Key Principal: Key Principal is a high net worth individual who has the balance sheet to guarantee the loan. In most syndications, this often members of sponsor team or general partner.
K-1: A tax form provided at year end to all partners of an LLC that have an ownership interest in the Investment. It summarizes their investment basis and their share of profit and loss from operations.
Metropolitan Statistical Area: Metropolitan statistical area (MSA) is the formal definition of a region that consists of a city and surrounding communities that are linked by social and economic factors. Metropolitan statistical areas serve to group counties and cities into specific geographic areas for population censuses and compilations of related statistical data.
Net Operating Income: This computation is derived after deducting total operating expenses form total operating revenue.
Non-Recourse Loan: A loan in which a lender can go after the collateral (real estate) but has no recourse to pursue borrower personally.
Operating Agreement: A legal document commonly used in the LLC to outlines the responsibilities, decision making and ownership percentages for the general and limited partners in an apartment syndication.
Physical Occupancy Rate: This is derived by dividing number of occupied units by number of units.
Preferred Return: In some syndications, sponsor gives agreed upon percentage return to investors first (preferred) before sponsor takes their share.
Private Placement Memorandum (PPM): A legal document that outlines the terms of the investment and the primary risk factors involved with making the investment. Providing a PPM to the investor is necessary for anyone selling securities, such as a real estate syndicator.
Pro forma: Broker provides a projection of property’s future cash flows based on current market conditions and comps.
Rent Roll: A report listing of tenant’s names, occupancy, unit mix, unit size, unit number, current leased rent, market rent, security deposit, past due balance, lease duration & additional charges for water, trash & pest control if applicable.
Return hurdle: The rate of return that, when achieved, triggers a disproportionate profit split.
Reposition: A strategy used by the sponsor to rebrand the property & add value through interior upgrades & exterior improvements.
Return on Investment: Total annual return inclusive of cash flows and profits upon sale divided by original investment amount.
Subscription Agreement: 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.
Syndication: Apartment syndications are essentially real estate partnerships pairing passive investors, capital, and a syndicator (sponsor or active partner and promoter) who organizes the deal, puts it together, and manages.
Underwriting: The process of financially evaluating an apartment community to determine the projected returns, offer price, future value & risks.
Vacancy Loss: Amount of loss of rent caused by unoccupied unit.
Value Add Property: The term used to describe a property that offers the opportunity to increase cash flow or value through renovations, rebranding, or increased operational efficiencies.
Yield Maintenance: A pre-penalty paid by the borrower on a loan is the principal is paid off early.
Waterfall: A method for splitting profits among partners in a business deal that allows for said profits to follow an uneven distribution. In a waterfall model, payouts change when previously agreed upon return hurdles are met. Preferred return, IRR and hurdles are few examples.
1031 Exchange: IRS code that allows seller of real property to sell the property & defer capital gains tax if the proceed are invested in another property of at least same or greater value.