An apartment syndication is a temporary professional financial services alliance formed for the purpose of handling a large apartment transaction that would be hard or impossible for the entities involved to handle individually, which allows companies to pool their resources and share risks and returns. In regard to apartments, a syndication is typically a partnership between general partners (i.e. the syndicator) and the limited partners (i.e. the investors) to acquire, manage and sell an apartment community while sharing in the profits.
Appreciation is an increase in the value of an asset over time. There are two main types of appreciation: natural and forced. Natural appreciation occurs when the market cap rate “naturally” decreases. Forced appreciation occurs when the net operating income is increased (either by increasing the revenue or decreasing the expenses).
The asset management fee is an ongoing annual fee from the property operations paid to the general partner for property oversight. Generally, the fee is 2% of the collected income or $250 per unit per year.
Bad debt is the amount of uncollected money a former tenant owes after move-out.
Breakeven occupancy is the occupancy rate required to cover the all of the expenses of an apartment community. The breakeven occupancy rate is calculated by dividing the sum of the operating expenses and debt service by the gross potential income.
A bridge loan is a mortgage loan used until a person or company secures permanent financing, which are short-term (6 months to three years with the option to purchase an additional 6 months to two years). They generally have a higher interest rate and are almost exclusively interest-only. Also referred to as interim financing, gap financing or swing loan. The loan is ideal for repositioning an apartment community.
Capital expenditures, typically referred to as Capex, are the funds used by a company to acquire, upgrade and maintain an apartment community. An expense is considered to be a capital expenditure when it improves the useful life of an apartment and is capitalized – spreading the cost of the expenditure over the useful life of the asset.
Capital expenditures include both interior and exterior renovations.
Examples of things that wouldn’t be considered Capex are operating expenses, like the costs associated with turning over a unit (i.e. paint, new carpet, cleaning, etc.), ongoing maintenance and repairs, ongoing landscaping costs, payroll to employees, utility expenses, etc.
Capitalization rate, typically referred to as cap rate, is the rate of return based on the income that the property is expected to generate. The cap rate is calculated by dividing the property’s net operating income (NOI) by the current market value or acquisition cost of a property (cap rate = NOI / Current market value)
Cash flow is the revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue.
The cash-on-cash (CoC) return is the rate of return, expressed as a percentage, based on the cash flow and the equity investment. CoC return is calculated by dividing the cash flow by the initial investment.
For example, a 238-unit apartment community with a cash flow of $320,285 and an initial investment of $3,645,170 results in a CoC return of 8.8%
Closing costs are the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction.
Examples of closing costs are origination fees, application fees, recording fees, attorney fees, underwriting fees, credit search fees and due diligence fees.
Concessions are the credits (dollars) given to offset rent, application fees, move-in fees and any other revenue line time, which are generally given to tenants at move-in.
Debt service is the annual mortgage paid to the lender, which includes principal and interest. Principal is the original sum lent and the interest is the charge for the privilege of borrowing the principal amount.
The debt service coverage ratio (DSCR) is a ratio that is a measure of the cash flow available to pay the debt obligation. DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 means that there is enough net operating income to cover 100% of the debt service. Ideally, the ratio is 1.25 or higher. An apartment with a DSCR too close to 1.0 is vulnerable, and a minor decline in cash flow would result in the inability to service (i.e. pay) the debt.
Distributions are the limited partner’s portion of the profits, which are sent on a monthly, quarterly or annual basis, at refinance and/or at sale.
The economic occupancy rate is the rate of paying tenants based on the total possible revenue and the actual revenue collected. The economic occupancy rate is calculated by dividing the actual revenue collected by the gross potential income.
Effective gross income (EGI) is the true positive cash flow of an apartment community. EGI is calculated by the sum of the gross potential rent and the other income minus the income lost due to vacancy, loss-to-lease, concessions, employee units, model units and bad debt.
An employee unit is a unit rented to an employee at a discount or for free.
