Commercial Real Estate Syndications Glossary

  1. 1031 Exchange

Under Section 1031 of the Internal Revenue Code, like-kind property used in a trade or business or held as an investment can be exchanged tax-deferred. Under a fully qualified Section 1031 exchange, real estate is traded for other like-kind property. All capital gains taxes are deferred until the newly acquired real estate is disposed of in a taxable transaction. The underlying philosophy behind the deferral of capital gains taxes is that taxation should not occur as long as the original investment remains intact in the form of (like-kind) real estate.

  1. Absorption

The amount of inventory or units of a specific commercial property that become occupied during a specified time period (usually a year) in a given market. Often reported as the absorption rate.

  1. Amortization

The repayment of loan principal through equal payments over a designated period of time consisting of both principal and interest.

  1. Assumption Fee

A fee that the buyer of a property with an assumable mortgage pays to the lender (usually a bank) for the ability to take over the mortgage, often included in the closing costs. 1% is common here.

  1. Average Annual Effective Rate

The average annual effective rent divided by the square footage.

  1. Average Annual Effective Rent

The tenant’s total effective rent divided by the lease term.

  1. Average Annual Return

A return calculated by taking the difference between the initial investment and the future value of that investment divided by the number of years. This is calculated using: (Average Annual Return) = (Total Gain/Initial Investment)/(# of years).

Example: Assume a $100K investment has $40K in distributions and $50K of profit at disposition which equates to a total gain of $90K, thus the AAR is (90,000/100,000)/(5) = .18 or 18%

  1. Basis

The total amount paid for a property, including equity capital and the amount of debt incurred.

  1. Break-Even Point

The stage at which an investment produces an income that is just sufficient to cover recurring expenditure. For an investment in real property, the point at which gross income is equal to normal operating expenses, including debt service (the stage at which the next cash flow becomes positive). Also known as the default point. 

  1. Capital Account

An account that tracks each owner/partner’s equity in an asset. Calculated using: (Partners Equity) = (Contributions) + (Allocations) – (Distributions).

  1. Capital Expenditures (CapEx)

The money spent by a company in order to acquire or maintain or extend the useful life of an asset. Not to be confused with operating expenses, which are short term expenses required to meet the basic ongoing operational cost of running the property. Capital expenditures are expensed using depreciation over the life of the asset, while operating expenses are fully tax-deductible in the year they are incurred.

  1. Capital Gain

Taxable income derived from the sale of a capital asset. It is equal to the sales price less the cost of sale, adjusted basis, suspended losses, excess cost recovery, and recapture of straight-line cost recovery.

  1. Capital Improvement Budget

A budget created for the expenses that are expected to improve, or reposition, the property through interior and/or exterior improvements, along with other methods. It is common for an operator to include some contingencies in the budget for cost overages.

  1. Capitalization Rate (CAP)

A rate of return on a real estate investment property based on the expected income that the property will generate. It is used to estimate the investor’s potential return on their investment. When acquiring, a higher CAP rate is better. When selling, a lower CAP is better. A higher CAP rate implies a lower price, and vice versa. Calculation: (CAP) = (NOI) / (Total Asset Value).

Example: Assume we buy an apartment for $10M and the annual return is $400K, then the CAPrate is (400,000) / (10,000,000) = .04, or 4%.

  1. Cash Flow

Cash generated from the operations of a company. (Cash Flow) = (Revenue) – (All Operating Expenses)

Example: Assume your duplex has annual revenue of $36,000. Now assume you have operating expenses of $26,000 (debt service, insurance, CapEx, vacancies, etc), then the cash flow is ($36,000) – ($26,000) = $10,000/yr, or $833/mo.

  1. Cash-on-Cash Return (CoC)

A rate of return often used in real estate transactions that determines the cash income generated in proportion to the cash invested. (CoC) = (Annual Cash Flow) / (Total Equity Invested).

Example: Assume you invest $100K into an apartment syndication deal and realize a return of $8K annually, then the CoC is (8,000) / (100,000) = .08, or 8%.

  1. Concessions

Reduced rents or specials, such as first month’s rent for free, that aim to get new residents to lease. 

  1. Debt Service Coverage Ratio (DSCR)

The multiples of cash flow available to meet annual interest and principal payments on debt. A bank will typically want to see 1.2x – 1.4x here. Anything under 1.0x would imply that there is not enough cash flow to cover debt service. Calculation: (DSCR) = (NOI) / (Total Debt Service)

Example: Assume a NOI of $120,000 and a debt service, or annual note, or $100,000, then the DSCR is (120,000) / (100,000) = 1.2x.

