1031 Exchange

 

An IRS rule which allows the deferral of capital gains tax when an investor sells a property and reinvests the proceeds into a new property.

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Accredited Investor

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An individual who qualifies to invest in private placement opportunities by earning an annual income of $200,000 (or $300,000 for joint income) or having a net worth of at least $1 million not including their primary residence.

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Acquisition Fee

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Payment made to the syndication’s general partner for sourcing, screening, arranging financing and closing on an investment asset.

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Active Investing

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An investing strategy where an investor directly finds, structures, manages, and sells investments.

 

 

Average Annualized Return

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The total return on investment divided by the number of years the investment is held.

 

 

Asset Management Fee

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A recurring fee taken from property revenues and paid to the general partner for asset management.

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Bridge Loan

 

A bridge loan is a short-term loan used to buy assets or covers obligations until a property is renovated and stabilized and longer-term financing is found.

 

 

Capital Expenditures

 

Also referred to as CapEx, these are funds used by the managing company or partners to acquire, update, improve or maintain a property.

 

 

Capitalization Rate 

 

Also referred to as cap rate, this is calculated by dividing net operating income by a property’s current market value to predict the rate of return.

 

 

Cash Flow

 

The remaining balance of liquid profit after deducting operating expenses and debt service payments.

 

 

Cash-on-Cash (CoC) Returns

 

A rate of return calculated by dividing the property’s cash flow by the initial cash investment.

 

 

Condominium (condo)

 

An spacial unit within a property whose ownership may be freely transferred via it’s own deed. A condo is most commonly an apartment in a multifamily building, but any type of real estate can be turned in to condos, so it can be used to divide ownership in land, commercial buildings, or create a similar result to subdivision. 

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A developer can divide a property into multiple condo units by creating a condominium declaration, a Home Owners Association (HOA), and the corresponding bylaws and governing body to manage the HOA. 

 

 

Cost Segregation Study

 

A tax strategy of dividing a building into its individual components, each with its own shortened depreciation schedule, to reduce current tax liability and defer federal and state income taxes.

 

 

Closing Costs

 

Dues owed to close on a real estate or financing transaction, including origination, application, processing, underwriting, appraisal and recording fees.

 

 

Debt Investment

 

A type of loan (e.g., a mortgage) where debt investors typically earn interest until the debt is fully repaid or, in some cases, converted to equity. This often done via a promissory note.

 

 

Debt Service

 

The amount of loan payments required to be paid back to a lender, which is also used to calculate the debt service coverage ratio for qualifying for commercial real estate financing.

 

 

Debt Service Coverage Ratio (DSCR)

 

The ratio that lenders use to evaluate a property by looking at how much cash flow will be available to service the debt (pay the mortgage bill). The ratio is the Net Operating Income (NOI) divided by the debt service. A DSCR ratio of 1.25 means that there is enough NOI to pay the mortgage 1.25 times over. The higher the DSCR, the higher the cash flow and the safer the investment. 

 

Development

 

The process of adding value to real estate, typically by conducting rehabilitations or repurposing existing buildings, new construction, or preparing raw land for further development. The process includes identifying a need in the market, and pairing that with a suitable property. The local municipality must approve the develop plan so it is often a collaborative. Furthering the process involves planning, permitting, financing, constructing and property managing. 

 

 

Disposition

 

The sale of an asset (property).

 

 

Distributions

 

The funds paid out to investors monthly, quarterly or upon a successful exit from the deal. 

 

 

Due Diligence

 

An extensive vetting process used to evaluate a property and satisfy lender underwriting requirements. This includes appraisals, surveys, building inspections, market studies, environmental studies, financial modeling and much more. 

 

 

Earnest Money

 

A deposit held in escrow that’s paid by the buyer to demonstrate their commitment to fulfil the purchase contract; is credited toward the acquisition cost at closing.

 

 

Effective Gross Income

 

The effective gross income is found by subtracting losses from the gross potential income due to vacancy, concessions, employees, model units and bad debt.

 

 

Equity Investment

 

The cash put into an investment. In a multifamily syndication, this capital can be utilized for the down payment, closing costs, borrowing costs, funding an operating account and any compensation earned by the general partner.

 

 

Equity Multiple

 

A way to calculate a rate of return on commercial investment property by dividing the total cash distributions (cash flow and cash on exit) by the total equity invested. The higher the multiple, the better the return. 

 

 

Exit Cap Rate

 

Also known as the reversion cap, the exit cap rate is the expected cap rate at the end of an investment or disposition of a property, or what an investor expects to receive at the time of sale.
 

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Exit Strategy

 

The general partner’s future plan for cashing investors out of the deal, which could include selling the property, purchasing their shares or refinancing.

 

 

Floating Interest Rate

 

Also known as variable or adjustable interest rate loan, this is when interest rates (and therefore payments) are allowed to move up and down based on the market.  

 

 

Forced Appreciation

 

The increase in market value through an increase in net operating income, which is set in motion by an increase in income or a decrease in expenses.

