Multifamily Terminology

Accredited Investor :

Anyone who has a earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

Accelerated Depreciation :

A depreciation method whereby an asset loses book value at a faster rate than the traditional straight-line method. Generally, this method allows greater deductions in the earlier years of an asset and is used to minimize taxable income.

Acquisition Fee :

As a syndicator of real estate typically receives compensation for finding the property, conducting due diligence, and structuring the deal. Acquisition fees can range anywhere from 1% – 5% of the acquisition costs or it can be a flat fee (i.e.$25,000).

Amortization :

The process of spreading a loan into payments that consist of both principal and interest over a set timeline, called an amortization schedule. While some commercial real estate loans are fully amortizing, not all are.

Apartment Syndication :

Raising money from passive investors and buying apartment buildings.

Appraisal :

A report created by a certified appraiser that specifies the market value of a property. Apartments are appraised based on costs, sales comparison, and the income approach.

Appreciation :

An increase in the value of asset overtime. Natural appreciation happens when the market cap rate naturally decreases over time. Forced appreciation occurs when the net operating income is increased by either increasing the revenue or decreasing the expenses. It can also happen by doing renovations and operational improvements.

Asset Management Fee :

An ongoing annual fee from the property operations paid to the general partners for overseeing the property. Typically, the range is 2% of collected income or $250 per door

Bad Debt :

Money not collected from a tenant after move out.

Break-even Occupancy :

Occupancy rate required to cover all of the expenses of the property. Calculated by dividing the sum of the operating expenses and debt service by the gross potential income. For example, a property with $1,100,000 operating expenses, $500,000 in debt service, and $2,300,000 in gross potential income has a break-even occupancy of 69.5%

Bridge Loan :

a sum of money lent by a bank used until the borrower secures permanent financing. Usually very short term (six months to 3 years). Generally, they have higher interest-only payments and used to re-position apartment communities that don’t qualify for permanent agency financing.

 

Capital Expenditures(CapX) –Funds used to acquire, upgrade, and maintain a property. It is considered a CapX when it improves the useful life of a property and is capitalized. This included both interior and exterior renovations. Examples of exterior CapX are replacing the HVAC system, installing carports, resurfacing the parking lot, replacing a roof, etc. Examples of interior CapX are new countertops, carport or flooring, new appliances, new blinds, etc.

Capitalization Rate (Cap Rate) :

The rate of return based on the income that the property is expected to generate. This is calculated by dividing the net operating income by the current market value of a property. Example, a 250 unit purchased for $15,400,000 with a net operating income of $1,303,000 has a cap rate of 8.46%

Cash Flow :

The revenue remaining after paying all the expenses. This is calculated by subtracting the operating expense and debt service from the effective gross income.

Cash on Cash Return :

Rate of return based on the cash flow and equity investment. CoC is calculated by dividing the cash flow by the initial equity investment. For example, a community with a cash flow of $350,500 and an initial investment of $4,001,000 has a CoC return of 8.76%. A good rule of thumb is to look for 8% or higher CoC.

Class A/B Investors :

Class A investors are paid first before class B investors. Typically, Class A investors are the passive investors.

Closing Costs :

The expenses, over and above the purchase price of the property, that buyers and sellers normally incur to complete a real estate transaction. This cost can include origination fees, application fees, recording fees, attorney fees, underwriting fees, due diligence fees, and credit search fees.

Concessions :

Credits are given to offset rent, application fees, move-in fees, and any other cost incurred by the tenant, which are given to entice a tenant into signing a lease.

Cost Approach :

A method of calculating a property’s value based on the cost to replace or rebuild the property from the ground up.

Debt Leverage :

Leverage or trading on equity, refers to the use of debt to acquire additional assets. A decrease in the value of the assets will result in a larger loss on the owner’s cash.

Cost Segregation :

A federal income tax tool that increases your near-term cash flow, in the form of a deferral, by utilizing shorter recovery periods to accelerate the return on capital from your investment in property. Whether newly constructed, purchased or renovated, the components of your building may be properly classified through a cost segregation study into shorter recovery periods for computing depreciation. The study carves out (into 5, 7, and 15-year lives) certain qualifying portions of your building that are normally buried in 39 or 27.5-year categories.

Debt Leverage :

Leverage or trading on equity, refers to the use of debt to acquire additional assets. A decrease in the value of the assets will result in a larger loss on the owner’s cash.

Debt Leverage :

Leverage or trading on equity, refers to the use of debt to acquire additional assets. A decrease in the value of the assets will result in a larger loss on the owner’s cash.

Debt Leverage :

Leverage or trading on equity, refers to the use of debt to acquire additional assets. A decrease in the value of the assets will result in a larger loss on the owner’s cash.

Debt Service :

The annual mortgage amount paid to the lenders, which includes principal and interest.

Debt Service Coverage Ratio (DSCR) :

The ratio that is a measure of the cash flow available to pay the debt obligation. This is calculated by dividing the net operating income by the total debt service. Ideally, a ratio of 1.25 or higher is what we look for. Anything lower is too vulnerable to a minor decline in revenue which would cause an inability to pay the debt service.

Debt Paydown :

When a mortgage borrower pays the principal and interest of a mortgage.

Depreciation :

A decrease or loss in value due to wear, age, or other cause.

Distressed Property :

Anon-stabilized property in which the economic occupancy rate is below 85% and likely much lower due to poor operations, tenant problems, outdated interiors/exteriors, or amenities, mismanagement, and/or deferred maintenance.

Distributions :

The limited partner’s portion of the profits. It can be sent monthly, quarterly or annually.

Due Diligence :

The process of confirming that a property is as represented by the seller and broker and is not subject to other problems. The general partners will perform due diligence usually in about 30 days to confirm their underwriting and business plan.

Equity Multiple :

The rate of return based on the total net profit and equity investment. This can be calculated by dividing the sum of the total net profit and the equity investment by the equity investment.

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