Common Terms Used
There are many common terms we use while talking about Real Syndication projects. So, it is good to get to know them.
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Accredited Investor
Accredited investors are individual with annual income of $200K, or joint income of $300K in the last 2 years; or net worth of $1M (excluding primary residence).
Acquisition Fee
Form of compensation earned by the general partner in a syndication in exchange for sourcing, vetting, securing financing and closing on a new investment asset.
Asset Management Fee
A recurring fee paid from property revenues to the general partner for managing the asset is called Asset Management Fee. It is different than Property Management fee.
Cap Rate
The capitalization rate is calculated by dividing net operating income by the current market value of a property in order to determine a forecasted rate of return.
Capital Expenditure
Capital expenditures are funds used by the management company or active partners to acquire, improve or maintain a property. It's also called as ‘CapEx’
Cash Flow
Cash profit left after subtracting debt service from net operating income. Consitent cash flow is one of the reasons of investing into multi family assets.
Cash-on-Cash Return
CoC returns are the rate of return calculated by dividing cash flow being produced by a property by the upfront cash investment. CoC tells us how hard the money is working.
Class A Properties
They represent highest quality and professionally managed properties built within 10-15 years with top amenities, high-income earning tenants and low vacancy.
Class B Properties
They represent older than class A, medium income tenants, well maintained with some deferred maintenance. These are the best “value-add” investments.
Class C Properties
They arre typically more than 20 years older and in need of renovation. They are in less than desirable locations with lowest rental rates than Class A or B.
Concessions
Incentives offered by the seller to the buyer of a property to close the deal faster. This may be reduced final price, repair cost, or personal possessions like furnishing.
Cost Segregation
The the process of identifying costs and assets, and their classification for tax purposes. It is applied to reducing current tax liability and deferring taxes.
CRM
Customer Relationship Management is the technology to manage all communications with existing and potential customers or clients of a business.
Depreciation
Depreciation is the overtime decline in the value of the build real estate over the land. IRS lets you depreciate the asset by its life or using the cost-segregation.
PPM
Private Placement Memorandum is an offer document provided by a private company that comprises the details and disclosures for their private real estate offering.
Due Diligence
List of various tasks like inspections, T12 verifications, appraisal, surveys, zoning etc. to satisfy all the lender underwriting requirements is called Due Diligence.
Earnest Money Deposit
Earnest money is the initial deposit by the buyer to show their commitment to execute on the purchase contract. EM is credited toward the purchase at closing.
Financing Fees
Total amount paid by the borrower to the lender, other than the principle amount, throughout the life of a mortgage is called Financing fee.
General Partner
General Partner is the syndicator who leads the transaction. General Partner can be an individual, a small group of investors or a company.
Guaranty Fee
Guarantee Fee is a sum paid under administrative costs to the issuer of a mortgage-backed security, which reduces the risk for loss in case of defaults.
Holding Period
Holding period is the amount of time a sponsor as well as the limited partners are prepared to wait to make their investment grow over time.
K-1 Tax Form
A tax form used for reporting business-related income, losses, and dividend payments. Every year GP is responsible for issuing K1 to LPs.
Key Principal
The key principal is a person who is essential to ensurre the success of the investment. This person should be insured to cover any interruptions.
Lead Sponsor
The largest stakeholder in the syndication whose reputation is used by the bank to guarantee the loan, even for non-rescourse loans.
Letter of Intent
A non-binding agreement provided by a buyer listing purchase terms to make an offer, without spending legal fees and getting tied into the deal.
Limited Partner
LP is a passive investor who simply puts in the capital and expects cash flow on proposed terms and gains on the sale of the asset because of appreciation.
Loss-to-Lease
Loss-to-Lease is the difference between the market rental rate the actual rent being charged at the monent by the current landlord.
Net Operating Income
NOI is calculated by subtracting operating expenses from the total incoming revenue from a property from all sources like rent, parking, fees etc.
Operating Expenses
The costs to run and maintain an investment property like payroll, maintenance, contractors, management fees, property tax, insurance, utitliets etc.
Passive Investment
Placing your capital into a real estate syndication where you do not practically take part in maintainig, operating, or adding value to the property.
Preferred Return
Minimum returns that Limited Partners need to get before GP gets paid from the profit to ensures that general partners work hard to get expected returns.
Property Management Fee
Recurring cost of having a professional property management company handle the day-to-day operations of a property. It is different than asset management fee.
Ratio Utility Billing System
A RUBS system is a method to bill tenants back for incurred utility costs. It can be based on utility type or square footage of the leased area.
Reg-D 506b
Regulation D 506b is a provision in the Securities Act which allows companies to raise funds without registering with the Securities and Exchange Commission (SEC).
Reg-D 506c
Regulation D 506c is a provision in the Securities Act that allows issuers to broadly solicit and advertise an offering to accredited investors only.
Rent Premium
Rent premiums can be earned by completing upgrades and renovations. e.g. Upgrading the units with new appliances and cabinets one can raise rent.
Reposition
Repositioning is the act of renovating, remodeling, and upgrading a property to change its position in the real estate market and increase its value.
Soft Commitments
Wherein potential investors indicate their intent to invest in the project based on the term-sheet, electronically or through a small payment in advance.
Sophisticated Investor
An individual deemed to have enough experience and knowledge to assess the risks and merits of an investment opportunity for themselves.
Sponsor
The General Partner individual or a team, hosting a real estate syndication by gathering a pool of investors to acquire a property.
Submarket
Submarket is a geographic boundary outlining a core area competitive with other such areas of similar property types. It is typically a Suburb or an MSA.
Subscription Agreement
Document signed by Limited Partner promising to pay a set price and LLC that owns the property promises to sells a specific number of shares.
Underwriting
The process of evaluating an apartment building community to determine its income potential, status, value, risks, value-add, and potential returns.
Value-Add Property
Value-Add Property is a property that requires corrective actions or upgrades to reach its potential value. It is used to Reposition the property.
Waterfall Structure
Waterfall Structure is a financial structure showing how the return on real estate investment will be distributed among varrious classes of investors.