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1031 Exchange
Taxpayers can reinvest the proceeds from an investment property sale into another property investment using a 1031 Exchange. This capital gains tax deferral option can allow taxpayers to delay any capital gains taxes, but should be done with the help of a tax expert.
506(b)
Rule 506(b) is an exemption under the Securities Act, Regulation D, that allows companies to sell investment opportunities and raise money with both accredited and non-accredited investors. The investments allow for a limited number of non-accredited investors per opportunity via Rule 506(b). However, when abiding by this rule, companies cannot publicly share or advertise the investment details.
506(c)
Through Rule 506(c), a company can generally advertise an investment, but it is only open to accredited investors. To verify the accredited investor status of potential investors, companies need to take certain steps to satisfy other Regulation D conditions.
A
Abatement
In real estate, an Abatement generally applies to decreases in rent or taxes associated with a decrease in assessed value of a property.
Absorption Rate
The Absorption Rate is used to express the net difference in available square feet for lease in a given unit between two dates. This is usually presented as a percentage.
Accredited Investor
- Have an annual income of $200,000 single or $300,000 joint income for at least the past two years, with the expectation that you will continue to make that or more in the future.
- Have a net worth, either solo or with a spouse, of $1 million or more.
For more information on this, check out our blog on accredited investors.
Acquisition Fee
When the buyer acquires a property, they pay the Acquisition Fee to the general partner as part of the service the general partner has performed to find, evaluate, analyze, finance, and close the investment. The size of the deal normally determines the size of the fees.
Ad Valorem
"Ad Valorem," translated from Latin, means to abide by the value of something. At the time of transaction, the ad valorem tax is applied based on the value of the transaction at the time.
Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) represents what it costs to borrow money. Interest rates, loan origination fees, loan discount points, and lender-paid credit costs will be reflected in the APR.
Appreciation
Appreciation is the increase in value over time of a given asset. This can happen naturally or as part of forced appreciation. Natural appreciation normally occurs during the course of owning an asset - as the economy improves, the market cap rate can decrease "naturally," leading to appreciation of the asset. Forced appreciation requires intentional intervention - the net operating income needs to increase in some way by decreasing expenses or increasing revenue. Capital improvements made to a property can lead to appreciation, for example.
Asset Management Fee
The Asset Management Fee is paid to the General Partner annually as compensation for their work on property oversight.
Average Annual Effective Rent
The Average Annual Effective Rent is calculated by taking the total effective rent of the tenant and dividing it by the term of the lease.
B
Bad Debt
After a tenant moves out, the Bad Debt is a reflection of how much money they owe and are past-due as a sum.
Balance
The Balance is the amount left over. This can refer to the amount still owed on a loan, or the amount that has already been paid on an account, for example.
Base Rent
A property's fundamental rental price is known as its Base Rent. This is a minimum rent applied to a business plan that is set before factoring in any potential adjustments or extra fees. It also generally applies to an unfurnished property. A Base Rent is used to set a baseline for future financial projections.
Base Year
The Base Year sets the status for the point of purchase. The expenses and taxes present at purchase represent the base year. After this, unit leases increase annually to reflect increases in expenses that are above the figures set in the base year.
Breakeven Occupancy
The Breakeven Occupancy equals the minimum percentage of units an apartment community needs to rent out to cover their expenses and debt obligations. This can help determine the overall financial viability of the investment.
Bridge Loan
A Bridge Loan serves as a bridge between acquiring the property and achieving permanent financing. They are short-term loans, lasting six months to three years on average. Those who take out bridge loans also have the option to extend them by six months to two years longer. Bridge loans work well for apartment financing. They do tend to have a higher interest rate and are almost always interest-only. You may also hear the term gap financing, interim financing, or swing loans.
Broker
A Broker serves as an intermediary in commercial real estate by facilitating transactions between property owners and tenants. Buying, selling, and leasing commercial properties go through Brokers, who should ensure smooth and successful transactions.