 

 

General Partner

 

Also known as the syndicator, this is the investor who vets the deal, builds relationships, negotiates with the owner, performs due diligence, signs on the loan, facilitates necessary renovations and oversees the property management company. The general partner can be an individual, a small group of investors or a company. 

 

 

Gross Potential Income

 

The gross potential rent plus ancillary income from laundry machines, parking spaces, late fees, etc.

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Gross Potential Rent 

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The maximum possible amount of revenue earned if a multifamily property is leased at 100% occupancy at market rental rates and no bad debt is incurred.

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Gross Rent Multiplier

 

The number of years it would take for the property to pay for itself based on the gross potential rent, found by dividing the property purchase price by the annual gross potential rent.

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Holding Period

 

The amount of time the general partner plans to own and operate the property before exiting. 

 

 

Interest Rate

 

An interest rate is the cost of borrowing money, expressed as a percentage of the amount borrowed, typically over a one year period.

 

 

Interest-Only Payment

 

A monthly mortgage payment that only requires payment of interest. The principal balance may be due at sale, when refinancing or at the maturity of the loan.

 

 

Internal Rate of Return (IRR)

 

A rate of return calculated from all anticipated cash flow, principal pay down of debt and profits on the exit of a property, taking into account the time value of money. Most often IRR is used to make an apples-to-apples comparison of investments with dissimilar projected cashflows. 

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Joint Venture (JV)

 

A collaborative partnership between two or more parties where each leverages their resources and are responsible for profits, losses and costs.

 

 

Land Use Restriction Agreement (LURA)

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A legal document in which the property owner gives up some of their rights of the land use in exchange for the promise of future tax credits, tenant income restrictions, unit set asides to be rented to lower income tenants or other affordability restrictions.

 

 

Letter of Intent (LOI)

 

A non-binding agreement created by the buyer to outline their purchase terms and notify the seller of intent to purchase; often used as a way to make an offer without legal implications. 

 

 

Limited Partner

 

A passive investor who invests capital in exchange for shares with no day-to-day involvement; their liability is legally limited to the extent of their investment. A limited partner received a K1 Partnership Tax Return which gives them the tax benefits of depreciation. 

 

 

Loan-to-Cost Ratio

 

The property’s loan amount divided by total costs incurred from acquisition and development.

 

 

Loan-to-Value Ratio

 

The property’s loan amount divided by its appraised value.

 

 

London Interbank Offered Rate (LIBOR)

 

An globally recognized interest rate that’s used as the benchmark to calculate borrowing costs and interest rate adjustments on a variable rate loan.

 

 

Low Income Housing Tax Credits (LIHTC)

 

A federal program that enables affordable housing development. Developers can apply for LIHTCs at a state level. The tax credits can be sold to private entities to offset their tax liability, which provides capital to the developer for construction. In exchange for the tax credits, the developer agrees to place income restrictions on the residential units so that they are only rented to lower income individuals and families. 

 

 

Manufactured Home

 

Also known as a mobile modular home, this is a residential structure that’s primarily assembled in factories then transported to the home site for installation.

 

 

Market Rent

 

Used to calculate value, cash flow and loan amounts, this is the value of a subject rental unit compared to rates for similar units in close geographical proximity. 

 

 

Metropolitan Statistical Area (MSA)

 

The federally recognized definition of a region that typically consists of a core city and its surrounding communities with a total minimum population of 50,000.

 

 

Multifamily

 

A property classification where multiple residential units are contained within either a single building or several buildings within one complex. 

 

 

Net Operating Income (NOI)

 

The difference of all the incoming revenue from a property minus the operating expenses. This would be the net cash flow if the property was owned without any debt. 

 

 

Non-Recourse Loan

 

A loan in which the borrower doesn’t personally sign a guarantee and the lender has no recourse to pursue them in the event of default beyond the pledged real estate collateral.

 

 

Operating Expenses

 

The dollar amount it takes to manage and maintain an investment property, which could 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 outlines an investment’s risks, terms and goals, and may include the general partner’s financial statements, biography, business operations and more.

 

 

Passive Investing

 

The investment strategy of placing capital into a real estate syndication that is managed by a general partner.  

 

 

Planning Board

 

A planning board is a governing body responsible for reviewing, developing, and implementing land-use plans and regulations within a particular jurisdiction.

 

 

Preferred Return (Pref)

 

A model where passive investors receive an agreed upon percentage of distributions and returns before the general partner in an effort to retain accountability and ensure interests are aligned.

 

 

Prepayment Penalty

 

A fee charged for paying off a loan balance early, thus protecting the lender from the financial loss of interest income that would otherwise have been paid over the loan’s duration.

 

 

Promissory Note

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A contract between a two parties where the lender agrees to lend money to the borrower, in return for interest accrued on their loan. Interest may be paid periodically during the term of the loan, or as a balloon payment at the end of the term. 

 

 

Price Per Unit

 

The price of a multifamily property divided by total number of units (e.g., an 100-unit building sold for $10,000,000 would have a $100,000 price per unit); a common method of comparing competing properties, assessing value and evaluating returns.

