frequently asked questions
An accredited investor is one of the sophisticated investors which hold special status about the financial regulation or invest in apartment syndication as a limited partner. An accredited investor has engaged in fulfilling the requirement about income or net worth. The existing requirement to be eligible is an annual income of $200,000 if single, or $300,000 if married for the mutual income for the last two years with the same earning expectations or higher exceeding $1 million individually or jointly with a spouse.
The acquisition fee is the amount which is paid by the buyer while acquiring a community apartment. The fee range is determined by the magnitude of the deal. Normally, the acquisition fee falls between 0.5% to 5%.
It is temporary financial regulation services that are formed owing to handle harder or near to impossible apartment transitions for the companies. Furthermore, it allows entities to pool their resources and mitigate the risk and return. However, syndication is characterized by the partnership between limited partners and general partners to gain or acquire, manage, and sell apartment communities to distribute the return.
It the amount that increases over the estimated life of an asset. Appreciation is divided into two types; natural and forced. Natural appreciation takes place when the cap rate is naturally reduced. While forced appreciation occurs when the net operating income (NOI) increases.
Asset Management Fee
The asset management fee is charged by the fund manager or mutual fund investor on the capital investment. As per recent trends, the asset management fee is 2% over the collected income or $250 for each unit annually.
Bad debt refers to an account for which the tenant is not willing to pay the amount owed or unlikely to pay due to several reasons.
The break-even occupancy is one apartment occupancy rates that cover all the expenses. The formula to calculate the breakeven occupancy is to divide the sum of the operating expenses and debt service with gross potential income (GPI).
Bridge Loan is the sum of the money that is used to cover an interval between transaction for a person or company. The bridge loan is also known as interim financing, which holds a higher interest rate. However, the loan is more than perfect for the reposting of a community apartment.
Capitalization rate determines the profitability matrix and returns of a real estate investment. The formula for finding capitalization rate is to divide property net operating income by current market value.
Cash flow is the difference between the net amount of cash and cash equivalent being transferred out of business. Cash flow can simply be calculated by subtracting operating expenses and debt service from the profit of the passive investment.
Cash on cash (CoC) return
Cash on cash return is the rate which expresses the percentage based on the cash flow and equity investment. Cash on cash can be calculated by dividing cash flow with the initial investment.
For example, here is the cash flow for our example 200-unit apartment property;
Cash flow $300,00
Initial Investment $3,900,000
CoC Return 7.69%
Closing cost is the property or business overhead that the seller and buyer incur to complete a financial transaction of real estate.
Examples of closing costs are origination fees, application fees, attorney fees, credit search fees, underwriting fees, and due diligence fees, etc.
The concession is a preferential allowance that is given to application fees, offset rent, and several multiple streams to capture the attention of targeted tenants.
Debt is the amount of cash that is required to the repayment of interest along with the principal amount for a specific period.
Debt Service Coverage Ratio (DSCR)
The term debt service ratio is the measure of cash flow that is available to pay the long term or short-term debt obligations. To calculate DSCR, divide net operating income with total debt service. Furthermore, DSCR depicts enough capacity to cover the income if the figure is in 1.0 (100% capacity to pay the obligation). If it is 1.25, it means the ratio is perfect or higher than expected. Similarly, as the ratio number increases the chances of paying obligation increase.
Distribution is the amount of portion profit for limited partners which is sent monthly, quarterly, semi-annually, and annually for refinancing purposes.
Economic Occupancy Rate
Economic occupancy refers to the rate of paying tenants for an apartment, building, or some other rented out space like an office building, based on the possible revenue. It can be calculated by dividing actual revenue collected by Gross potential Income (GPI).
Effective Gross income (EGI)
Effective Gross income is the constructive cash flow of an apartment community. EGI can be calculated by taking the potential gross income and add other forms of income that are taken from the property and subtract from the vacancy and losses collection.
An employee unit rent determines the discount or free of cost unit that is offered to an employee.
Equity investment refers to the cost of purchasing a community apartment. The major upfront costs include down payment for the loan, financing fees, closing costs, operating account fund, and several other fees that are paid to the general partner.
Equity Multiplier is the rate of return based on net sales or net profit and equity investment. It can be calculated by dividing the sum of total net profit and the equity investment.
The exit strategy is the course of action that is established to achieve the goals and objectives. The exit strategy refers to the closing of the business plan and selling the community apartment.
Financing fees are the amount that is charged by the lender over the borrowed amount in a specific period. The purchase fees typically fall around 1.75% of the purchase price.
General Partner (GP)
It is the basic form of partnership or an owner who has unlimited liability. A general partner is engaged to manage day-to-day business affairs and entire project operations. The General Partner is also known as a sponsor or syndicator.
The Gross potential Income
The gross potential rent (GPR) is the imaginary amount of revenue that would be earned if the apartment community was 100% leased year-round at market rental rates.
Gross Rent Multiplier
The gross rental multiplier is the possible number of years to be paid based on gross potential rent (GPR). GRM can be founded by dividing the purchase price with annual GPR.
The guarantee fee is the amount that is paid by the guarantor on the specific date. This confirms that the loan guarantor guarantees the loan. Guaranty fee 0.25% to 1% over the principal amount of the mortgage loan.
Internal Rate of Return
Internal rate of return allows you to know at what percentage amount of inflow equals to the amount of outflow. Internal Rate of return is one of the prime financial calculations that every mutual fund investor performs before taking the risk.
Interest-only payments are when a borrower required to pay the monthly interest to lender over the principal amount of loan. Whereas, the period of interest-only payment is made on the market-determined rate where both lender and borrower sign a memorandum to make the contract.
Is the rate that a lender asks the borrower to pay over the principal amount.
