Investing Definitions Flashcards
A person that can invest in apartment syndications by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $ 200,000, or $ 300,000 for joint income, for the last two years with the expectation of earning the same or higher, or a net worth exceeding $ 1 million either individually or jointly with a spouse.
Accredited Investor
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.
Active Investing
The paying off of a mortgage
loan over time by making fixed payments of principal and interest.
Amortization
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.
Appraisal
An increase in the value of an asset over time.
Appreciation
occurs when the market cap rate naturally decreases over time, which isn’t always a given.
Natural appreciation
occurs when the net operating income is increased by either increasing the revenue or decreasing the expenses.
typically occurs by adding value to the apartment through renovations and/ or operational improvements.
forced appreciation
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.
Asset Management Fee
The amount of uncollected money owed by a tenant after move-out.
Bad Debt
The occupancy rate required to cover all of the expenses of a property. The ________________ rate is calculated by dividing the sum of the operating expense and debt service by the gross potential income.
For example, a 216-unit apartment community with $ 1,166,489 in operating expenses,
$581,090 in debt service, and
$ 2,441,050 in gross potential income
($ 2,263,624 gross potential rent plus
$ 177,426 other income) has a breakeven occupancy of 71.6%.
Breakeven Occupancy
A mortgage loan used until a borrower secures permanent financing. A______________are short term (six months to three years, with the option to purchase an additional six months to two years), generally have higher interest rates, and are almost exclusively interest only. Also referred to as interim financing, gap financing, or swing loans. The loan is ideal for repositioning an apartment community that doesn’t qualify for permanent agency financing.
Bridge Loan:
The funds used by a company to acquire, upgrade, and maintain a property. An expense is considered _______ when it improves the useful life of a property and is capitalized–spreading the cost of the expenditure over the useful life of the asset. _____ include both interior and exterior renovations. Examples of exterior _______ are repairing or replacing a parking lot, repairing or replacing a roof, repairing, replacing, or installing balconies or patios, installing carports, large landscaping projects, rebranding the community, new paint, new siding, repairing or replacing HVAC, and renovating the clubhouse. Examples of interior _______are new cabinetry, new countertops, new appliances, new flooring, installing fireplaces, opening up or enclosing a kitchen, new light fixtures, interior paint, plumbing projects, new blinds, and new hardware (e.g., door knobs, cabinet handles, outlet covers, or faucets). Examples of things that wouldn’t be considered ________ are the operating expenses, debt service, fees paid to the general partner, and distributions to the limited partners.
Capital Expenditures (CapEx):
The rate of return based on the income that the property is expected to generate. The ______ is calculated by dividing the net operating income by the current market value of a property. For example, a 216-unit property purchased for $ 12,200,000 with a net operating income of $ 960,029 has a cap rate of 7.87%.
Capitalization Rate (Cap Rate):
Cash Flow:
The revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the effective gross income. For example, here is the cash flow of the 216-unit apartment community:
Effective Gross Income $ 2,123,235 Operating Expense ($ 1,166,489) Debt Service ($ 581,090) Asset Mgmt. Fee ($ 45,272) Cash Flow $ 330,383
The rate of return based on the cash flow and the. is calculated by dividing the cash flow by the initial equity investment. For example, the 216-unit apartment community with a cash flow of $ 330,383 and an initial equity investment of $ 3,843,270 has a CoC return of 8.6%.
Cash-on-Cash Return
The expenses, over and above the purchase price of the property, that buyers and sellers normally incur to complete a real estate transaction. These costs include origination fees, application fees, recording fees, attorney fees, underwriting fees, due diligence fees, and credit search fees.
Closing Costs
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.
Concessions
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.
Cost Approach
The annual mortgage amount paid to the lender, which includes principal and interest. Principal is the original sum lent to a borrower and the interest rate is the charge for the privilege of borrowing the principal amount. For example, for a 24-month $ 11,505,500 loan with a 5.28% interest rate amortized over 30 years secured on the 216-unit apartment community, the monthly debt service is $ 60,977. If the loan required interest-only payments, the monthly debt service would be $ 48,424.
