Apartment Terminology Flashcards
Accredited Investory
A person that can investing in apartment syndication by satisfying one of the requirements. Annual income of $200,000 or $300,00 for joint income for the last two years. Net worth exceeding $1 million either individually or with a spouse.
Acquisition Fee
Upfront fee pay by the buying partnership to the general partners for finding, evaluating, financing, and closing the investment. Fees range from 1% to 5% of the purchase prince, depends on size of the deal
Active Investing
The finding of, qualifying, and closing on an apartment building using one’s own capital and overseeing the business plan through to its successful execution.
Amortization
The paying off of a mortgage loan over time by making fixed payments of principal and interest.
Apartment Syndication
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. Allows companies to pool their resources and share risks and returns.
Appraisal
A report created by a certified appraiser that specifies the market value of a property. For apartments, the value is based on cost, sales comparable and income approach.
Appreciation
An increase in the value of an asset over time. Natural appreciation occurs when the market cap rate naturally decreases over time and forced appreciation occurs when the net operating income increases by increasing revenue or decreasing expenses through renovations or operational improvements.
Asset Management Fee
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
The amount of uncollected money owed by a tenant after move-out
Breakeven Occupancy
The occupancy rate required to cover all of the expenses of a property. Calculated by dividing sum of operating expense and debt service by the gross potential income.
Bridge Loan
Mortgage loan used until a borrower secures permanent financing. Short Term (6 months-2 years), higher interest rates, almost exclusively interest only. Also referred to as interim financing, gap financing, or swing loans. Ideal for repositioning an apartment that doesn’t qualify for permanent agency financing.
Capital Expenditures (CapEx)
Funds used to acquire, upgrade, and maintain a property. An expense that improves the useful life of a property and is capitalized-spreading the cost over the useful life of the asset. Examples are parking lots, roofs, balconies, patios, carports, landscaping, rebranding, pain, siding, HVAC, clubhouse, cabinetry, countertops, appliances, flooring, fireplaces, light fixtures, paint, plumbing, blinds, hardware.
Capitalization Rate ( Cap Rate )
The rate of return based on the income that the property is expected to generate. Calculated by dividing the net operating income by the current market value (purchase price) of a property.
Cash Flow
Revenue remaining after paying all expenses. Calculated by subtracting the operating expense and debt service from the effective gross income.
Cash-on-Cash Return
Rate of return based on the cash flow and the equity investment. Calculated by dividing the cash flow by the initial equity investment.
Closing Costs
The Expenses, over and above the purchase price of the property, that buyers and sellers normally incur to compete a real estate transaction. Costs include origination fees, application feeds, recording fees, attorney fees, underwriting fees, due diligence fees, and credit search fees.
Concessions
The credits given to offset rent, application fees, move-in fees, and any other cost incurred by the tenant, which are generally given at move-in to entice tenants into signing a lease.
Cost Approach
A method of calculating a property’s value based on the cost to replace (or rebuild) the property from scratch. Also referred to as the replacement approach.
Debt Service
The annual mortgage amount paid to the lender, which includes principal and interest.
Debt Service Coverage Ratio (DSCR)
The ratio that is a measure of the cash flow available to pay the debt obligation. Calculated by dividing the net operating income by the total debt service. Ideally, DSCR is 1.25 or higher.
Depreciation
A decrease or loss in value due to wear, age, or other cause.
Distressed property
A non-stabilized apartment community, which means the economic occupancy rate is below 85% and likely much lower due to poor operations, tenant problems, outdated interiors, exteriors, or amenities, mismanagement, and/ or deferred maintenance.
Distributions
The limited partners’ portion of the profits, which are sent on a monthly, quarterly, or annual basis, at refinance, and/ or at sale.
Due Diligence
Process of confirming that a property is as represented by the seller and is not subject to environmental or other problems. General partner will perform
Earnest Money
A payment by the buyers that is a portion of the purchase price to indicate to the seller their intention and ability to carry out the sales contract.
Economic Occupancy Rate
The rate of paying tenants based on the total possible revenue and the actual revenue collected. Calculated by dividing the effective gross income by the gross potential income.
Effective Gross Income (EGI)
The true positive cash flow. Calculated by subtracting the revenue lost due to vacancy, loss-to-lease, concessions, employee units, model units, bad debt from the gross potential income (gross potential rent plus other income)
Employee Unit
An apartment unit rented to an employee at a discount or for free
Equity investment
The upfront costs for purchasing a property. These costs include the down payment for the mortgage loan, closing costs, financing fees, operating account funding, and the fees paid to the general partnership for putting the deal together. Also referred to as the initial cash outlay or the down payment.
Equity Multiple (EM) **
The rate of return based on the total net profit and the equity investment. Calculated by dividing the sum of the total net profit (cash flow plus sales proceeds) and the equity investment by the equity investment.
Exit Strategy
The general partner’s plan of action for selling the apartment community at the conclusion of the business plan.
Financing Fees
The one-time, upfront fees charged by the lender for providing the debt service. Approximately 1.75% of the purchase price.
General Partner
An owner of a partnership who has unlimited liability. Usually a managing partner and is active in the day-to-day operations of the business.
Gross Potential Income
Hypothetical amount of revenue if the apartment were 100% leased year-round at market rental rates plus all other income.
Gross Potential rent (GPR)
Hypothetical amount of revenue if the apartment were 100% leased year round at market rental rates.
Gross Rent Multiplier (GRM)
Number of years it would take for a property to pay for itself based on the gross potential rent. Calculated by dividing the purchase price by the annual gross potential rent.
Guaranty Fee
A fee paid to a loan guarantor at closing for signing for and guaranteeing the loan. Standard guaranty fee is 0.5% to 5% of the principal balance of the loan paid at closing and/or 5% to 30% of the general partnership. A lot depends on recourse or non-recourse loan.