Building Classifications
When you see the term "Building Classifications," this is generally in regards to class ratings of properties - A, B, C, and D. Building class ratings are subjective but can give you an idea of how the property stacks up in its submarket. Class A buildings tend to be newer buildings with higher-end finishes in prime locations. However, Class A buildings in one submarket may be lower ranked compared to other submarkets based on competition. Some factors that go into classing apartments include finishes, amenities, construction, location, and age. Learn more about classes of property in real estate on our blog.
C
CAP Rate
Capital Expenditures (CapEx)
Capital Expenditures, often shortened to CapEx, are costs applied to apartment communities that are spread across the useful life of the asset. Expenses that fall under CapEx can include interior and exterior updates, such as installing new flooring, adding covered parking, or painting units. These differ from operational costs, which can include routine maintenance, landscaping, payroll, utilities, and costs associated with turnover.
Capital Gain
Capital Gain is calculated by starting with the final sale price of the investment property and subtracting the exchange expenses and adjusted basis of the sold property.
Capital Improvements
Exterior and interior updates made to a property in the name of improvement can be Capital Improvements. They can also be additions, such as garages, gates, and playgrounds, made to a property.
Capitalization
The value of a real property is calculated by determining its Capitalization. Take the net operating income and divide it by the predetermined annual rate of return to get this value.
Carrying Charges
Think of Carrying Charges as the costs of upkeep associated with owning a building. They are the ongoing expenses property owners need to pay outside of making mortgage payments. These costs can also add up during vacancy periods when the building isn't rented out, and can include expenses such as insurance, taxes, and maintenance.
Cash-On-Cash (CoC)
Cash-on-Cash (CoC) is a rate that expresses the percentage of return related to your original investment. To calculate CoC, take the cash flow and divide it by the initial investment. For example, a $20,000 cash flow from a $200,000 investment means that the CoC is 10%.
Cash Flow
CBD: Central Business District
The Central Business District will be where the bulk of business and commercial activity is located in the particular market in which you are looking to invest. This could be particular to a city, metro area, or neighborhood, depending on the size of the market.
Certificate of Insurance
A Certificate of Insurance is a verification issued by an insurance company or an agent to confirm that an insurance policy is active for specific parties, amounts, and properties.
Closing Costs
When investors buy or sell a property, they need to pay Closing Costs. These are extra fees that are paid on top of the purchase price of a property. This can include title insurance, property taxes, appraisal fees, and commissions to real estate agents, among other things.
Commencement Date
The date the lease is active is known as the Commencement Date.
Common Area
All tenants have use of the Common Areas of a building. These can include the lobbies, corridors, and parking lots.
Concessions
Concessions are incentives that may be made to either the investor or the renter to make a deal or property more appealing. To learn more about rental concessions, look up the term in our glossary. Concessions in real estate investing can happen on the buyer or seller side and may include applying credits toward closing costs, fixing major repairs before closing, accepting shorter closing periods, or agreeing to higher purchase prices.
CPI
Consumer Price Index, also known as CPI, is an economic indicator used to measure inflation. Generally, rent increases in alignment with increases in CPI.
D
Debt Service
Debt Service is a money that is applied regularly to pay back a loan. These payments include interest and the principal. Interest is the fee that is paid to borrow money, whereas the principal is the amount of money borrowed that needs to be reimbursed over time. With each Debt Service payment, money is applied to interest first, and then the outstanding principal balance.
Debt Service Coverage Ratio (DSCR)
Depreciation
Depreciation can help investors account for the normal wear and tear of an asset. With depreciation, an asset's cost is allocated over its useful life, meaning that the cost of the property is distributed across the years it should be in use. This helps the cost be gradually reflected in financial statements over time instead of as one lump sum.
Distributions
After a property is refinanced, sold, or starts turning a profit, the investors will receive Distributions. Limited partner profits are paid through either monthly, quarterly, or annual distributions, as well as when a property is refinanced or sold.
E
Earnest Money
The buyer may need to prove they can carry out the contract by putting forward Earnest Money, an advance payment as a portion of the purchase price.
