Terminology
1031 Exchange
A 1031 Exchange is a capital gains tax deferral option in which taxpayers/investors can reinvest the proceeds from the sale of an investment property into another similar investment or property, delaying any capital gains taxes, until the asset is sold without intent to reinvest those particular proceeds of the sale.
506(b)
Rule 506(b) provides an exemption under Regulation D of the Securities Act. This exemption provides a way for companies to raise money and sell investment opportunities to both accredited investors and a limited number of non-accredited investors per opportunity. Under this rule, the company offering the investment can’t advertise or publish investment details publicly.
506(c)
Rule 506(c) permits issuers to solicit and generally advertise an offering to accredited investors. The issuer must take steps to verify purchasers’ accredited investor status and satisfy other conditions in Regulation D.
Abatement
A decrease in amount or intensity. Usually applies to reduction in taxes or rent.
Absorption Rate
The Absorption Rate is the net difference in available unit square feet for lease between two dates, typically expressed as a percentage.
Accredited Investor
A partner with an annual income of $200,000 individual income, or $300,000 of joint income with a spouse, for the last two years, with reasonable anticipation of earning the same or higher in the future. If the individual does not meet this qualification, they will also meet the requirement, if they, either individually or with their spouse, have a net worth above $1 million, excluding their primary residence.
Active Market
It is a market depicted by increasing demand, a correlating lag in supply, and a boost in prices, also known to be a seller’s market because the sellers of available properties can obtain higher prices. In contrast, a depressed market is characterized with a drop in demand and a corresponding oversupply and decline in prices of properties; also known to be a buyer’s market, because of buyers’ advantages.Acquisition Fee
The buyer pays the Acquisition Fee as an upfront fee to the general partner for the service they provided to source, scrutinize, evaluate, identify financing, and close the investment. The fees vary based on the size of the deal.
Ad Valorem
The Ad Valorem Tax is a tax imposed at the time of a transaction, depending on the value of the transaction.
Annual Percentage Rate (APR)
The Annual Percentage Rate is the cost of borrowing money, also called mortgage interest. This rate represents the entire disclosure of the interest rate, loan discount points, loan origination fees, and other lender-paid credit costs.
Appreciation
Appreciation considers the increase in value of a property over time. Appreciation of property can be forced and/or market-driven. Market appreciation occurs when the economy is performing well and the market cap rate decreases “organically.” Forced appreciation occurs by increasing the net operating income (either by increasing revenue- typically done via rents & occupancy) and/or reducing expenses.
Asset Management Fee
An Asset Management Fee is an ongoing fee paid annually to the general partner for property oversight.
Average Annual Effective Rent
The Average Annual Effective Rent is the tenant’s total effective rent divided by the lease term.
Bad Debt
Bad Debt reflects the sum of past-due money a tenant owes after they move out.
Balance
The amount remaining subtracting the amount owed (on a mortgage) or the amount left over that is already paid (in an account).
Base Rent
A Base Rent is the set amount used as the minimum rent in a business plan.
Base Year
The Base Year refers to the expenses and taxes at the point of purchase. Once these expenses are known, the unit leases increase annually to reflect expense increases above the base year figures.
Breakeven Occupancy
Breakeven Occupancy is the rate needed to handle the entire apartment community expenses. This rate is calculated by dividing the operating expenses and debt service by the gross potential income.
Bridge Loan
A Bridge Loan is a loan utilized until a company secures permanent financing. Bridge loans are short-term, usually six months to three years, with the choice to purchase an additional six months to two years. Bridge Loans typically have a higher interest rate and are basically interest-only. Bridge Loans are optimal options for apartment financing. They are also called swing loans, interim financing, or gap financing.
Broker
A Broker is a commercial real estate agent who represents a party to facilitate buying, selling, or leasing a commercial property.
Building Classifications
Building Classifications typically refer to Class “A”, “B”, “C”, and “D” properties. The ranking determined of a building is subjective and comparative to the sub-market. Class “A” properties are typically newer buildings with a higher level of construction, higher-finish levels, and located in prime locations. Age, location, amenities, and construction of the building affects its classification tier. A Class “A” building in one sub-market may rank lower in another sub-market because of competition in that area.
