fees or finance charges.

A benchmark rate that some of the world’s leading banks charge each other for short-term loans. LIBOR often serves as the first step to calculating commercial loan interest rates worldwide.

Reflects the amount of difference or variance between the Scheduled Market Rent and the Gross Potential Rent. The objective is to recapture this difference as soon as possible after the property acquisition is complete.

The United States Office of Management and Budget (OMB) has defined geographic regions that include a major city and its surrounding communities that are linked by social and economic factors. Data is combined to show an aggregate accounting of: jobs, population, unemployment, and industries etc.

An apartment unit, fully decorated and furnished, used by Leasing staff to show prospective residents how the actual unit will appear once occupied.

Probably the most relevant consideration when planning a renovation or repositioning of a property is how much the local area will support the reinvestment. A ranking system of A, B, C, or D is given to a neighborhood based on a number of factors.

Class A: high-income earners, very affluent neighborhood, expensive homes nearby

Class B: white collar, upper middle-class part of town, good schools, safe neighborhood

Class C: blue collar, low-to-moderate income neighborhood, older and smaller homes

Class D: high crime, distressed real estate, very bad neighborhood, scary at night

The total profits of the remaining revenue earned by the property after deducting the operating expenses. This calculation is commonly used to value a property and specifically excludes capital expenditures and debt service costs.

For example, an apartment community with an effective gross income of $1,000,000 and operating expenses of $550,000 would have an NOI of $450,000.

This comment often refers to the limitations of an older property’s inability to compete in the local market. Some examples are: limited parking, no in-unit laundry, no air-conditioning, etc.

Monies added in the pro forma to cover things like the first month’s operating expenses and may include reserves for expected dips in occupancy, or renovation reserves to allow for the CapEx work to proceed prior to being reimbursed by the lender.

Represent the costs of running and maintaining the physical property and its grounds.

For example, common line-items included in operating expenses for an apartment community include: Real Estate Taxes, Insurance, Utilities, Trash Removal, Property Management Fee, Legal, Marketing, Contract Services, Repairs and Maintenance, General / Admin, and Payroll.

This revenue is derived by other means and can add to the overall property income. Examples of other income include: application fees, late fees, community laundry, reserved parking, utility charge back programs, etc.

Placing one’s capital into an investment opportunity with the intention of personal gain which is managed by others.

A long-term mortgage commonly secured from Fannie Mae or Freddie Mac and represents the lowest interest rate available at the time of funding.

The Physical Occupancy rate represents the number of units leased. It is calculated by dividing the total number of occupied units by the total number of units available.

This term describes the minimum threshold return that Limited Partners will be paid on their equity investment before the General Partners begin receiving distributions.

A lender’s clause in a mortgage asserting that a penalty will be assessed if the mortgage is repaid prematurely.

The calculation derived by taking the price for the entire project and dividing it by the number of rental units involved.

For example; a property worth $6,000,000 ÷ 100 Units would have a $60,000 price per unit.

This collection of documents is prescribed by the Securities and Exchange Commission (SEC) and satisfies the legal hurdles of offering a private security investment. It should include several documents not limited to; the PPM which describes the specific offering and the legal structure and risk factors related to the investment, the Operating Agreement which defines the active and passive roles of the participating individuals through the life of the project, and the Subscription Agreement that qualifies the Investor and their equity contribution.

Describes a forward-looking financial statement that is based largely on earlier Underwriting efforts. It contains a collection of facts, assumptions and projections that provide both income and expenses for the duration of the term of proposed ownership.

Here is a sample three-year pro forma:

An industry wide term for the trailing twelve-month report of actual income and expenses. The document is used for evaluating the Net Operating Income history of a potential purchase.

Common rankings used by the real estate industry to help define properties in general terms.

Class A: newer construction, high-end amenities, commands highest rents

Class B: well maintained and managed, little differed maintenance

Class C: shows its age, some deferred maintenance and repositioning needed

Class D: highly distressed, no amenity package, low occupancy, needs extensive work

An ongoing monthly fee paid for managing the day-to-day operations of the property, issued to the onsite property management company. This fee ranges from 3% to 6% of the total monthly Effective Rental Income and is also dependent on the size of the real estate.

A specified method accepted by local governing bodies of sharing the Property’s common utility expenses with the individual users of the utility (i.e. water, electricity, and trash etc.) Calculating a tenant’s potential utility bill is often based on: number of bedrooms and baths, occupancy, apartment square footage or a combination of each. Once calculated, the amount is billed back to the resident monthly, which results in an increase in revenue to the property.

The act of replacing an existing mortgage on a property with a newer mortgage obligation with updated terms. This often benefits Investors in our syndications because we often acquire distressed properties with a Bridge Loan, and after increasing the NOI, can refinance to a higher mortgage amount and return a significant portion of our Limited Partner’s initial equity.

The process of analyzing the local apartment communities of a similar age and size to identify competitive market rents for properties competing with the subject property.

The increase in rents that can be expected after renovations are performed to an apartment community. This assumption is made during the underwriting process by comparing the rental rates of similar units in the market.

A document containing detailed information on each of the rental units within the subject property, along with data that summarizes monthly income.

This term describes the renovation effort necessary to raise an existing property’s position in the local market to justify rent increases and to correct inherent obsolescence.

The profit from the sale of the apartment community, after all debt, investor’s equity and fees have been repaid.

The largest rent amount supported by localized market conditions and a thorough competitive Rent Comparison. Also accepted by the local tenant and property management market. Ideally this is the rent that the property can charge for new leases once the acquisition is complete.

A person or entity who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity but may not meet the SEC standards for Accredited Investor status. A third-party advisor such as your Accountant or Investment Advisor can support your investment activities.

The target real estate that the General Partner has researched and intends on purchasing.

A very localized geographic area which may be known by a specific name within a smaller market, a neighborhood or township of a larger city or Metropolitan Statistical Area (MSA).

A formal and legally structured alliance formed to bring numerous parties together to acquire a large investment. Pooling the groups resources to accomplish a specific goal with defined roles and responsibilities for each party. Syndications are typically between ‘General Partners” (i.e. the Syndicators) and “Limited Partners” (i.e. the Investors) limiting risks and sharing in profits.

The in-depth process of financially evaluating the acquisition of a real estate opportunity. Often including the detailed efforts of a Pro Forma and diligence including site visits and like-kind property comparisons to determine the projected returns and at a specific purchase price.

The amount of rental revenue lost due to unleased units. While some properties have a waiting list and may be marketed as 100% full, there remains a portion of vacancy that must be considered due to turn over days. The banking industry requires a minimum of 5% vacancy in pro forma underwriting unless a greater vacancy is common in a specific market.

This term is widely used to describe a property that allows the purchasing party to manage and/ or renovate the real estate, producing a potentially higher return on its investment.