Effective Gross Income (EGI)
The positive cash flow of a multifamily property can be expressed with the Effective Gross Income (EGI). This is the sum of income from the property minus the lost income. Properties tend to lose income from concessions, vacancies, and bad debt.
Effective Rent
If tenants are given concessions of some kind, the Effective Rent can help landlords understand the actual rental rates paid by the tenant by subtracting any discounts that were distributed. The effective rent is shared as an average rate spread over the term of the lease, so if the concession is only for three months, the effective rent would show the average for the full 12 months, not just the discounted or regular rate period.
Employee Unit
Some apartment complexes may have Employee Units. These are units that are rented to employees at discounted rates. This can be an attractive bonus to offer employees of property management groups.
Encumbrance
Certain conditions can affect a land's value and be an Encumbrance. These conditions include interest in or rights to the land via outstanding mortgages, easements, unpaid taxes, and deed restrictions.
Equity Investment
The Equity Investment, also known as a down payment or an initial cash outlay, is the initial cost of purchasing an apartment community. This investment includes the down payment, closing costs, and associated fees.
Equity Multiple (EM)
The Equity Multiplier (EM) is the rate of return on a property, based on the initial investment and factoring in net profit. To calculate, take the total net profit and the gross cash flow and divide it by the equity investment. This can help investors understand the multiple return on their investment. For example, a 2X equity multiple means an investor is doubling their money.
Escalation
Over time, rents need to increase with inflation and other rising costs. An Escalation is a lease provision that will increase the cost of rent for a tenant in a certain frequency or after a set duration.
Exit Strategy
In the lifecycle of a business plan for real estate investments, the last step is the Exit Strategy. With this strategy, you determine what will happen next with the property - will it be refinanced or sold, and what will the timeline or process look like?
F
Fair Market Value
Financing Fees
At the beginning of debt service, a lender may charge upfront Financing Fees. You may also hear the term "finance charge" referring to the same thing.
Fixed Costs
Some costs do not vary during the course of doing business. These are called Fixed Costs. Loan services are one type of fixed costs.
G
General Partner
A General Partner (GP) is someone in the partnership who doesn't have limited liability. In an ordinary partnership, all partners are general partners. In a limited partnership, most members have limited liability, but there still needs to be one GP. A GP is responsible for the company's actions, personally liable for debts and obligations, and can legally bind the business.
Gross Potential Income (GPI)
Gross Potential Income (GPI) is a calculation of the maximum rental income that could be generated by a multifamily property. This is really the best-case scenario, where all rent is being paid without issue and there are no vacancies on the property. GPI is calculated using the average rent people pay in the geographic area, known as the market rent. You may also hear people talk about Gross Potential Rent (GPR), which is the same thing.
Gross Rent Multiplier (GRM)
To understand how long it would take for a property to pay for itself, you need to use the Gross Rent Multiplier (GRM). This is the real estate investment price compared to the annual rental income it takes in before expenses expressed as a ratio. The lower the GRM, the less time it will take for a property to pay for itself.
I
Indirect Costs
Indirect Costs, also known as soft costs, are development costs that are not related to materials or labor. This is often used when describing development improvements.
Interest Rate
The amount of interest due in each period is the loan's Interest Rate. This rate, paired with the principal sum of money borrowed, compounding frequency, and length of the loan will determine the total interest that is charged.
Interest-Only Loan
When borrowers pay back loans, they tend to repay a portion of interest and a portion of the principal at the same time. With Interest-Only Loans, borrowers only pay back the interest for a set period, leaving the principal balance untouched. This can free up money for other projects by lowering monthly payments, but this does mean that the principal sum will take longer to get paid.
Internal Rate of Return (IRR)
L
Lease Agreement
A Lease Agreement is a contract between a tenant and a landlord. This agreement provides the tenant exclusive possession of the premises for lease and may include specific terms and conditions, such as responsibilities, additional fees, duration of the lease, and more. Usually, this agreement is done in return for a periodic payment that we know as "rent."
Lease Commencement Date
The beginning of a lease term is the Lease Commencement Date. This may or not be when the tenant has taken possession of the lease.
