EDUCATION | Real Estate Terms - Chris Tao Real Estate

Real Estate Terms

Every master was once a beginner. Learn these terms and discover your potential to syndicate!

Accredited Investor

A individual is considered “accredited” as it pertains to investing in apartment syndications if they have an annual income of $200,000, ($300,000 yearly income if married) for the last two years, or has a net worth over $1 million either individually or jointly with a spouse.

Active Investing

An active investor is involved in locating, structuring, financing, and managing real estate investments. This is the opposite of passive investing, such as a limited partner in apartment syndication.

Acquisition Fee

The advance fee earned by the general partner in an apartment syndication for finding, assessing, screening, financing, and closing the investment deal.

Apartment Syndication

An apartment syndication is a partnership formed between general partners (the syndicator) and limited partners, which allows investors to pool together their money and share risks as well as returns in acquiring, managing, and selling an apartment community.

Asset Management Fee

A fee collected and earned by the general partner of an apartment syndication for overseeing the property.

Capital Expenditures (CapEx)

Money spent by a company to acquire, upgrade, and maintain a property, extending the useful life of a property. The expense is capitalized and spread out over the useful life of the asset. CapEx is not operating expenses, which are short-term expenses.

Cash Flow

The amount of cash or profits remaining after paying all expenses. Income – All operating expenses = Cash Flow.

Cash-on-Cash Return (CoC)

A calculation used in apartment syndication to determine the rate of return based on the cash flow and equity investment. You Divide the cash flow by the initial equity investment. For example, (5,000/100,000) = .05 or 5% CoC.

Depreciation

A loss in value of any asset over time. Many real estate investors must utilize depreciation as a strategy to offset their taxable income.

Distressed Property

An unstable apartment community where the occupancy rate is below 85% and typically has tenant problems, located in a bad location, or mismanaged with outdated interiors, exteriors or amenities, and/or deferred maintenance.

Due Diligence

As it pertains to apartment syndications, the general partner will perform due diligence to confirm the property is not subject to any environmental or financial problems as well as confirming the underwriting assumptions and business plan.

Equity Investment

The initial costs for purchasing a property. As it pertains to apartment syndications, these costs may include fees paid to the general partner, the down payment for the mortgage loan, closing costs, and financing fees.

Equity Multiple (EM)

EM is the rate of return calculated by dividing the net profit and the equity investment by the total equity investment.

Exit Strategy

The general partner’s plan or strategy for selling the apartment syndication at a certain time, as outlined in the business plan.

General Partner (GP)

In apartment syndications, the general partner is responsible for managing the entire apartment syndicate. Sometimes general partners are referred to as the sponsor or syndicator.

Limited Partner (LP)

In apartment syndications, the LP is the passive investor who funds a portion of the equity investment, and has limited liability based on their share of ownership in the syndicate.

Net Operating Income

A commercial real estate lingo that refers to all the revenue from the property minus the operating expenses of the building.

Operating Agreement

A legal document used in an apartment syndication that outlines the responsibilities and ownership percentages for the general and limited partners.

Operating Expenses

For apartment syndications, the costs of running and maintaining the property, the operating expense typically include payroll, utilities, maintenance, repairs, contract services, advertising/marketing, administrative, management fees, taxes, insurance, and reserves.

Passive Investing

The act of placing one’s capital into an apartment syndication that is managed in its entirety by a general partner.

Preferred Return

Refers to the threshold return that limited partners are offered before the general partners can receive any payments.

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.

Pro-forma

As it pertains to apartment syndication deal, pro forma will predict anticipated results for future years.

Profit And Loss Statement (T-12)

A spreadsheet containing detailed information about the revenue and expenses of a property over the last year.

Reposition

In an apartment syndication, when a general partner wants to change the position of the property in the market by adding value or rebranding.

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 fee paid by a buyer of a property who is taking over an existing mortgage. (standard fee is 1%).

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

It is a provision in a mortgage loan that voids the loan and allows for repayment of the loan, through substitution of collateral.

Distributions

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.

Net Operating Income

A commercial real estate lingo that refers to all the revenue from the property minus the operating expenses of the building.

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.