The equity investment is the upfront costs for purchasing an apartment community, which includes the down payment for a loan, closing costs, financing fees, operating account funding, and the various fees paid to the general partner for putting the deal together. May also be referred to as the initial cash outlay or the down payment.
Equity Multiplier (EM) is the rate of return based on the total net profit (cash flow plus sales proceeds) and the equity investment. EM is calculated by adding the sum of the total net profit and the gross cash flow and dividing it by the equity investment.
The exit strategy is the plan of action for selling the apartment community at the end of the business plan.
Asset Management Fee
Construction Management Fee
Financing fees are the one-time, upfront fees charged by the lender for providing the debt service. Also referred to as a finance charge. Typically, the financing fees are 1.75% of the purchase price.
The general partner(GP) is an owner of a partnership who has unlimited liability.A general partner is also usually a managing partner and active in the day – to – day operations of the business.In real estate syndications, the GP is also referred to as the sponsor or syndicator.The GP is responsible
for managing the entire project.They should be able to easily answer:
The general partner (GP) is an owner of a partnership who has unlimited liability. A general partner is also usually a managing partner and active in the day-to-day operations of the business. In apartment syndications, the GP is also referred to as the sponsor or syndicator. The GP is responsible for managing the entire apartment project.
The gross potential income is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rates plus all other income.
The gross potential rent (GPR) is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates.
The gross rent multiplier (GRM) is the number of years the apartment would take to pay for itself based on the gross potential rent (GPR). The GRM is calculated by dividing the purchase price by the annual GPR.
The guaranty fee is a fee paid to a loan guarantor at closing. The loan guarantor guarantees the loan. At closing of the loan, a fee of 0.25% to 1% of the principal balance of the mortgage loan is paid to the loan guarantor.
internal rate of return
Preferential return (Pref’s)
The interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of their funds.
An interest-only payment is the monthly payment on a loan where the lender only requires the borrower to pay the interest on the principal as opposed to the typical debt service, which requires the borrower to pay principal plus interest.
The internal rate of return (IRR) is the rate, expressed as a percentage, needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal pay down) to equal the equity investment. IRR is one of the main factors the passive investor should focus on when qualifying a deal.
As a partner in the LLC that purchases the properties, you will receive a K-1. A K-1 is a tax form used by partnerships to provide investors with detailed information on their share of a partnership’s taxable income. Partnerships are generally not subject to federal or state income tax, but instead issue a K-1 to each investor to report his or her share of the partnership’s income, gains, losses, deductions and credits. The K-1s are provided to investors on an annual basis so that each investor can include K-1 amounts on his or her tax return.
The limited partner (LP) is a partner whose liability is limited to the extent of the partner’s share of ownership. In apartment syndications, the LP is the passive investor and funds a portion of the equity investment.
Loss to lease (LTL) is the revenue lost based on the market rent and the actual rent. LTL is calculated by dividing the gross potential rent minus the actual rent collected by the gross potential rent.
The market rent is the rent amount a willing landlord might reasonably expect to receive, and a willing tenant might reasonably expect to pay for a tenancy, which is based on the rent charged at similar apartment communities in the area. Market rent is typical calculated by performing a rent comparable analysis.
A metropolitan statistical area (MSA) is a geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core, which are determined by the United States Office of Management and Budget (OMB).
A model unit is a representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.
Net operating income (NOI) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.
The operating account funding is a reserves fund, over and above the price of the property, to cover things like unexpected dips in occupancy, lump sum insurance or tax payments or higher than expected capital expenditures. The operating account fund is typically created by raising extra money from the limited partners.
Operating expenses are the costs of running and maintaining the property and its grounds.
A permanent agency loan is a long-term mortgage loan secured from Fannie Mae or Freddie Mac and is longer-term with lower interest rates compared to bridge loans. Typical loan term lengths are 5, 7 or 10 years amortized over 20 to 30 years.
The physical occupancy rate is the rate of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units.
Preferred Return: the threshold return that limited partners are offered prior to the general partners receiving payment.
A prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain period.
