Learn With Chris Tao
Apartment Syndication
ADVANCED TERMS
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Upgrade your game in the syndication industry by mastering these words.
ABSORPTION RATE
A commercial real estate term that describes the rate of available units that are currently rented in a specific real estate market during a particular period of time.
APPRAISAL
The valuation of a property by a certified appraiser. The assessment can be based on cost, sales comparable, and an income approach.
APPRECIATION
An increase in the value of an apartment syndication (whether natural or forced) of an asset over time.
ASSUMPTION FEE
A fee paid by a buyer of a property who is taking over an existing mortgage. (standard fee is 1%).
BRIDGE LOAN
A short–term, interim loan, usually between six months to three years, used by investors until they can find long-term financing of a property.
COST APPROACH
An appraisal method based on the cost to replace (or rebuild) the property.
DEBT SERVICE
The annual mortgage amount of an apartment syndication, which includes the principal and interest.
DEBT SERVICE COVERAGE RATIO (DSCR)
A ratio used by commercial real estate lenders to measure the cash flow available to pay the debt obligations of a building. You calculate the DSCR by dividing the net operating income by the total debt service of the building. A property with a DSCR close to 1.0 is considered risky, as the building may not have enough to pay its expenses with the slightest increase in expenses. Lenders typically like to lend to projects with a DSCR of 1.25 or higher.
DEFEASANCE
is a provision in a mortgage loan that voids the loan and allows for repayment of the loan, through substitution of collateral.
DISTRUBUTIONS
In an apartment syndication, distributions are the limited partner’s portion of the profits, which can be sent either monthly, quarterly, or annually, or at refinancing and/or at the sale. These distributions are paid out to investors.
ECONOMY OCCUPANCY RATE
This commercial real estate calculation is performed by dividing the actual revenue of a building by the gross potential income of a building.
EFFECTIVE GROSS INCOME
EGI is the actual cash flow of a building, which is calculated by subtracting the revenue lost due to vacancy, loss-to-lease, concessions, employee units, model units and bad debt from the gross potential income.
GROSS POTENTIAL INCOME
The theoretical amount of income if an apartment syndication was 100% leased year-round at market rental rates in addition to all other income.
GROSS POTENTIAL RENT (GPR)
The theoretical amount of revenue if the apartment community was 100% leased year-round at market rental rates.
GROSS RENT MULTIPLIER
You calculate the GRM by dividing the purchase price by the annual gross potential rent. The GRM is a commercial real estate term that refers to the number of years, based on the gross potential rent, that it would take for a property to pay for itself.
INCOME APPROACH
A method of calculating an apartment syndication’s value by using the cap rate and the net operating income (value = net operating income/capitalization rate).
INTERNAL RATE OF RETURN
The rate required to convert the sum of all future cash flow (cash flow, sales proceeds, and principal paydown on the mortgage loan) so that it equals the equity investment.
K-1 TAX FORM
As it pertains to apartment syndication, this form allows the general partner to pass–through tax liability to.
LOSS-TO-LEASE (LtL)
LtL, calculates the revenue loss on a building based on subtracting the actual rent collected by the gross potential rent divided by gross potential rent.
PRIVATE PLACEMENT MEMORANDUM (PPM)
A document/memo that outlines the investment terms and the primary risk factors involved in an apartment syndication or other investment.
SALES COMPARISON APPROACH
An appraisal method based on similar apartments recently sold.
SUBSCRIPTION AGREEMENT
Every LLC prepares a subscription agreement for the property that it owns an agrees to sell, and the limited partners agree to purchase a specific number of shares to a limited partner at a specific price.
VALUE-ADD PROPERTY
An apartment complex that has an opportunity to be improved by adding value, which means making improvements to the operations and the physical property through exterior and interior renovations of the asset to increase the income and/or decrease the expenses.
WATERFALL STRUCTURE
In an apartment syndication, a method for splitting profits between the partner. It allows for the uneven distribution and the payout changes when certain return hurdles are met. For example, a 7% return is met. After the returns may be split 80/20 between the investor and the general partner.