Cap Rate
The capitalization rate, or “cap rate,” refers to a ratio utilized to convert an income stream into an estimation of value. The income stream used is the property’s net operating income, which considers expenses like utilities, insurance, management, and repairs, yet does not include financing expenses (i.e. debt service). At the period of acquisition, the cap rate can be calculated by dividing a property’s net operating income by the property’s purchase price (its then current value). For instance, a property with gross income of $500,000 and operating expenses of $165,000 (with a net operating income of $335,000), and a purchase price of $3,000,000 would be figured: Net Operating Income ÷ Purchase Price = $335,000 ÷ $3,000,000 = 11.1% cap rate. Since cap rates convert an income stream to value, the above calculation can be re-figured so that a given income stream and an assumed cap rate can be used to estimate the value of a comparable property, or estimate the future value of a property. Investors often use cap rates to convert future projected income streams into that property’s future value (and thus its expected sales price at that particular period).
Capital Expenditures (CapEx)
Capital Expenditures, also called CapEx, are funds utilized to upgrade and maintain an apartment community. An expense is considered a capital expenditure when utilized to improve the life of an apartment complex or unit and is capitalized, (or spreading the cost of the expenditure over the asset’s useful life). Capital Expenditure renovations can include both interior and exterior updates. Examples of CapEx include rebranding the property, installing new flooring, and fresh paint, etc. CapEx does not include operating expenses, turnover costs, ongoing maintenance and repairs, landscaping, utilities, or payroll.
Capital Gain
Capital Gain is figured by subtracting the final purchase price of the investment property, minus the exchange expenses, minus the sold property’s adjusted basis.
Capital Gains Tax
Capital Gains tax is a tax on capital gains. In other words, the profit earned on the sale of a property, that was purchased at a price lower than the sales price.
Capital Improvements
Improvements refer to renovations completed on a property to enhance its physical appearance on the exterior or interior. It could also include additions to the property like playgrounds, gates, picnic areas, and carports.
Capitalization
Capitalization is the process of defining the value of real estate property. This formula divides net operating income by a predetermined annual rate of return on investment. Reference “Cap Rate.”
Capitalization Rate (Cap Rate)
Cap Rate is the rate of return on investment, and hinges on the income the property is anticipated to generate. The cap rate formula is the NOI (net operating income) divided by the purchase price. Also known to be “free and clear return” on investment. See reference to “Capitalization” and “Cap Rate.”
Capital Stack
It is the amount of funds brought to the deal to acquire a subject property, and plays a significant impact in the overall return on investment.Carrying Charges
Carrying Charges includes the incidental expenses to property ownership, beyond interest, that must be absorbed during the lease-up of a property and during periods of vacancy. For example – taxes, insurance, and maintenance.
Cash-On-Cash (CoC) Return
Cash-On-Cash (CoC) Return on Investment considers the rate that cash is returned compared to your initial investment, and it is displayed as a percentage. The CoC formula divides the cash flow by the original investment. If you receive 10,000 in cash flow and you initially invested $100,000, your CoC would be 10% (10,000/$100,000). So basically, it is a percentage measurement of the annual cash flow returned per dollar of the cash in a deal.
Cash Flow
Cash Flow is the recurring revenue provided to investors after all expenses are paid. To figure Cash Flow, subtract the operating expense and debt service from the collected revenue (rents, etc.)
CBD (Central Business District)
The Central Business District is the primary business and commercial area of a local town or metropolitan / city.
Certificate of Insurance
An insurance company or its agent issues a Certificate of Insurance to verify that an insurance policy is in effect for stated amounts, coverages, and names of those insured.
Closing Costs
Closing Costs include the additional expenses other than the property’s price that buyers and sellers usually incur to finish a real estate transaction.
Commercial Real Estate (CRE)
Commencement Date
The Commencement Date is the date the lease goes into effect.
Common Area
The Common Area consist of the areas of a building (and its site) available for enjoyment by all tenants, such as lobbies, corridors, and parking lots.
Concessions
Concessions are incentives offered to prospective tenants to encourage them to sign a lease. For example, a landlord may offer a discount for the first three months if a tenant signs a longer lease term.
Consumer Price Index (CPI)
Consumer Price Index, or CPI, is an economic indicator and measurement of inflation. Rental rates tend to increase yearly, comparatively with this inflation rate.
