Apartment syndication investing is filled with terminology that can be daunting for new investors, but learning these terms is the first step to becoming a well-informed and experienced general or limited partner, capable of finding the most profitable properties and deals.
Below, we’ve provided a comprehensive list of the top 100 terms often heard in apartment syndications and what they mean, to ensure you don’t have to hop from one online source to another in search of these essential definitions.
A
Accounting Rate of Return (ARR): a metric used to estimate the average net income a property is expected to make compared to its initial cost. The result is presented as an annual percentage.
Accredited Investor: the title of an investor who meets the required net worth or annual income of $200,000 (or 300,000 if married) for the previous two years consecutively or has an individual or joint net worth of over $1 million.
Acquisition Fee: up front compensation earned by the syndication’s general partner for their efforts in sourcing, screening, arranging, financing, and closing on an investment property or asset.
Active Investing: contributing to an investment by finding, qualifying, closing on, and managing properties while following a business plan to increase property equity, enact a successful exit plan, and ensure the highest rate of return for all involved parties.
Amortization: the method of paying off debt using a schedule of monthly mortgage loan payments that include varying amounts of interest and principal payments. Initial payments typically go towards interest while later payments go towards the principal.
Annualized Return: a metric to calculate the average annual return investors will receive throughout the syndication property’s hold period.
Appreciation: an increase in the asset or property’s value over time. This can come in the form of forced appreciation through renovations and other property improvements, or natural appreciation based on market value at a given time.
Apartment Syndication: a form of real estate investment that entails a group of individuals pooling their resources (financially or intellectually) to acquire and maintain an apartment building or complex.
Asset Manager: an individual, typically the General Partner, who overlooks the syndication property and its management company for a fee (average of 1.5-2%).
Assessed Value: the value placed on a property as assigned by a local government official
B
Basis Points (BPS): a unit of measurement for interest rates equivalent to 1/100th of 1% (0.0001)
Bridge Loan: a short-term, interim mortgage loan that allows investors to use the equity of one syndication property to acquire an additional property or access cash for a down payment on the separate property. This option is typically utilized when investors cannot finance a new property long-term.
Additionally, bridge loans have a brief repay period ranging from six months to three years, and as such, they tend to have significantly higher interest rates.
C
Capital Expenditures (CapEx): an expense regarding funds utilized by the syndication’s GP or management company to acquire, improve, or maintain an invested property, effectively increasing the useful life of the asset. These are considered long-term expenses (not operating expenses) and apply to the property’s interior and exterior spaces.
Capitalization Rate (Cap rate): a metric to calculate an apartment syndication’s rate of return for a single year based on the property’s expected income. This is achieved by dividing the property’s net operating income by the current market value without accounting for the asset’s current debt.
Cash Flow: the revenue or liquid profit remaining after all expenses of an asset are paid. This can be calculated by subtracting the property’s operating expenses (funds used for daily operations, such as utilities, maintenance and repairs, management fees) and debt service payments from the current market value.
Cash-on-cash return (CoC): a metric to calculate a property’s rate of return by dividing its cash flow by the property’s initial equity investment (ex. 8,000/800,000= .01 or 1% CoC)
Closing Costs: an expense paid to close on a property and complete this real estate transaction. Costs include:
- Origination fees
- Application fees
- Recording fees
- Attorney fees
- Processing fees
- Appraisal fees
- Underwriting fees
- Due diligence fees
- Credit search fees
Cost Approach: a valuation method where the buyer estimates that the price they should pay for a property is equivalent to the cost of constructing an equivalent building.
Cost Segregation: a tax deferral strategy allowing investors to frontload depreciation deductions in the early years of ownership to increase cash flow, reduce tax liability, and ultimately defer taxes.
D
Debt Service: the annual mortgage amount of a syndication that is paid to the lender. This includes the principal (the original lent sum) and the interest. This figure is commonly used to calculate the property’s Debt Service Coverage Ratio (DSCR) to qualify for commercial real estate financing.