Price per unit is the cost of purchasing an apartment community based on the purchase price and the number of units. The price (or cost) per unit is calculated by dividing the purchase price by the number of units.
The private placement memorandum (PPM) is a document that outlines the terms of the investment and the primary risk factors involved with making the investment. The four main sections are the introduction, which is a brief summary of the offering, the basic disclosures, which includes general partner information, asset description and risk factors, the legal agreement and the subscription agreement.
The profit and loss statement is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement or a T12.
Property and neighborhood classes is a ranking system of A, B, C, or D given to a property or a neighborhood based on a variety of factors. These classes tend to be subjective, but the following are good guidelines:
Class A: new construction, command highest rents in the area, high-end amenities
Class B: 10 – 15 years old, well maintained, little deferred maintenance
Class C: built within the last 30 years, shows age, some deferred maintenance
Class D: over 30 years old, no amenity package, low occupancy, needs work
Class A: most affluent neighborhood, expensive homes nearby, maybe have a golf course
Class B: middle class part of town, safe neighborhood
Class C: low-to-moderate income neighborhood
Class D: high crime, very bad neighborhood
The property management fee is an ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property. This fee ranges from 2% to 8% of the total monthly collected revenues of the property, depending on the size of the deal.
Ration Utility Billing System (RUBS) is a method of calculating a tenant’s utility bill based on occupancy, apartment square footage or a combination of both. Once calculated, the amount is billed back to the resident, which results in an increase in revenue.
A refinance is the replacing of an existing debt obligation with another debt obligation with different terms. In apartment syndication, a distressed or value-add general partner may refinance after increasing the value of a property, using the proceeds to return a portion of the limited partner’s equity investment.
The refinancing fee is a fee paid for the work required to refinance the property. At closing of the new loan, a fee of 0.5% to 2% of the total loan amount is paid to the general partner.
The rent comparable analysis is the process of analyzing similar apartment communities in the area to determine market rents of the subject apartment community.
A rent premium is the increase in rent after performing renovations to the interior or exterior of an apartment community. The rent premium is an assumption made by the general partner during the underwriting process based on the rental rates of similar units in the area or previously renovated units.
The rent roll is a document or spreadsheet containing detailed information on each of the units at the apartment community, along with a variety of data tables with summarized income.
The sales proceeds are the profit collected at the sale of the apartment community.
A sophisticated investor is a person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.
The subject property is the apartment the general partner intends on purchasing.
The submarket is a geographic subdivision of a market.
A subscription agreement is an agreement between a company and investor(s) that sets out the price and terms of a purchase of shares in the company. The subscription agreement details the rights and obligations associated with the share purchase.
Most likely, the general partner is selling private securities to the limited partners under Rule 506(b) or 506(c).
506(b) offerings do not allow for general solicitation or advertising, there can be up to 35 unaccredited but sophisticated investors. Not required to verify the accredited investors status with a 3rd party – the passive investor can self-verify that they are accredited or sophisticated. In addition, for the 506(b) offering, to prove that the general partners didn’t solicit the offering, they must be able to demonstrate that they had a relationship with the passive investor before their knowledge of the investment opportunity, which is determined by the duration and extent of the relationship.
506(c) allows for general solicitation or advertising of the deal to the public but is strictly for accredited investors only. Must verify the accredited investor status of each passive investor with a 3rd party, which requires the review of tax returns or bank statements, verification of net worth or written confirmation from a broker, attorney or certified account. The accredited investor qualifications are a net worth exceeding $1,000,000 excluding a personal residence or an individual annual income exceeding $200,000 in the last two years or a joint income with a spouse exceeding $300,000.
Underwriting is the process of financially evaluating an apartment community to determine the projected returns and an offer price.
Investor funds are used for the total acquisition cost of the property. This includes but is not limited to the actual purchase price of the property, acquisition fees, legal and transaction costs, capital projects, and reserves.
Vacancy loss is the amount of revenue lost due to unoccupied units.
The vacancy rate is the rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.