Deal Sponsor
Debt Service
The recurring loan payments required to cover the interest payments — and typically includes a part of the principal amount — of a mortgage.
Debt Service Coverage Ratio (DSCR)
Debt Service Coverage Ratio (DSCR) is a measurement of cash flow available to cover the building’s debt obligation. This ratio formula divides the net operating income by the total debt service. A DSCR of 1.0 indicates there is adequate net operating income to cover 100% of the debt service.
Deals
A property under contract with favorable terms to a buyer, like lower than the market purchase price, or easy, flexible financing terms.
Depreciation
Depreciation allocates an asset’s cost, (or paper loss) over its useful life. Depreciating assets allows companies, on taxes, to deduct a part of the asset’s cost each year the property is utilized while earning revenue on the investment.
Distributions
Distributions are disseminated based on the cash flow of the property and profits realized when the property is refinanced or sold. The limited partner’s portion of the profits is paid through these distributions, which are disseminated monthly, quarterly, or annually, and when a property is refinanced or sold.
Earnest Money
Earnest Money is an advance of a portion of the purchase price to show the ability of the buyer to fulfill the contract.
Effective Gross Income (EGI)
Effective Gross Income (EGI) considers the positive cash flow of the apartment building. It considers the total income minus the lost income – usually due to vacancy, concessions, and bad debt.
Effective Rent
Effective Rent is the actual rental rate obtained by the landlord after deducting any concessions from the base rental rate paid by a tenant, typically displayed as an average rate over the lease term.
Employee Unit
An Employee Unit is a unit rented at a discounted rate to employees, at a property.
Encumbrance
Any right to, or interest in, land that affects its value. It may include outstanding mortgage loans, unpaid taxes, easements, and deed restrictions.
Equity Investment
The Equity Investment is the initial cost incurred with purchasing an apartment complex, like the down payment, closing costs, and fees. This investment may also be called the initial cash outlay or the down payment.
Equity Multiple (EM)
Equity Multiplier (EM) displays the rate of return on investment, based on the total net profit and the original investment. The formula to calculate the value is adding the total net profit and the gross cash flow, then dividing the number by the equity investment (down payment). An equity multiple of 2X means that you are doubling your money throughout the project.
Escalation
An Escalation is a provision, or clause, in a lease that increases the cost of rent for the tenant.
Exit Strategy
The Exit Strategy is the final stage of the business plan which specified the timeline and process to refinance or the disposition (sell) of the property.
Fair Market Value (FMV)
Fair Market Value (FMV) describes the most favorable price of a property in a competitive market, when the buyer and seller is reasonable and informed. The fair market value is typically the highest price that a buyer would pay, and the lowest price a seller would accept, when each party is willing to act.
Financing Fees
Financing Fees are the fees charged by the lender at the onset of the debt service. These fees are also called a finance charge.
Fixed Costs
Fixed Costs are expenses, such as loan service, which do not fluctuate over the period of doing business.
General Partner (GP)
In a partnership, a partner whose liability is not limited. All partners in a typical partnership are general partners, while in a limited partnership most members enjoy limited liability (although one partner must be a general partner).
Gross Potential Income (GPI)
The Gross Potential Income, or GPI, formula figures the maximum rental income that a multifamily apartment building can generate. Gross Potential Rent (GPR) basis its calculation on a property that has no rental payment issues and 0% vacancy. The formula is based on market rent, which is the average rent in the same geographic area. It is also called Gross Potential Rent (GPR).
Gross Rent Multiplier (GRM)
Gross Rent Multiplier (GRM) displays the ratio, or measurement, of a real estate investment price in comparison to its yearly rental income (before accounting for expenses). The GRM considers the amount of years necessary for the property to pay for itself. For a prospective real estate investor, a lower GRM represents a better opportunity.
Indirect Costs
Indirect Costs are development expenses that do not include material and labor costs. These expenses are called Soft Costs.
Interest Rate
An Interest Rate is the amount of interest due per period. The total interest on the amount lent or borrowed depends on the interest rate, principal total, compounding frequency, and the length of the period it is lent, deposited, or borrowed.
Interest-Only Loan
An Interest-Only Loan is a loan type in which the borrower pays only the interest for a specified period, with the principal balance remaining the same during the interest-only timeframe.