Debt Service Coverage Ratio (DSCR): the ratio of a commercial mortgage lender’s available cash flow to pay the property’s current debt obligations in efforts to evaluate and qualify a deal for financing. This measurement is calculated by dividing the property’s net operating income by its total debt service. Ideally, the final DSCR figure should be above 1.25 (1.0 at the minimum) to ensure a low level of risk and sufficient cash flow and funding to cover expenses
Depreciation: the “wear and tear” that contributes to an asset’s loss in value over time. Therefore, it is a deductible expense that investors can claim in their taxes to effectively reduce tax liability even if the property generates positive cash flow.
Defeasance: the process of rendering a mortgage loan or similar contract void and permitting repayment by substituting the collateral of the loan with securities (ex. fixed-rate government bonds) of equivalent return.
Disposition: the final sale of a syndication property or asset.
Distressed Property: an apartment complex that is deemed unstable because it fulfills multiple criteria listed below:
- Occupancy rate is below 85%
- Tenant problems
- Poor operations
- Outdated interiors, exteriors, and/or amenities
- Poor location
- Mismanagement
- Deferred maintenance
Distributions: funds provided to the limited partners within an apartment syndication. These funds are most commonly provided quarterly but can alternatively be distributed on a monthly or annual basis or upon refinancing and/or final sale of the property.
Due Diligence: a process conducted by the general partners of an apartment syndication to ensure the investment property in question is not subject to any environmental or financial issues through procedures such as inspections, surveys, appraisals, etc. Additionally, this process helps general partners ensure the property satisfies their underwriting assumptions and business plan.
E
Earnest Money: a deposit (the amount of which is a portion of the property’s purchase price) made to a property’s seller by a buyer as a sign of good faith and commitment to fulfill the sales contract. This payment is then credited toward the acquisition of the property’s cost at closing.
Economic Occupancy Rate: a metric used to calculate how much rent a property’s tenants are paying versus the total possible revenue. This is determined by dividing the actual revenue collected by the property’s gross potential income.
Effective Gross Income (EGI): a metric used to calculate a property’s true cash flow by subtracting the revenue lost due to:
- Vacancy
- Loss-to-lease
- Concessions
- Employee units
- Model units
- Bad from GPI
Equity Investment: a property’s upfront purchasing cost. This overarching figure includes various costs, such as:
- The down payment for the property’s mortgage loan
- Fees paid to the general partner(s)
- Closing costs
- Financing fees
- Operating account funding
Equity Multiple (EM): the sum of all positive cash flows (total cash distributions received) in a real estate investment deal, divided by the sum of all negative cash flows (total equity invested) for a total return within the property’s hold time.
Exit Strategy: the general partner’s plan to cash investors out of the apartment syndication investment in the future, typically by selling the property at the end of the property’s hold period, as dictated by their business plan.
F
Fair Market Value (FMV): a metric used to calculate a property’s selling price/market value by dividing its net operating income (NOI) by its capitalization rate (CAP).
Floating Interest Rate: a variable or adjustable interest rate that changes periodically with the market or an index rather than remaining consistently fixed.
G
General Partner: investor(s) responsible for finding, funding, managing, and maintaining any apartments within the syndication. As a result, they hold the most influence when making decisions regarding the properties and are considered active investors.
Gross Potential Income: the theoretical amount of revenue an apartment syndication can yield with a 100% lease rate year-round (each leased at market rental rates), along with additional sources of income.
Gross Potential Rent (GPR): the theoretical amount of revenue an apartment syndication can yield when solely accounting for a 100% lease rate year-round at market value (does not include additional sources of income).
Gross Rent Multiplier (GRM): a metric used to calculate the number of years it would take for a property to pay for itself based on gross potential rent. This is determined by dividing the property purchase price by its annual gross potential rent.
