Accredited Investor

Any person who has an individual income in excess of $200,000 in the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year.

• Any person whose individual net worth, or joint net worth with that person's spouse, exceeds $1 million ( excluding equity in that person's principal residence).
• Search Rule 501 for the full definition of "accredited investor"

---OR---

---

Acquisition Fee

A fee paid to the general partner for finding, analyzing, financing and closing on the investment. Fees can range from 0.5% to 5% of the purchase price.

Apartment Syndication

A group of people pooling money and resources to buy an apartment complex. General partners (the syndicator(s)) and the limited partners (investors) work together to acquire and share the profits.

Appreciation

The increase in value of an asset over time. The two types of appreciation are natural and forced.

• Natural appreciation occurs when the market cap rate decreases (building becomes more valuable due to location).
• Forced appreciation occurs when the net operating income is increased (increasing the revenue or decreasing the expenses). This is achieved through value-add apartment syndication.

Asset Management Fee

An annual fee given to the asset manager for the oversight of the property. This fee ensures someone is paying attention to all the details, hires the operators, analyzes the market, evaluates offers, oversees the budget, the loan, property management, and makes sure we are on track with the goal of the property. The fee is generally 2% of the collected income.

Bad Debt

The amount of uncollected money that a former tenant owes after move-out.

Breakeven Occupancy

The lowest occupancy needed to cover all expenses of the apartment complex. Breakeven Occupancy = ( Operating Expenses + Debt Service) / Gross Potential Income For example, a 296 unit apartment complex with $1,595,915 in annual operating expenses, a debt service of $734,700, and $3,640,800 in gross potential income has a breakeven occupancy of 64%. This means the building must be 64% full to cover all expenses.

Bridge Loan / Interim Financing / Gap Financing / Swing Loan

A short term (6 months - 5 years), high interest loan used until the syndicator can obtain permanent financing.

Capital Expenditures (CapEx)

The funds used by the company to upgrade/maintain the apartment community while improving the useful life of the building. These expenditures spread the cost over the useful life of the asset. Examples: Landscaping projects, replacing HVAC, new paint, repairing roof, replacing parking lot, replacing countertops/cabinets, replacing flooring, etc.

Capitalization Rate (Cap Rate)

Cap Rate = Net Operating Income / Current Value The cap rate is the percentage amount of money you would make from a property if you had no debt. Example: A 296 unit apartment complex with a net operating income of $968,948 and a purchase price/current value of $13,700,000 has a cap rate of 7.1%

Cash Flow

The money left over after paying all expenses. Cash flow is used for distributions between Limited Partners and General Partners. Example for 296 unit apartment community: Total Income: + $3,698,146 Total Operating Expenses: - $1,595,915 Debt Service (mortgage): - $734,700 Asset Management Fee: - $73,963 Cash Flow = $1,364,532

Cash-On-Cash (CoC)

The cash on cash return is the ratio of annual before-tax cash flow to the total amount of cash invested. CoC (%) = (Cash Flow / Initial Investment) * 100 Example: 296 unit apartment complex with a yearly cash flow of $1,364,532 with an initial investment of $3,100,000 results in a CoC return of 44%

Closing Costs

Closing costs are extra billed expenses, not incurred by the syndicator, to complete a real estate transaction. Examples of closing costs: due diligence fees (bank), attorney fees, recording fees (city/title), application fees (bank), origination fees (bank), underwriting fees (bank), and credit search fees (bank)

Concessions

Perks given to tenants to move in. Example: discount on first month of rent, waiving application fees, etc.

Debt Service

The mortgage for a loan over a year. Example: a loan for $24,256,513 with an interest rate of 3.87% amortized over 30 years has a yearly debt service of $1,367,925

Debt Service Coverage Ratio (DSCR)

A ratio that measures the ability to cover your debt from your net operating income (NOI). A DSCR of 1.25 means you have 25% more money after you pay your debt service. This is useful to determine your ability to pay your loans. DSCR = NOI / Debt Service (Mortgage) Example: 296 unit apartment building with an annual debt service of $734,700 and a NOI of $2,102,231 has a DSCR of 2.86.