Internal Rate of Return (IRR)
The IRR is the annual rate of return on the investment, considering the period of when those returns on investment are achieved. For Example: If you invest $100,000 and receive a sum of $100,000 in returns of investment over five years, the average annual return on investment is 20%. However, the IRR would be less than that, because it considers the timeframe of the payouts.
Large Apartments
Lease
A Lease is an agreement between a tenant and a landlord. This contractually binding agreement allows exclusive possession or utilization of property, usually in return for a recurring payment called “rent.”
Lease Agreement
The Lease Agreement is a type of contract allowing exclusive possession of the leased premises entered into by a landlord and tenant with agreed-upon terms and conditions.
Lease Commencement Date
The Lease Commencement Date typically displays the onset of the lease term, whether or not the tenant has taken possession.
Letter of Intent (LOI)
The Letter of Intent (LOI) is a document expressing the intent of each party in an agreement. It is not legally binding, yet instead aims to reduce misunderstandings between the parties.
Leverage
The use of debt to secure financing for the acquistion of properties.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure in which the owners are not held personally liable for any of the company’s debts or liabilities. LLCs do not pay taxes—their profits and losses are passed through to members, who claim them on their federal taxes.
Loan to Value (LTV)
LTV is expressed in a percentage ratio, of the amount of a loan to the value of the property that was purchased.
Loss To Lease (LtL)
Loss To Lease (LtL) defines the contrast between the actual rent (per the lease) and a unit’s market rental rate. For example: If the market rent for a unit is $2,000 per month and the actual rent is $1800 each month, the loss to lease is $200 each month.
Market Rent
Market Rent is the rental rate that a apartment building unit would command on the competitive real estate market.
Market Value
Market Value is the highest price a property would command in a competitive and open market.
Metropolitan Statistical Area (MSA)
Metropolitan Statistical Area, (or MSA), is an area consisting of a major city and the surrounding areas.
Mid-Rise
A Mid-Rise building may have 4 to 8 stories above ground. However, in a Central Business District, this may extend to buildings up to twenty-five stories.
Mid-Size Apartments
Mid-size apartments generally range between 30 – 150 units.
Model Unit
A Model Unit is a unit utilized to show prospective tenants how the actual unit appears in layout, amenities, and construction.
Multifamily Dwelling
A Multifamily Dwelling is a classification of housing where multiple and separate housing units are within one building or a complex of several buildings. A typical form is an apartment building.
Net Absorption
Net Absorption is the square feet leased in a defined geographic area or defined sub-market over a fixed timeframe and offset by space vacated in the same area during the same timeframe.
Net Operating Income (NOI)
The Net Operating Income (NOI) includes all revenue from the property, minus operating expenses. NOI does not include capital expenditures and mortgage payments.
Normal Wear and Tear
Normal Wear and Tear considers the deterioration or loss in value caused by normal and reasonable use by a tenant. A tenant is usually not responsible for “normal wear and tear” when the tenant vacates the premises.
Operating Expenses
Operating Expenses considers cash necessary to maintain and operate a property. Examples of operating expenses include property insurance, real estate taxes, property management, maintenance expenses, utilities, and accounting costs. Operating costs do not include debt service, capital expenditures, or cost recovery.
Pari-Passu Preferred Return
If the sponsor and investor receive the same preferred return, paid simultaneously, the pref is called a “Pari-Passu” Preferred Return.
Passive Investor
Typically, within a buy and hold strategy, a passive participant that invests funds in other people’s projects (like syndications); where they own and operate the property, from which passive participants receive passive return on investment.
Permanent Agency Loan
A Permanent Agency Loan is defined as a loan on a piece of commercial property that has a term of at least five years and some amortization. Most commercial permanent loans are amortized over 25 years.
Physical Occupancy Rate
The Physical Occupancy Rate is the ratio, expressed as a percentage, that’s available rental space occupied by paying tenants. To figure the occupancy rate for a specified month, calculate the amount of units rented, and divide by the amount of units available to be rented, times 100.
Preferred Return (Pref)
A Preferred Return is a profit distribution structure in which proceeds are disseminated to one class of equity before another group of investors, until a specific rate of return on the original investment is reached.
Prepayment Penalty
A Prepayment Penalty is an additional fee some lenders charge if you pay off your loan early.
Price Per Unit
The Price Per Unit is the price per apartment (called units or doors) comparative to the total of the multifamily investment. In other words, the number of units divided by the total investment.