Letter of Intent (LOI)
Before a legally binding document is created, parties may create and sign a letter of intent (LOI). This should express the intent of each party in an agreement and can be used to reach a common understanding around a deal, transaction, or other agreement.
Limited Liability Company (LLC)
Real estate investors often use a Limited Liability Company (LLC) to limit personal liability in a real estate investment. With an LLC, owners are not personally liable for debts or liabilities. Profits and losses for LLCs are passed through to individual members and LLCs don't pay corporate income tax. This can avoid double taxation.
Loss To Lease (LtL)
The difference between the actual rent per lease and the market rental rate is the Loss to Lease (LtL). This difference can occur due to concessions. For example, if the actual rent averages $1,500 per month for a year with a 3-month discount on rent, and the market rent is $1,800, the loss to lease is $300 per month.
M
Market Rent
Market Rent is similar to the Market Value - it is the maximum rate a property can get for rent on the open market.
Market Value
The highest price a property would garner in a competitive and open market is known as the Market Value. This is the best-case scenario for a property's value.
Metropolitan Statistical Area (MSA)
The Metropolitan Statistical Area (MSA) consists of a major city and includes smaller surrounding cities.
Mid-Rise
A building that has 4-8 stories above ground is considered Mid-Rise, but it can be even taller than that! In central business districts, a mid-rise building can go as high as 25 stories.
Model Unit
Examples can help prospective investors or tenants understand more about a property. A Model Unit can show prospects how a unit will appear, generally after renovations have been made. This can be an important resource in a value-add project.
Multifamily Dwelling
A Multifamily Dwelling is a property where more than one housing unit is available in one building or a series of buildings. An apartment building is a common example of a multifamily dwelling.
N
Net Absorption
Net Absorption illustrates how many square feet of a property type are available in a given geographic area or submarket in a prescribed amount of time. This is described by taking the total square footage of new properties that are leased and dividing by the total square footage of existing properties that have been vacated. For example, Net Absorption may be calculated for square footage of new office spaces leased divided by total square footage that becomes vacant over a one-year period.
Net Operating Income (NOI)
The Net Operating Income (NOI) is the revenue from the property minus any operating expenses. Debt service and capital expenditures are not added to the NOI calculation. More information on NOI is available on our blog!
Normal Wear and Tear
Even in the best of circumstances, properties don't remain in pristine condition forever. Normal Wear and Tear is a term that describes the loss of value and deterioration that happens with normal tenant use. Tenants are not responsible for costs associated with normal wear and tear when their lease ends.
O
Operating Expenses
Two types of expenses you may incur on properties are capital expenditures (also known as CapEx) and operating expenses (also known as OpEx). Operating Expenses include any costs associated with maintaining and operating a property in an ongoing way. This can include costs for accounting, property management, maintenance, real estate taxes, property insurance, and utilities. Debt service and cost recovery are not included in these expenses.
P
Pari-Passu Preferred Return
A "Pari-Passu" preferred return is when the sponsor and investor receive the same preferred return and get paid at the same time.
Permanent Agency Loan
A Permanent Agency Loan is a loan for a commercial property that has a minimum term of five years and some level of amortization. A typical commercial permanent loan amortization is 25 years.
Physical Occupancy Rate
An apartment complex is rarely, if ever, 100% occupied. The Physical Occupancy Rate is the percentage of space that tenants can rent and are currently occupying. The number of units rented and divided by the number of available units (times 100) will give you the Physical Occupancy Rate percentage.
Preferred Return (Pref)
Prepayment Penalty
While it may be in one's best interest to pay off a loan early, this needs to be weighed against other uses for your money and any penalties or fees that may be incurred. a Prepayment Penalty is a fee that may be issued by a lender if a loan is paid back early.
Pro Forma
There is no crystal ball in investing, but the Pro Forma statement is designed to project potential earnings and expected results to investors. This can help prospective investors understand what is likely to happen with the deal to make a well-informed decision about investing.
Profit and Loss Statement
A profit and loss statement provides details on revenue and expenses incurred during a given time period. Net income and net profit can be determined by this statement.
