Comprehensive FAQ

Reference

Key Terms

Apartment Syndication

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. This allows companies to pool their resources and share risks and returns. In regards 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.

Accredited Investor

An accredited investor is a person that can invest in securities (i.e. invest in an apartment syndication as a limited partner) 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 expectation of earning the same or higher or a net worth exceeding $1 million either individually or jointly with a spouse.

Sophisticated Investor

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.

General Partner (GP)

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, syndicator, or operator. The GP is responsible for managing the entire apartment project.

Limited Partner (LP)

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.

Capital Expenditures (CapEx)

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.

Operating Expenses

Operating expenses are the costs of running and maintaining the property and its grounds — taxes, insurance, repairs and maintenance, general and admin, management, utilities, marketing, contract services, payroll, reserves and asset management.

Debt Service

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. For example, a $19,800,000 loan with 5.50% interest amortized over 30 years results in a debt service of $1,349,067 annually and $112,422.25 per month.

Net Operating Income (NOI)

Net operating income (NOI) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service. For example, a 415 unit apartment community with a total income of $3,033,229 and total operating expenses of $1,032,109 has a NOI of $2,001,120.

Capitalization Rate (Cap Rate)

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 purchase price of a property. For example, a 415 unit property with an NOI of $2,001,120 that was purchased for $24,750,000 has a cap rate of 8.09%.

Price Per Unit

Price per unit is the cost of purchasing an apartment community based on the purchase price and the number of units. The price per unit is calculated by dividing the purchase price by the number of units. For example, a 415 unit apartment community purchased for $24,750,000 has a price per unit of $59,639.

Cash Flow

Cash flow is the revenue remaining after paying all expenses and is calculated by subtracting the operating expense and debt service from the collected revenue.

Closing Costs

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 are legal fees, insurance, survey, recording fees, 3rd party reports, title endorsements, utility deposit, and due diligence fees.

Financing Fees

Financing fees are the one-time, upfront fees charged by the lender for providing the debt service. Also referred to as loan points or loan point cost. Typically, the financing fees are 1% to 2% of the loan amount.

Capital Reserves Account

The capital reserves account 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. This capital reserves account is typically created by raising extra money from the limited partners.

Equity Investment

The equity investment is the upfront costs for purchasing an apartment community, which includes the down payment for a loan, closing costs, financing fees, capital reserves account, and the various fees paid to the general partner for putting the deal together. May also be referred to as the total raise.

Sales Proceeds

The sales proceeds are the profit collected at the sale of the apartment community.

Internal Rate of Return (IRR)

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. The timing of when cash flow is received has a significant and direct impact on the calculated return — the sooner you receive the cash, the higher the IRR will be.

Cash-On-Cash (CoC)

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 415 unit apartment community with a cash flow of $694,934 and an initial investment of $6,804,625 results in a CoC return of 10.21%.

Equity Multiplier (EM)

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.

Market 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 typically calculated by performing a rent comparable analysis.