H
Holding Period: an amount of time set by the general partner and dictated in their business plan to own an apartment building or complex for investment from purchase to final sale.
I
Income Approach: a valuation method used to estimate an apartment syndication’s fair value by dividing its net operating income by its capitalization rate.
Interest Rate: an amount charged to a lender based on a proportion of their loan for the privilege of borrowing money.
Interest-Only Payment: a loan payment (typically for a mortgage) that requires the lender to only pay interest, rather than a percentage of the principal balance.
Internal Rate of Return (IRR): metric used to estimate what an investor will earn on each dollar in a rental property over its holding period, allowing them to accurately estimate its profitability by calculating its expected compound annual rate of return.
J
Joint Venture: a business arrangement or investment involving two or more parties for the purpose of pooling resources.
K
K-1 Tax Form: a form allowing the apartment syndication’s general partner to utilize pass-through taxation and shift tax liability from themselves to the syndication’s limited partners.
Key Principal: an individual in an apartment syndication who controls and/or manages the property and is deemed essential to the successful operation and management of that property. This individual usually lies a step below the syndication’s general partner, as they will sign on the loan but might not have a level property control equal to the general partner(s).
L
Letter of Intent (LOI): a non-binding agreement provided by a buyer proposing their purchasing terms for a property in efforts to expedite making an offer before settling on an official deal between parties.
Limited Partner: investor(s) who contribute financially to the syndication property’s equity investment, allowing the GPs to acquire, renovate, and maintain properties. A limited partner is considered the passive investor of an apartment syndication and their liability is limited to the extent of their share of ownership.
London Interbank Offered Rate (LIBOR): considered the benchmark interest rate within the investment and real estate industry that select renowned banks worldwide charge each other for short-term loans. This interest rate is utilized to calculate interest rates on various loans and interest rate adjustments on a variable rate loan.
Loan-to-Cost Ratio: a metric used to compare the financing amount of an apartment syndication project, in its entirety, to its cost. The ratio is calculated by dividing the total project’s cost, meaning its loan amount and capital expenditure costs, by the property’s appraised value.
Loan-to-Value Ratio: a metric used to help determine a property’s level of risk. The ratio is calculated by dividing the loan amount by the property’s appraised value.
Loss-to-Lease: a metric used to calculate the revenue loss on a property when units are not rented at market rental rates. This is calculated by subtracting the market rent (or the GPR) of a unit by its actual rent.
M
Market Rent: the market value of a rental unit that landlords can reasonably expect to receive, and tenants are willing to pay based on comparable rental rates for other units within the same area. This amount can be calculated by conducting a rent comparable analysis and is further utilized to calculate value, cash flow, and potential loan amounts.
Metropolitan Statistical Area (MSA): a core geographic area containing a substantial population nucleus, adjoined with adjacent communities demonstrating a high degree of economic and social integration with the core.
Multifamily: also referred to as multifamily properties, is a classification of residential housing that contains multiple housing units and inhabitants within one building or several buildings within a complex (ex. duplex, townhouse, apartment complex).
Model Unit: an apartment unit used as a sales tool for demoing that demonstrates to potential tenants how the unit would look after moving in.
N
Net Operating Income (NOI): a metric used to calculate a property’s annual income after deducting all possible expenses.
Non-Recourse Loan: a loan in which the borrower does not personally sign a guarantee, resulting in the loan being secured by collateral (usually the property). This ensures that, in the event of default, the lender cannot seize any of the borrower’s assets beyond the agreed collateral.
O
Operating Account Funding: a reserves fund set aside to provide additional financial security and cover unexpected charges, expenditures, and losses of income. These funds should be utilized for immediate or short-term resolutions and should be replenished when possible for future use (if necessary).
Operating Agreement: a legally binding document, often utilized by limited liability companies (LLCs) as well as apartment syndications, that outlines the responsibilities and ownership percentages of the general and limited partners.