Property Management Fee
Apartment syndicators may choose to hire their own team or work with an external team to manage their properties. The Property Management Fee is the amoutn paid to day-to-day property management services.
R
Ratio Utility Billing System (RUBS)
The Ratio Utility Billing System (RUBS) is a popular alternative to applying individual meters to tenants, while still allowing for fairer utility payments. Utility bills are divided among residents based on certain criteria, such as the size of the apartments, the number of bedrooms, or the number of occupants in a certain property. Based on the formula and factors considered, each tenant is assigned a multiplier that is used to calculate the utility bill.
Recourse Loan
If a party defaults on a loan, a lender can recover losses against the personal assets of a party that is liable for the debt through Recourse Loans.
Refinance (Refi)
Sometimes, the initial loan on a deal isn't optimal, especially if interest rates fall over time. This may call for a Refinancing (refi), where older loans are replaced with newer loans that typically carry better terms.
Refinancing Fee
During a refinancing process, businesses may have to pay different fees related to obtaining a new loan. Refinancing Fees can include application fees and attorney fees.
Rehab
A building or project can go through rehabilitation, also known as Rehab, to improve its appearance through significant renovations.
Rent Comparable Analysis
During the due diligence process, a Rent Comparable Analysis is performed to analyze multiple apartment communities in one submarket. This can help investors better understand how the rents at one property stack up to others in the same market or submarket.
Rent Roll
In a mulitenant property, a Rent Roll serves to list residents by their unit and the rent that is paid per resident.
Rental Concession
You might hear "Concessions" and think of hot dogs, but that's not what we're talking about in real estate! Rental Concessions are incentives that landlords or property management companies may use to entice prospective tenants to sign a lease. These can include free rent for a period of time, discounted rent, waived fees, or extra amenities for no cost.
S
Sale Proceeds
Net Sale Proceeds are how much a seller earns from selling an asset. The amount is calculated by taking the gross proceeds and subtracting costs and expenses associated with the sale.
Soft Cost
Soft Costs are any project costs that are related to imporvements made on a property. This can include development, marketing, construction, maintenance, leasing, and operations costs.
Soft Interest
Investors who are potentially interested in a deal may display Soft Interest, which can also include the amount an investor may want to place in a deal. Before sharing limited information with an investor, an investment manager may ask for Soft Interest, and then open the deal for investment. While this is a good indication of who may invest, Soft Interest is not a commitment.
Sophisticated Investor
Sophisticated Investors have high net worth and are knowledgeable and experienced when it comes to matters of finance and business. This means they are able to evaluate potential risks and merits of investments. They may or may not qualify as accredited investors.
Submarket
Submarkets are sections of larger geographical markets. These portions can be identified using one or more attributes that set them apart from other nearby submarkets, such as specific geographical features, price ranges, and types of properties available in an area.
Syndication
Apartment Syndication may be why you are looking at these definitions as a prospective or current passive investor! A Syndication is a partnership that is made between general partners and limited partners to purchase and later sell an apartment community, sharing the profits created during the investment.
T
Tenant
The Tenant is also known as the lessee or the renter. This is the individual or group that possesses the property via a lease.
Term
The length of the lease agreement is known as its Term.
Time Value of Money (TVM)
We can acknowledge that a dollar today will have greater earning power, and therefore holds a greater value, compared to a dollar in the future. This is an economic principle known as the Time Value of Money (TVM).
True Preferred Return
A "True" Preferred Return is when an investor receives a preferred return before the sponsor does. See more on Preferred Returns above.
U
Underwriting
Underwriting involves weighing the risks and potential returns from an investment or loan. The risk is researched, evaluated, and given a quantification.
V
Vacancy Loss
When there are vacancies, there is a vacancy loss - the money that a property owner won't receive because of either unfilled units or unpaid rent. This is also called vacancy and credit loss.
Vacancy Rate
The vacancy rate is a calculation of how many units are available in a given building when compared to the total unit count, expressed as a percentage. If 10 apartments are available in a 50-unit building, the vacancy rate is 20%.