  1. Defeasance

Allows the cancellation of a mortgage upon repayment of the loan through substitution of collateral.

  1. Demographics

Characteristics of human populations as defined by population size and density of regions, population growth rates, migration, vital statistics, and their effect on socio-economic conditions.

  1. Discount Rate

The percentage rate at which money or cash flows are discounted. The discount rate reflects both the market risk-free rate of interest and a risk premium. You’ll see this rate used in IRR calculations.

  1. Disposition

The sale of an asset.

  1. Due Diligence

The process of examining a property, financial record, other related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. Applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as represented.

  1. Economies of Scale (Economies)

Relative to real estate, is the increased cost advantage associated with the increase in number of units.

Example: Assume an investor is renovating a single family house and needs to purchase a washer and dryer. She goes to Home Depot and purchases a modest set for $700. Now assume another investor is renovating an apartment complex with 100 units and also needs a washer and dryer for each unit, but her contractor is able to negotiate a price of $55,000 for all 100 sets. This equates to $550/set, saving her $150 per. This is one of the advantages of purchasing larger properties.

  1. Effective Income

An amount after a base amount has been adjusted for concessions, allowances, and costs.

  1. Equity Multiple

The total cash distributions received from an investment in proportion to the total equity invested. A value less than one implies that the investment loses money, while a value greater than one implies the investment makes money. (Equity Multiple) = (Total Cash Distributions) / (Total Equity Invested).

Example: An equity multiple of 2.5x implies that for every $1 invested, you receive $2.5 in return at the conclusion of the investment.

  1. Equity Required

The amount of equity, or cash, that a syndicate needs to raise in order to purchase the property at hand. It typically covers expenses such as the down payment, closing cost and renovation budget.

  1. Fair Market Value (FMV)

The selling price (or market value) of a property. Calculation: (FMV) = (NOI) / (CAP).

Example: Assume that a property generates $1M in NOI and that the CAP rate is 6%, then the FMV is (1,000,000) / (.06) = $16,666,666.

  1. Feasibility Analysis

The process of evaluating a proposed project to determine if that project will satisfy the objectives set forth by the agents involved (owners, investors, developers, and tenants).

  1. Financial Leverage

The use of borrowed funds to acquire an investment.

  1. Financial Risk

The possible change in an investment’s ability to return principal and income.

  1. Fixed Expenses

Costs that do not change with a building’s occupancy rate. They include property taxes, insurance, and some forms of building maintenance.

  1. Forced Appreciation

The increase in market value through an increase in NOI, which is forced by an increase in income or a decrease in expenses.

Example: Assume a starting point of $1M NOI and a 6% CAP which equates to a FMV of $16.67M. Now assume income is increased through the addition of covered carports that bring an additional $100K per year. Our new NOI is $1.1M, and thus the new FMV is (1,100,000) / (.06) = $18,333,333. Appreciation was forced on the asset by driving up NOI.

  1. Future Value (FV)

The amount to which money grows over a designated period of time at a specified rate of interest.

  1. Gross Leasable Area (GLA)

The total floor area designed for tenant occupancy and exclusive use. This includes basements, mezzanines, and upper floors, and it is measured from the center line of joint partitions and from outside wall faces. It is that area on which tenants pay rent and thus produces income.

  1. Gross Operating Income

The total income generated by the operations of a property before payment of operating expenses. It is calculated from potential rental income, plus other income affected by vacancy, less vacancy and credit losses, plus other income not affected by vacancy.

  1. Gross Potential Rent (GPR)

The rental income that a property could achieve if it was at full occupancy. Calculation: (GPR) = (Total # of Units) x (Market Rent).

  1. Gross Rent Multiplier (GRM)

The price of the property in proportion to its potential gross income. The GRM is commonly used to compare potential investments and/or to determine if the listing price of a property is fair. Calculation: (GRM) = (FMV) / (Potential Gross Income).

Example: Assume a property, which is valued at $5M, has potential gross income of $500K, then the GRM is (5,000,000) / (500,000) = 10x.

  1. Interest Only Loan

A type of loan often negotiated by syndicators that features an interest only payment on the property loan in order to reduce cost exposure. With no principal required during the interest only period (commonly at least 2 years), this allows for an improvement in cash flow distributions to investors during the repositioning period.