Holding Period
The amount of time the general partner plans on owning the apartment from purchase to sale.
Income Approach
A method of calculating an apartment’s value based on the capitalization rate and the net operating income ( Value = net operating income / cap rat )
Interest-Only Payment
The monthly payment for a mortgage loan where the lender requires the borrower to pay only the interest on the principal.
Interest Rate
The amount charged by a lender to a borrower for the use of their funds.
Internal Rate of Return (IRR)
Rate needed to convert the sum of all future uneven cash flow ( cash flow, sales proceeds, and principal pay down on the mortgage loan ) to equal the equity investment.
Lease
A formal legal contract between a landlord and a tenant for occupying an apartment unit for a specified time and at a specified price with specified terms.
Letter of Intent (LOI)
A non-binding agreement created by a buyer with their proposed purchase terms.
Limited Partner ( LP )
A partner whose liability is limited to the extent of their share of ownership. funds a portion of the equity investment but is passive.
Loan-to-cost Ratio (LTC)
The ratio of the value of the total project costs (loan amount + capital expenditure costs ) divided by the apartment’s appraised value.
Loan-to-value Ratio (LTV)
The ratio of the value of the loan amount divided by the apartment’s appraised value.
London Interbank offered rate (LIBOR)
A benchmark rate that some of the world’s leading banks charge each other for short-term loans.
Loss-to-Lease
The revenue lost based on the market rent and the actual rent. Calculated by dividing the gross potential rent minus the actual rent collected y the gross potential rent.
Market Rent
The rent amount a willing landlord might reasonable expect to receive and a willing tenant might reasonable expect to pay for tenancy, which is based on the rent charged at similar apartment communities in the area. Calculated by rent comparable anaylysis.
Metropolitan Statistical Area (MSA)
A geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core. Determined by the U.S. office of management and budget.
Model Unit
A representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.
Mortgage
A legal contract by which an apartment is pledged as security for repayment of a loan until the debt is repaid in full.
Net Operating Income (NOI)
All the revenue from the property (effective gross income) minus the operating expenses.
Operating Account Funding
A reserves fun, over and above the purchase price of an apartment, to cover things like unexpected dips in occupancy, lump sum insurance or tax payments, or higher than expected capital expenditures. Creased by raising extra capital from the limited partners.
Operating Agreement
A document that outlines the responsibilities and ownership percentages for the general and limited partners in an apartment syndication.
Operating Expenses
The costs of running and maintaining the property and its ground. For apartment syndications, the operating expenses are usually broken into payroll, maintenance and repairs, contract services, make ready, advertising / marketing, administrative, utilities, management fees, taxes, insurance, and reserves.
Passive Investing
Placing on’e capital into an apartment syndication that I managed in its entirety by a general partner.
Permanent Agency Loan
A long-term mortgage loan secured from Fannie Mae or Freddie Mac. Typical loan terms lengths are 3,5,7,10,12 or more years amortized over up to 30 years.
Physical Occupancy Rate
The proportion of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units at the property.
Preferred Penalty
The threshold return that limited partners are offered prior to the general partners receiving payment.
Prepayment Penalty
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
The cost per unit of purchasing a property. The price per unit is calculated by dividing the purchase price of the property by the total number of units.
Private Placement Memorandum (PPM)
A document that outlines the terms of the investment and the primary risk factors involved with making the investment. Typically has four main sections: the introduction ( brief summary of the offering), basic disclosures (general partner information, asset description, and risk factors), the legal agreement, and the subscription agreement.
Pro Forma
The projected budget with itemized line items for the revenue and expenses for the next 12 months or 5 years.
Profit and Loss Statement (T:12)
A document or spreadsheet containing detailed information about the revenue and expenses of a property over the last 12 months.
Property and Neighborhood Classes
A ranking system of A,B,C,or D assigned to a property and a neighborhood based on a variety of factors.
Property Management Fee
An ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property.
Ratio utility billing system (RUBS)
A method of calculating a tenant’s utility usage based on occupancy, unit square footage, or a combination of both. Once calculated, the amount is billed back to the tenant.
Recourse
The right of the lender to go after personal assets above and beyond the collateral if the borrower defaults on the loan.
Refinance
The replacing of an existing debt obligation with another debt obligation with different terms.
Refinancing fee
A fee paid to the general partner for the work required to refinance an apartment.
Rent Comparable analysis (Rent Comps)
The process of analyzing the rental rates of similar properties in the area to determine the market rents of the units at the subject property.
Rent Premium
The increase in rent demanded after performing renovations to the interior and or exterior of an apartment community.
Rent Roll
A document or spreadsheet containing detailed information on each of the units at the apartment. Includes the unit number, unit type, square footage, tenant name, market rent, actual rent, deposit amount, move-in date, lease-start and lease-end dates, and the tenant balance.
Sales Comparison Approach
A method of calculating an apartment’s value based on similar apartments recently sold.
Sales Proceeds
The profit collected at the sale of the apartment
Sophisticated Investor
A person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.
Subject Property
The apartment the general partner intends on purchasing.
Submarket
A geographic subdivision of a market
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.
Underwriting
The process of financially evaluating an apartment to determine the projected returns and an offer price.
Vacancy Loss
The amount of revenue lost due to unoccupied units.
Vacancy Rate
The proportion of unoccupied units. Calculated by dividing the total number of unoccupied units by the total number of units.
Value-Add Property
A stabilized apartment community with an economic occupancy above 85% and an opportunity to be improved by adding value, which means making improvements to the operations and the physical property though exertion and interior renovations in order to increase the income and or decrease the expenses.
Yield Maintenance
A penalty paid by the borrower on a loan if the principal is paid off early