Distributions

The portions of profit sent out on a monthly, quarterly or annual basis. Distributions are dependent on cash flow, refinance proceeds or sale of an investment.

Economic Occupancy Rate

The rate of paying tenants based on the total possible revenue and the actual revenue collected. Economic Occupancy Rate = Actual Revenue Collected / Gross Potential Income (GPI) Economic occupancy rate considers concessions, bad debt, model units, and empty units. For example, a 296 unit apartment complex has:

• GPI of + $4,023,195
• Concessions and bad debt of - $144,050
• Vacancy of - $180,999

Effective Gross Income (EGI)

The true cash flow of an apartment complex. EGI = (Gross Potential Income + Other Income) - Vacancy - Loss-to-Lease (LtL) - Concessions - Employee Units - Model Units - Bad Debt Example: 296 unit apartment building has

• Gross Potential Income + Other Income = $4,023,195
• Vacancy, LtL, Concessions, Employee Units, Model Units, Bad Debt = $325,049

Employee Unit

A unit rented to an employee like a groundskeeper at a discount or free.

Equity Investment

The total money required for putting a deal together. Example: financing fees, closing costs, down payment for loan, acquisition fee, operating account funding, etc.

Equity Multiplier (EM)

The total return based on (cash flow + sale/refinance proceeds) / equity investment. Example: limited partners invest $3,100,000 into an apartment community over 5 years with an average cashflow of $900,000/year and a refinance proceeds of $4,000,000, the EM = ($4,500,000 + $4,000,000) / $3,100,000 = 2.74 (1.0 is a 100% return of money; 2.74 would be 174% total profit)

Exit Strategy

The plan to reach the investment goal of a building through refinance or sale.

Financing Fee

Fees charged by lender for providing the debt service (mortgage)

General Partner (GP)

The managing partner who is active in the day-to-day operations of the business. GP is also known as a sponsor or syndicator.

Gross Potential Income (GPI)

The total amount of income you receive if all of the apartment units are 100% leased year-round, plus all other income.

Gross Potential Rent (GPR)

The total amount of income you receive if all the apartment units are 100% leased year-round excluding other income.

Gross Rent Multiplier (GRM)

The total number of years it would take for an apartment building to pay itself off if you used every dollar towards the purchase price (excluding interest of the loan). GRM = Purchase Price / Gross Potential Rent (GPR) Example: 296 unit apartment building purchased at $13.7 million with a GPR of $303,400 per month has a GRM of 3.76. It would take 3.76 years to pay off what you purchased the building for if you used every dollar towards the loan (excluding interest).

Guaranty Fee

A fee that a loan guarantor gets paid at closing. A loan guarantor signs their name for the loan and gets paid a fee of 0.25% to 1% of the principal balance.

Interest Rate

The percentage amount charged by a lender for the use of their funds.

Interest-Only Payment

A debt service (mortgage) payment has 4 payments included: principal, interest, taxes, and insurance (PITI). An interest-only payment has 3 payments included: interest, taxes, and insurance.

Internal Rate of Return (IRR)

Your average annualized return year over year. A dollar today is more than a dollar tomorrow because you can invest a dollar today, but you can’t invest a future dollar. The IRR considers the time value of money. The IRR also assumes that every year you receive a profit on your money, you are able to reinvest into something else and not let it lose value in the bank.

Limited Partner (LP)

Limited partners are passive investors. Limited partners supply the money but don't have to deal with the day to day operations of an apartment complex. As a limited partner you reap the benefits of owning real estate: cash flow, forced appreciation, and a tax sheltering asset.

London Interbank Offered Rate (LIBOR)

The rate at which banks charge each other for short-term loans. LIBOR is used to calculate interest rates throughout the world.

Loss to Lease (LtL)

The revenue lost based on market rent and the actual rent. LtL = Gross Potential Rent - Actual Rent Collected

Market Rent

The average rent in comparison to similar apartment communities in the area.

Model Unit

A unit used as a sales tool to show prospective tenants what to expect at our community.

