Accredited Investor: To be an accredited investor, a person must have an annual income exceeding $200,000 ($300,000 for joint income) for the last two years with the expectation of earning the same or a higher income in the current year. A person is also considered an accredited investor if they have a net worth exceeding $1 million, either individually or jointly with their spouse not including the primary residence.
Acquisition Fee: Initial fee charge by the general partners in a real estate syndication for sourcing, purchasing, financing, managing & closing on an investment property. This fee is paid by the limited partners to general partners upon closing on the investment.
Annualized Return: Total return on investment divided by number of years.
Asset Management Fee: Monthly fee paid to general partners in a syndication for day-to-day management of the asset.
Breakeven Occupancy: Occupancy rate required to pay all your expenses and loan payment.
Bridge Loan: A short term floating interest rate loan primarily used to reposition the property prior to sale or permanent financing.
Capital Expenditures: Expenses incurred to significantly upgrade & renovate a property. These expenses are one time and tracked separately from day-to-day operating expenses.
Capitalization Rate: Market cap rate is the most barometer used in commercial property to assess market value of the property. It is simply return rate calculated by dividing Net Operating Income by the purchase price of the property.
Cash Flow: Profit left after deducting expenses & loan payment.
Cash on Cash Return: It is a rate of return calculation that only measures profits from cash flows as a percentage of invested capital. It is derived by dividing cash flows by initial invested capital.
Debt Service: Mortgage payment including principal and interest.
Debt Service Coverage Ratio (DSCR): This calculation is derived by dividing annual debt service by net income. This ratio will be 1.0 if debt service and cash flow is same; an indication to lender that property is not generating enough income to satisfy debt. A ratio of minimum 1.2 or better is normal required by lenders to obtain permanent financing.
Depreciation: Accounting term used to allocate and write off cost of an asset such as real property over a period. Syndicators often look for accelerated depreciation methods that allow bigger write off thereby reducing net income for tax purposes. Depreciation is book entry and has no effect on cash flows.
Due diligence: This is a process of physically inspecting the property & documents such as leases, financial records, zoning & surveys to confirm it is what the seller represented.
Earnest Money: A refundable or non-refundable deposit that the general partner places in escrow upon executing a purchase contract.
Economic Occupancy Rate: This is an important indicator of how well property is collecting rent. This ratio is based on rental collections divided by billing. A rate of 92% may represent 8% tenants are not paying rent or paying late.
Equity Investment: Investment needed to purchase the property inclusive of closing cost, capital expenditures, reserves, and any general partner fees.
Equity Multiple: Rate of return barometer used by the investor to evaluate return on investment. An equity multiple of 2.0 means one has doubled their investment. If this took 4 years, then a simple rate of return will be 25%
Gross Potential Rent (GPR): The potential amount of rental revenue if the apartment community was 100% leased year-round at market rental rates without vacancy.
Internal Rate of Return: Internal rate of return (IRR) is the percentage of returns that a project will generate within a period to cover its initial investment. It is attained when the Net Present Value (NPV) of the project amounts to zero. The internal rate of return (IRR) determines the worthiness of any project.
Letter Of Intent: An LOI is a non-binding agreement provided by a buyer proposing their purchase terms. Typically used as a speedier method to make an offer, without legally tied into the deal.
Loan to Value: This is a measure of percentage of loan offered based on purchase price without including any closing cost. The ratio of the value of the loan amount divided by the apartment’s purchase price.
Loss to Lease: Lost revenue by comparing market rent versus actual leased rent. This can be an opportunity to improve operations by increasing rents to market.