Limited Partner (LP)
A limited partnership continues when two or more partners engage to conduct a business in which they are legally responsible for the amount of liability and debt. The general partner oversees the business operations while a limited partner doesn’t take part in managing business operations.
London Inter-Bank Offered Rate (LIBOR)
The London Inter-Bank Offered Rate (LIBOR) is a benchmark rate for short term and long terms loans which are followed by several banks across the world. LIBOR is a determined rate which can be calculated with the interest rate on several loans, such as commercial loans across the globe.
Loss to lease (LtL)
The loss to lease is the amount of revenue based on market rent and the actual rent. It can be calculated by dividing gross potential rent minus actual rent collected by the gross potential rent.
The market determines a rent on which both tenants and owners are willing to form an agreement. Market rent is calculated by performing a rent comparable analysis.
Metropolitan Statistical Area (MSA)
A Metropolitan Statistical Area (MSA) is a geographical region in the U.S with a high population density and a high degree of economic and social integration throughout the area.
Model units are used as a sales tool that indicate the pattern, configuration, and/or future products in the same line of investing activity.
Net operating income
Net operating income is calculated by subtracting the cost of the property or investment from total revenue, excluding capital expenditure and interest or debt service.
For example, a 200-unit apartment community with a total income of $2,000,000 and total operating expenses of $1,500,000 results NOI of $500,000.
Operating account funding
The operating account fund is the amount that is kept to cover the unexpected dips in occupancy, tax payments, insurance expenses, and other necessary expenditures. The operating account fund is generally pooled to create or raise extra money from the limited partner.
Operating expense is the type of expense whose overhead is running to maintain the daily operation of the property.
The list of common expenses is shown below:
- Contract services
- Turn/make ready
- Management fees
Permanent Agency Loan
A Permanent Agency Loan is a long-term mortgage loan. The permanent loan is comparatively lower than the bridge loan in terms of interest and return. The length of return permanent agency loan is 5,7, or 19 years amortized over 20-30 years.
Physical Occupancy Rate
Physical occupancy rate is the percentage rate of occupied units. The physical occupancy rate can be determined by dividing the total number of occupied units with the total number of units.
Suppose, 199 occupied units have a rate of 99.5% occupancy in a 200-unit community apartment.
A prepayment penalty is an article or clause in a mortgage contract that determines what the penalty will be imposed if the mortgage is paid off within a specific tenure.
Price per unit
Price per unit is the cost of purchasing an apartment community based on the total price of each unit. Price per unit can be calculated by keeping denominator as the purchase price, and nominator as the total number of units purchased.
Preferred return is the threshold return that limited partners are offered prior to the general partner receiving payment.
Private Placement Memorandum
The Private Placement Memorandum is the document that lays out the various terms and conditions of the investment and risk factors that can occur. It is typically broken down into sections like introduction, a brief summary of offering, asset description and basic disclosures, the subscription agreement, and legal agreement.
Profit and Loss Statement
The profit and loss statement is determined by calculating net sales minus expenses, debt service and net income. It displays the revenue for the community apartment over a specific period.
Pro-forma determine the budget projection for a community apartment with an itemized line for income and expenses for the next 12 months and five years.
Property and Neighborhood Classes
The property neighborhood classes are categorized into four sections such as A, B, C, D. These classes are bifurcated based on several factors, meanwhile, these classes are followed by certain guidelines as;
Class A: New construction area with the highest rent and apex end facilities.
Class B: 10-15 years old, well maintained and a little deferred maintenance
Class C: It is built within the last 30 years, shows the age and differed maintenance
Class D: No amenity package, over 30 years old, low occupancy, and required a piece of work.
Class A: Most luxurious home with the affluent neighborhood, expensive home with a near golf club
Class B: Safe Neighborhood with middle-class part of town
Class C: Low to moderate social-economic status neighborhood
Class D: Insecure neighborhood, high crime ratio, safety issues
Property Management Fee
The property management fee is collected monthly in order to manage day-to-day business operations. This fee is charged from 2% to 8% over property monthly collection. The fee range can be changed as it depends on the size or scale of the deal.
Ration Utility Billing System (RUBS)
A Ration Utility Billing System calculates the utility bills of tenants based on the occupancy and apartment square footage. The amount is billed back to residents once it is estimated. The ration utility billing system is one of the components that trigger revenue at large scale.
Refinancing is an amount that is paid to refinance the current debt obligation with another debt obligation with different terms and conditions.
The refinancing fee is the amount that is paid for work required to refinance the possessions. For new loan closing, a fee of 0.5% to 2%of the total amount that is paid to the general partner.
Rent Comparable Analysis
The rent comparable analysis is the course of action taken to analyze the market rent across the specific community apartment area.
Rent premium is the premium amount over rent that increases due to performing renovation to the interior or exterior of an apartment building. The rent premium is determined based on general partner consideration amid the underwriting process based on the rental rates of spontaneous units.
The rent roll includes detailed documents that provide detailed information about each unit in the apartment community. Like a spreadsheet, a rent roll is designed with rows and columns where data is summarized in tabular form.
Sales proceeds is the amount that is collected from the sale of the apartment community.
A sophisticated Investor is a person who holds versatile experience and ability to respond to the investment deal, analysis risk, return, merits, and investment opportunities.
The subjective property is the form of the apartment that a general partner plans to purchase.
The market is the broader term and the submarket is part of it. The submarket is the family of the market which is geographically divided. For example, Dallas/Forth-Worth is a renowned market in the U.S. Whereas, Richardson, Carrolton and Arlington are submarkets.
Underwriting is the method used to evaluate an apartment community that determines the return and offered price.
Vacancy loss is the amount of revenue that is lost due to unpaid and unoccupied units.
Vacancy units refers to the number of unoccupied units. We can calculate the vacancy unit by dividing the total number of unoccupied units by the total number of units.