  1. Internal Rate of Return (IRR)

The discount rate at which the net present value (NPV) of a set of cash flows equals zero. Simply put, it is the rate at which a real estate investment grows or shrinks. Another way to think of IRR is as a time sensitive compounded annual rate of return; the investment grows/shrinks by X% per year, evenly, over the life of the investment.

  1. K-1 Tax Form

A tax form that allows a company to utilize pass-through taxation, which shifts the income tax liability from the entity earning the income to those who have a beneficial interest in it. In the case of an apartment syndication, the general partner would pass on the tax liability to the limited partners (investors).

  1. Loan-to-Value Ratio (L/V)

The amount of money borrowed in relation to the total market value of a property. Calculation: (L/V) = (Loan Amount) / (Property Value).

  1. Loss to Lease (LTL)

A charge taken against Gross Potential Rent for leases signed on apartment units after their initial lease-up term has expired to simulate when the leases are either renewed, or a new tenant moves in (in either case, the unit is leased), at a rent below the then Gross Potential Rent. It is calculated by applying an assumed loss percentage to the GPR. 

The resulting dollar value is deducted from GPR. Put simply, it is the difference in market rent vs after renovations rent.

Example: Assume a unit, currently leased at $1,000/month, is coming up for renewal in 3 months, and the landlord sends you a letter with the new rent of $1,125/month for the new lease term should you renew. After considering it, the tenant decides not to renew and notifies them as such. A month later, the landlord emails the tenant saying that they would be willing to renew the lease at his or her current rent of $1,000/month. The tenant accepts.

Assuming that the $1,125 is what the market would otherwise bear for your apartment unit when the current lease term ends, the $125.00 difference between current rent and their $1,125 rent offer, is the monthly Loss to Lease, which would be incurred by the landlord as of the commencement of the new lease term.

  1. Market Analysis

The process of examining market supply and demand conditions, demographic characteristics, and opportunities; identifying alternative locations/sites that meet specific objectives or satisfy various criteria; and assessing the financial feasibility of those locations/sites to facilitate decision making regarding the commercial potential or suitability of various locations/sites to support a given activity or use.

  1. Market Rent vs Current Rent

The market rent refers to the price that the surrounding market is charging for similar square footage apartments within a given vicinity. The current rent is the price that a tenant is currently paying at a property and may be below market rent due to events like concessions, signing a long-term lease, etc.

  1. Metropolitan Statistical Area (MSA)

This serves to group counties and cities into specific geographic areas for the purpose of a population census and the compilation of related statistical data.

  1. Model Unit

An apartment that is deliberately left vacant, and thus generates no income, for the purpose of marketing.

  1. Net Operating Income (NOI)

The annual income that a property generates after accounting for all expenses. Calculation: (NOI) = (Gross Rent) – (Vacancy & Credit Losses) + (Other Income) – (Operating Expenses). NOI does not account for debt services, depreciation, or CapEx.

  1. Net Present Value (NPV)

The sum of all future cash flows discounted to present value and netted against the initial investment.

  1. Operating Expenses

Cash outlays necessary to operate and maintain a property. They do not include capital expenditures, debt service, or cost recovery. Examples: real estate taxes, property insurance, property management and maintenance expenses, utilities, and legal or accounting expenses.

  1. Operating Expense Ratio (OER) or Expense Ratio

The cost of operating a property in proportion to the income that the property generates. This measure can be used over time in comparison with that of other properties to help determine relative operating efficiency. (OER) = (Operating Expenses) / (Gross Income)

Example: Assume a property generates gross income of $100,000 and has operating expenses of $60,000, the OER is (60,000) / (100,000) = .6 or 60%.

  1. Other Income

Income that a property generates other than from rents. Examples: Washer/dryer rentals, internet/TV services, covered parking spaces, fenced yards, etc.

  1. Passive Income

Income from rental activity, limited business interests, or other activities in which the investor does not materially participate.

  1. Preferred Return (Pref)

A first claim on profits until a target return has been achieved. This helps minimize risk to investors and thus makes the investment more attractive.

Example: Assume an individual invests $100K in an apartment syndication deal and also assume that the general partner promised an 8% preferred returns. This means that the investor will receive $8K cash flow annually before the general partner receives any payout (excluding fees).

  1. Private Placement Memorandum (PPM)

A legal document that is provided to prospective investors that details the offering, the description of the company and how it will be managed, the use of proceeds, the risks of the investment, and the subscription terms, etc. The PPM is the contractual, governing body of the investment.

  1. Pro Forma

A method by which financial results are estimated for a potential investment. The typical pro forma that one will see in an apartment syndication deal will forecast anticipated results for future years.