Pro Forma
The Pro forma statement presents anticipated results to investors and evaluates the potential earnings using predetermined projections or presumptions.
Profit and Loss Statement
The Profit and Loss Statement specifies the revenues and expenses over a period. This statement displays how revenues are transitioned into net income or net profit.
Property Management Fee
The Property Management Fee is a fee paid for daily professional property management services in operating the properties. The 3rd party company handles the day-to-day operation of the apartment like leasing, maintenance, rent collection, marketing, bill paying, and accounting.
Ratio Utility Billing System (RUBS)
Ratio Utility Billing System, also called RUBS, can be a cost-effective and fair alternative to submeters. RUBS is a common utility management solution and basically divides the bill among tenants based on specific criteria. Various kinds of utility factors can often impact the kind of RUBS calculation a property utilizes.
Recourse Loan
Recourse Loans provides the lender to recover any losses against the personal assets of a party liable for the debt if they default on the loan.
Refinance (Refi)
A Refinance (Refi) explains the process of readjusting and replacing an existing loan agreement. When a business chooses to refinance a credit obligation, they effectively aim to make favorable changes to their interest rate, payment schedule, or other terms. If approved, the new agreement replaces the original contract.
Refinancing Fee
Refinancing replaces an older loan with a new loan, usually with better terms. Within this process, businesses will repay several other typical loan fees, like attorney and application fees.
Rehab
Rehabilitation, also called Rehab, is the intensive renovation of a building or project to improve the property’s appearance.
Rent Comparable Analysis
The Rent Comparable Analysis is a portion of the due diligence process to evaluate comparative apartment communities in the same sub-market to identify how the market rents compare to the subject apartment complex.
Rent Roll
A Rent Roll is a list of tenants by unit and the rent paid by each resident in a multi-tenant property.
Rental Concession
Rental Concessions are incentives a landlord may offer a tenant to secure the tenancy. For example: A move-in bonus or a brief discount in rent may encourage a tenant to lease.
Sale Proceeds
The Net Sale proceeds are the sum the seller earns from selling a property, minus the costs and expenses from the gross proceeds.
Soft Cost
Soft Costs include the project expenses with the development, construction, marketing, leasing, operation, and maintenance of the property improvements.
Soft Interest
Soft Interest explains the amount you may possibly be interested in investing in a deal. The investment managers, (often called GPs, general partners, or deal sponsors) may ask for a soft interest after providing limited details before they open the opportunity for investment. Soft Interest is not a commitment to invest.
Sophisticated Investor
A sophisticated investor is a high-net-worth investor with a adequate knowledge and experience in financial and business matters, making them capable of evaluating the merits and risks of the prospective investment opportunities.
Submarket
A Submarket is a segment or region of a larger geographic market specified and identified based on one or more characteristics that differentiate it from other submarkets or locations.
Syndication
From apartments perspectives, a syndication usually is a partnership between general partners and the limited partners to acquire and sell an apartment complex while sharing in the profits created through the process. The group formed typically pulls resources together to buy, rehabilitate/stabilize, operate and sell real estate.
Tenant
The Tenant is an individual resident who has possession of the property through a lease. A tenant may also be called a lessee.
Term
The Term describes the duration of the lease agreement.
Time Value of Money (TVM)
TVM is an economic principle describing that a dollar today has greater value than a dollar in the future due to its current earning power.
True Preferred Return
If the investor receives a preferred return on investment prior to a sponsor does, then the Pref is considered a “True” Preferred Return on investment.
Underwrite
In real estate, to underwrite typically describes an evaluation of the risks and possible returns of a potential investment or loan.
Underwriting
Underwriting describes an investor or business process in evaluating, researching, and quantifying the financial risk and opportunities affiliated with a specific investment.
Vacancy Loss
Vacancy Loss describes the money that a property owner will not obtain due to unfilled units or the non-payment of rent—also known to be vacancy and credit loss.
Vacancy Rate
Vacancy Rate is the sum of available units contrasted to the unit quantity, displayed as a percentage and calculated by multiplying vacant units by 100 and then dividing the number by the total number of units.
Yield
A synonym of internal rate of return (IRR), yield is a measurement of an investment’s return on investment rate that considers the time value of money.