Net Operating Income (NOI)

The total income of an apartment complex minus operating expenses. This does not include capital expenditures or debt service (mortgage). NOI is used as a tool by banks to determine the value of the complex. Example: 296 unit apartment complex Total Yearly Income: $3,698,146 Total Yearly Operating Expenses: $1,595,915 Net Operating Income = $3,698,146 - $1,595,915 = $2,102,231

Operating Account Funding

Also known as reserves. Operating account funding is money raised above the price of the property to cover unexpected dips in occupancy, high than expected capital expenditures, or lump sum tax/insurance payments.

Operating Expenses

The costs of running and maintaining the apartment complex. Example for 296 unit apartment building: Real Estate Taxes: $296,000 Insurance: $75,480 Contract Services: $155,000 Utilities: $320,000 Marketing: $55,000 Management Fee: $129,435 Repairs and Maintenance: $105,000 General/Admin: $80,000 Payroll: $380,000 Total Operating Expenses: $1,595,915

Permanent Agency Loan

A long-term mortgage loan secured through Fannie Mae or Freddie Mac. These loan lengths are 5, 7, or 10 years amortized over 20 - 30 years.

Physical Occupancy Rate

The rate of occupied units. Physical Occupancy Rate = (Total Number of Occupied Units / Total Number of Units) * 100

Preferred Return

A return given to the limited partners prior to general partners receiving payment.

Prepayment Penalty

A monetary penalty in a mortgage clause if you pay off a loan too soon

Private Placement Memorandul (PPM)

A document that outlines the terms of the investment along with the risk factors involved.

Property Management Fee

A monthly fee charged by the property manager to manage the day-to-day operations of the property.

Profit and Loss Statement

Also known as a T12. T12 stands for the trailing 12 months. The previous 12 months of profit and loss for an apartment complex.

Pro-Forma

The projected income and expenses for an apartment building based on the competition and expertise of the property management company in the area over the next couple years.

Property and Neighborhood Classes

The following is subjective: Neighborhood Class: Class A: expensive homes nearby, high median income, no crime Class B: middle class, no crime Class C: low-to-moderate income neighborhood, some crime Class D: low income, high crime

Ratio Utility Billing System (RUBS)

A system created to bill utilities such as water or electricity back to the tenant.

Refinance

The replacement of an existing debt with another debt under different terms. It is beneficial to refinance when the building is worth more in to all of the investors. Example: 296 unit apartment complex Old Loan: - $11,115,868 Refinance Costs: - $500,000 New Loan (75% of upgraded apartment): + $24,256,513 Total to split between Limited Partners and General Partners = $12,640,645

Refinancing Fee

Some general partners charge a fee for the work required to refinance the property. This fee can range anywhere from 0% to 2% of the total loan amount.

Rent Premium

An increase in rent after performing renovations to the interior or exterior of an apartment building.

Rent Roll

A spreadsheet that contains detailed information on each of the units at the apartment community.

Sale/Refinance Proceeds

The profit at the sale/refinance of the apartment complex. Example: 296 unit apartment complex refinance Exit Net Operating Income: $2,102,231 Exit Cap Rate: 6.5% New Appraised Value: ($2,102,231 / 0.065) = $32,342,015 New Loan at 75% Loan to Value: ($32,342,015 * 0.75) = + $24,256,511 Remaining Debt: - $11,115,868 Refinance Cost: - $500,000 Gross Proceeds from Refinance: ($24,256,511 - $11,115,868 - $500,000) = $12,640,645 split between limited partners and general partners.

Sophisticated Investor

Someone who has sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.

Subject Property

The property we are looking to purchase.

Underwriting

The process for evaluating an apartment complex to determine the projected returns.

Vacancy Loss

The amount of revenue lost due to unoccupied units.

Vacancy Rate

The percentage of units unoccupied.

Syndication

Groups of investors pooling their money in pursuit of a single investment goal. The syndicate is organized by a sponsor who does the investment legwork and property management and who asks many investors to join in the real estate investment, with everyone sharing in the profits. Syndicates sometimes meet the definition of “dealing in securities” and therefore must adhere to the rules and regulations of the Securities and Exchange Commission (SEC). An investment is a security, as defined by the Federal Securities Act of 1933