  1. Rate of Return (RoR)

The percentage return on each dollar invested. Also known as yield.

  1. Ratio Utility Billing System (RUBS)

Allows for the owner or property manager of a property to divide a utility bill (water, electricity, waste services, etc.), which may otherwise be charged as a whole, among residents based on occupancy factors, square footage, or a combination of both. This can dramatically decrease expenses, driving up NOI.

  1. Real Estate Investment Trust (REIT)

An investment vehicle in which investors purchase certificates of ownership in the trust, which in turn invests the money in real property and then distributes any profits to the investors. The trust is not subject to corporate income tax as long as it complies with the tax requirements for a REIT. Shareholders must include their share of the REIT’s income in their personal tax returns. 

Important distinction: with a REIT, you are the partial owner of a public company that owns a wide variety or real estate holdings; conversely, with a syndication, you are the partial owner of a private company that owns one property (or a relatively small portfolio of properties) of a particular real estate niche.

  1. Rent Comparable

A property in the same market of another and with similar upgrades that can be used in comparison in order to determine competitiveness of rents. Syndicates will most commonly aim to renovate and charge rents just under that of a rent comparable.

  1. Reposition

A strategy in which the owner, or general partner, of a property aims to change the position of the asset in a market through adding value and/or rebranding the property.

  1. Reserves

An amount of cash set aside, typically on a per unit basis, for expenses that are not forecasted or are otherwise unforeseen.

  1. Return Hurdle

The rate of return that, when achieved, triggers a disproportionate profit split between the syndicator (General Partners) and the investors (Limited Partners). Common return hurdles are preferred return, IRR, and equity multiple.

  1. Return on Equity (ROE)

The amount of net income returned as a percentage of shareholders equity. (ROE) = (Net Income) / (Shareholder’s Equity).

  1. Reversion CAP

The expected CAP rate at the end of an investment (or disposition of a property). It is the benefit that an investor expects to receive at the time of sale.

  1. Sensitivity Analysis

Also referred to as what-if or simulation analysis, is a way to predict a certain outcome given a number of variables. This is often used to show returns in the event of a market downturn (often proving that large, value-add multifamily apartment properties expose investors to less risk than other traditional investments).

  1. Subscription Agreement

A legal document provided to investors, by the sponsor, that outlines share/unit price (among other details) and servers for the investor to subscribe (or buy) shares/units in the deal.

  1. Supplemental Loan

A loan often used by syndicators in order to pull out equity and distribute it to investors after renovations are complete, rent premiums are achieved, and thus a higher NOI, while also allowing them to avoid refinancing an attractive fixed rate loan that is already placed on the property. 

As the loan-to-value (LTV) falls with the increased FMV of the property, a supplemental (second) loan is used to distribute profit to the investors, typically resulting in an increase in CoC and IRR.

  1. Syndicate

A team of individuals or companies that pool their resources (time, money, expertise, etc.) in order to accomplish a goal or complete a project that they are unlikely to be able to accomplish or complete on their own. 

  1. T12

A report of the previous 12 months of what the property actually operated at in terms of income and expenses. This is valuable (most would say absolutely necessary) information to have when underwriting the property.

  1. The Promote

A ‘bonus’ of sorts used to motivate the sponsor to exceed return expectations and reward them for their work in finding, managing and adding value to the property. It is an extra, disproportionate share of returns rewarded to the sponsor. 

Example: Investors receive 100% of profit until a preferred return of 8% is met, after which investors receive 70% and the sponsor receives 30%. The 30% to the sponsor is the “promote.”

  1. Unit Mix

The percentage of different types of unit layouts (i.e. 1 bed/1 bath, 2×2, 3×2, etc.) within an apartment community. An ideal mix for family apartment communities includes 70% 2x2s, which reduces turnover costs common in a higher preponderance of 1x1s.

  1. Value-Add

Is used to describe a property that offers the opportunity to increase cash flow or Fair Market Value through renovations, rebranding, or increased operational efficiencies.

  1. Vacancy Rate

The percentage of the total supply of units or space of a specific commercial type that is vacant and available for occupancy at a particular point in time within a given market.

  1. Waterfall

A method for splitting profits among partners in a business deal that allows for said profits to follow an uneven distribution. In a waterfall model, payouts change when previously agreed upon return hurdles are met.

Example: An investor is paid 100% of profits until a preferred return (the return hurdle) of 8% is met, after which profits are split 70/30 between the investor and the general partner.


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