Accredited Investor
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.
Acquisition Fee
Payment made to the syndication’s general partner for sourcing, screening, arranging financing and closing on an investment asset.
Active Investing
An investing strategy where an investor directly finds, structures, manages, and sells investments.
Average Annualized Return
The total return on investment divided by the number of years the investment is held.
Asset Management Fee
A recurring fee taken from property revenues and paid to the general partner for asset management.
Bad Debt
An expense that’s incurred when outstanding fees are deemed uncollectible, including unpaid rents.
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.
Cost Segregation Study
The strategic process of identifying assets and their classifications 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.
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 commercial mortgage lenders use to appraise and qualify a deal for financing by measuring how much cash flow will be available to cover debt service. A DSCR ratio of 1 means the cash flow should cover the debt payments, but lenders typically expect a minimum ratio of 1.2 to approve a loan, and a higher ratio may qualify the borrower for better terms.
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
A vetting process used to evaluate a property and satisfy lender underwriting requirements. May include appraisals, surveys, inspections and title work.
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 (EM)
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 EM, the better the return.
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 Rent
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.
Gross Potential Income
The gross potential rent plus ancillary income from laundry machines, parking spaces, late fees, etc.
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.
Holding Period
The amount of time the general partner plans to own the property before exiting.
Interest Rate
The fee charged by a lender for using their capital to finance a deal.
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. Because IRR cannot be easily calculated analytically, it must instead be calculated either through trial-and-error or by using software programmed to calculate IRR, such as a 10bii financial calculator or Excel.
Joint Venture (JV)
A collaborative partnership between two or more parties where each leverages their resources and are responsible for profits, losses and costs.
Key Principal
The person held accountable for the ongoing success of the investment. It is someone who should be insured to compensate for any interruptions if something happens to them.
Letter of Intent
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 but has restricted voting power and no day-to-day involvement; their liability is legally limited to the extent of their investment.
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.
Loan-to-Cost Ratio
The property’s loan amount divided by total costs incurred from acquisition and renovations.
Loan-to-Value Ratio
The property’s loan amount divided by its appraised value.
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.
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.
Permanent Agency Loan
A long-term mortgage loan that may be amortized for up to 30 years and is guaranteed by government-sponsored agencies Fannie Mae or Freddie Mac.
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.
Price Per Unit
The price of a multifamily property divided by total number of units (e.g., an 100-unit building sold for $100,000 would have a $1,000 price per unit); a common method of comparing competing properties, assessing value and evaluating returns.
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.
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 Premium
Money earned upon completing upgrades and renovations.
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.
Self-Directed IRA (SDIRA)
A tax advantaged account that allow 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 Wall Street 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, notes, private placements, tax lien certificates and much more.
Self-Storage
An industry in which storage units like rooms, lockers, containers and outdoor space are rented to businesses and individuals, typically under a short-term lease.
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 K-1 Tax Form
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.
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.
Terminal Cap
Also known as the reversion cap, the terminal cap 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.
The 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.
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.
Workforce Housing
Affordable housing for families and individuals whose earned income is insufficient to secure quality housing within a reasonable proximity to their workplace.
1031 Exchange
An exchange that allows an investor to sell a property and reinvest the proceeds in a new property while deferring all capital gain taxes.