Debt Service
The ratio that is a measure of the cash flow available to pay the debt obligation. The ______ is calculated by dividing the net operating income by the total debt service. A _____of 1.0 means that there is enough net operating income to cover 100% of the debt service. Ideally, the _____is 1.25 or higher. A property with a _____too close to 1.0 is vulnerable, and a minor decline in revenue or minor increase in expenses would result in the inability to service the debt. For example, the 216-unit apartment community with an annual debt service of $ 581,090 and a net operating income of $ 956,746 has a _____ of 1.65.
Debt Service Coverage Ratio (DSCR)
A decrease or loss in value due to wear, age, or other cause.
Depreciation
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.
Distressed Property
The limited partners’ portion of the profits, which are sent on a monthly, quarterly, or annual basis, at refinance, and/ or at sale.
Distributions
The process of confirming that a property is as represented by the seller and is not subject to environmental or other problems. For apartment syndications, the general partner will perform __________ to confirm their underwriting assumptions and business plan.
Due Diligence
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.
Earnest Money
Economic Occupancy Rate:
The rate of paying tenants based on the total possible revenue and the actual revenue collected. The economic occupancy is calculated by dividing the effective gross income by the gross potential income. For example, here is the economic occupancy rate for the 216-unit apartment community:
Gross Potential Rent $ 2,263,624 Other Income $ 177,426 Gross Potential Income $ 2,441,050 ————————————————- Loss-to-Lease ($ 67,909) Concessions ($ 36,306) Vacancy ($ 158,454) Bad Debt ($ 55,147) Effective Gross Income $ 2,123,235 ————————————————- Economic Occupancy 87%
Effective Gross Income (EGI):
The true positive cash flow. Also referred to as ___, total income, or total revenue. ____ is calculated by subtracting the revenue lost due to vacancy, loss-to-lease, concessions, employee units, model units, and bad debt from the gross potential income (gross potential rent plus other income). For example, here is the ____ for the 216-unit apartment community:
Gross Potential Rent $ 2,263,624 Loss-to-Lease ($ 67,909) Concessions ($ 36,306) Vacancy ($ 158,454) Bad Debt ($ 55,147) Other Income $ 177,426 ——————————————————- Total Income $ 2,123,235
An apartment unit rented to an employee at a discount or for free.
Employee Unit
Equity Investment:
The upfront costs for purchasing a property. For apartment syndications, 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. For example, here is the ________for the 216-unit apartment community:
Down Payment $ 2,806,000 Closing Costs $ 143,003 Financing Fees $ 214,700 Operating Account Funding $ 435,567 Acquisition Fee $ 244,000 ——————————————————- Equity Investment $ 3,843,270
Equity Multiple (EM):
The rate of return based on the total net profit and the equity investment. The ____is calculated by dividing the sum of the total net profit (cash flow plus sales proceeds) and the equity investment by the equity investment. For example, here is the _____to the limited partners on the 216-unit apartment community:
Equity Investment $ 3,843,270 Year 1 Cash Flow $ 329,359 Year 2 Cash Flow $ 323,507 Year 3 Cash Flow $ 481,209 Year 4 Cash Flow $ 510,755 Year 5 Cash Flow $ 385,342 Profit at Sale $ 3,803,677 Return of Equity Investment $ 2,198,439 Total Net Profit $ 8,032,288 ——————————————————— Equity Multiple 2.09
The general partner’s plan of action for selling the apartment community at the conclusion of the business plan.
Exit Strategy
The one-time, upfront fees charged by the lender for providing the debt service.Typically, the _________are approximately 1.75% of the purchase price.
Financing Fees
An owner of a partnership who has unlimited liability. A _______ is usually a managing partner and is active in the day-to-day operations of the business. In apartment syndications, the ____________ is also referred to as the sponsor or syndicator and is responsible for managing the entire apartment project.
General Partner (GP)
The hypothetical amount of revenue if the apartment community were 100% leased year-round at market rental rates plus all other income. For example, the 216-unit apartment community with a gross potential rent of $ 2,263,624 and other income of $ 177,426 has a ____________income of $ 2,441,050.
Gross Potential Income