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Private Placement Memorandum (PPM)

 

Also referred to as the offering memorandum, this document outlines an investment’s risks, terms and goals, and may include the general partner’s financial statements, biography, business operations and more.

 

 

Pro forma

 

A projected financial statement for estimated revenues and expenses that’s typically detailed for one and five years.

 

 

Promote

 

An incentive used to motivate the syndicator to surpass return expectations and reward their work in finding, managing and adding value to the property. 

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Property Management Fee

 

A recurring cost paid to a professional property management company that oversees day-to-day operations of a property.

 

 

Ratio Utility Billing System (RUBS)

 

A system of billing tenants back for common utility costs that can be determined by occupancy or square footage leased.

 

 

Recourse Loan

 

In contrast to a non-recourse loan, the lender has the right to pursue any debt owed to them and can expose liability to personal assets beyond the collateral in the case of default.

 

 

Refinance

 

Replacing a debt obligation on a property with a new loan under different terms.

 

 

Rent Roll

A document that details each unit in a multifamily property, including unit numbers, unit types, square footage, tenant names, market rent versus actual rent, deposit amounts, move-in dates, and lease-start and lease-end dates.

 

 

Reposition

 

A strategy in which the owner or general partner works to shift the asset’s position in a market by adding value and/or rebranding the property.

 

 

Return Hurdle

 

The rate of return that triggers a disproportionate profit split, such as a preferred return, internal rate of return and equity multiple.

 

 

Return on Equity (ROE)

 

The amount of net income returned as a percentage of shareholder’s equity.

 

 

Return on Investment (ROI)

 

A metric used to measure an investment's potential profitability that’s calculated by the aggregate cash flow plus net resale proceeds divided by the investors’ equity contribution.

 

 

Sales Comparison Approach

 

The standard method for estimating a property’s value based on recent and similar sales in the subject area.

 

 

Section 8 (Housing Choice Voucher)

 

A federal program under HUD that provides rental assistance to low income individuals or families.

 

 

Self-Directed IRA (SDIRA)

 

A tax advantaged account that allows investments to grow tax-free or tax-deferred over time to maximize growth. The IRA can also qualify for yearly tax-deductions depending on the account type, provide asset protection and allow inheritance of assets for future generations.

 

A self-directed IRA is unique due to the investment options available and the amount of control granted to the IRA owner. Conventional IRA custodians only allow for paper assets such as stocks, bonds, mutual funds and CDs, while a self-directed IRA custodian allows these, plus real estate, promissory notes, private placements, crypto and much more. 

 

 

Sensitivity Analysis

 

A stress test or what-if analysis performed on a deal’s underwriting projections to show worst and best case scenarios based on changing market conditions. Useful in determining break-even occupancy and DSCR thresholds. a way to predict a certain outcome given a set of variables and can show projected returns in the event of a market downturn.

 

 

Schedule K1 Tax Return

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Permits an entity to utilize pass-through taxation in order to reallocate income tax liability from those earning the income to those who have a beneficial interest in it.

 

 

Sophisticated Investor

 

An individual with enough experience and knowledge to personally assess the risks and benefits of an investment opportunity.

 

 

Split

 

The percentage share to investors / operator from operational cashflow and profits exceeding preferred return. Typically after the preferred return to investors has been satisfied, profits are split anywhere from 50/50 to 90/10 investor/sponsor.

 

 

Syndication

 

A real estate partnership that pairs passive investors and capital with a seasoned syndicator who organizes the deal and manages it through its duration.

 

 

Subdivision

 

The legal process for dividing a lot into smaller lots which can be separately sold. 

 

 

Subscription Agreement

 

A two-way guarantee between a company and a subscriber. The company agrees to sell a certain number of shares at a specific price, and in return, the subscriber promises to buy the shares at the predetermined price. The investor signs a subscription agreement after reviewing all relevant documents related to the investment.

 

 

Supplemental Loan

 

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.

 

 

T12

 

A profit and loss statement reporting the property’s financial numbers for the last 12 months.

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Tiny Home

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According to International Building Code (IBC), a tiny home is a dwelling that is under 400 square feet. Tiny homes have their own section of IBC, under Appendix Q. 

 

Underwriting

 

A process of evaluating an asset to determine its status, value, risks and potential.

 

 

Vacancy Loss

 

The potential revenue and cash flow forfeited due to vacant units.

 

 

Vacancy Rate

 

The percentage of vacant units in a multifamily property. 

 

 

Value-Add

 

A property that offers the opportunity to increase cash flow or market value through renovations, rebranding or increased operational efficiencies. 

 

 

Waterfall

 

A model for allocating profits between limited and general partners that allows for gains to follow an uneven distribution and where payouts change if previously agreed upon return hurdles are met. 

 

 

Wicked

 

The term New England folk use when they are excited about something and want to say "very". 

 

 

Workforce Housing

 

Affordable housing for families and individuals whose earned income is insufficient to secure quality housing within a reasonable proximity to their workplace. 

 

 

Zoning Board of Appeals

 

A town or city governing body that regulates land use within a particular jurisdiction, typically through the enforcement of zoning laws and the granting of variances or exceptions.