Operating Expense Ratio (OER): a metric used to calculate the cost of operating a property in proportion to the income it generates. This is determined by dividing the property’s operating expenses by its gross income. The remaining figure or percentage can be used to compare an investor’s property to other properties and establish relative operating efficiency.
Offering Memorandum: a document provided by a broker that describes the property, the investment’s objective, and details crucial information for the buyer, such as:
- Thorough building description (including location overview, demographics, etc.)
- Summary of property’s past, present and an educated assumption of its future
- Pro-forma financial statements (ex. P&L, balance sheet, investor distribution schedule)
- Biographies of all involved management and investment companies
- Participation requirements
- Confidentiality agreement
This information is split into four main sections: the introductions (a brief summary of the offering), basic disclosures (general partner information, asset description and risk factors), the legal agreement and the subscription agreement.
In essence, the offering memorandum, also known as the private placement memorandum (PPM), allows investors to determine the level of risk associated with a property and provides a clear vision of what to expect for the property and investment.
P
Passive Investing: predominantly contributing to an investment by providing capital while holding minimal to no responsibilities associated with the invested property. In an apartment syndication, this is the investing strategy of limited partners.
Permanent Agency Loan: a long-term loan secured solely by government-sponsored agencies Fannie Mae or Freddie Mac and amortized for terms as brief as three years or as long as 30 years.
Physical Occupancy Rate: a metric used to calculate a property’s rate of occupancy by dividing the total number of occupied units by the property’s total number of units.
Preferred Return: the threshold return offered to limited partners that must be received before the general partners can receive payment.
Prepayment Penalty: a clause typically found in mortgage contracts that assigns a penalty fee to lenders for paying off all or a portion of the loan (ex. the mortgage) early.
Price Per Unit: the value assigned to each unit within a property. This is calculated by dividing the purchase price of the property by the total number of units.
Principal Protected Note (PPN): a fixed-income security the guarantees limited partners within an apartment syndication receive a minimum return equal to their initial investment regardless of the property’s performance.
Pro-forma: a method for predicting the property’s results for future years using a projected budget with itemized line items for the revenue and expenses.
Profit and Loss Statement (T-12): a spreadsheet containing detailed information regarding a property’s revenue and expense over the last 12 months. Within this document, investors can examine revenue, cost of sales, gross and net profit, amongst several other calculations and figures.
Property and Neighborhood Classes: a ranking system consisting of classes A through D that is utilized to classify properties and neighborhoods based on factors, such as:
| Property Factors | Neighborhood Factors |
| Date of construction Property conditions Amenities offered | Demographics Median income Median home values Crime rates School district rankings |
Property Management Fee: a recurring fee paid to the apartment syndication’s property management company for managing its day-to-day operations.
Q R
Ratio Utility Billing System (RUBS): a management method for calculating and billing tenants for utilities based on occupancy, unit square footage, or both, to ensure the owner does not absorb utility costs.
Recourse: a lender’s right to pursue a debt owed to them directly from the borrower, with the potential to seize a borrower’s personal assets beyond the collateral in the case of default (as opposed to a non-recourse loan where they may only seize the collateral).
Refinance: the process of replacing one existing debt obligation on a property with a new loan, often containing different terms. This is commonly accompanied with a refinancing fee paid to the general partners.
Rent Comparable Analysis (Rent Comps): a comparison method where the rental rates of properties similar to the potential investment property are analyzed in order to determine the regions market rent per unit.
Rent Premium: a substantial increase in a unit’s rental rate due to internal renovations or external improvements.
Rent Roll: a spreadsheet consisting of every unit in the property accompanied with detailed information regarding:
- Unit numbers
- Unit types
- Square feet
- Tenant names
- Market rents versus actual rent
- Deposit amounts held
- Move-in dates
- Lease-start and lease-end dates
- Tenant balance
Reposition: a strategy utilized by the general partner to change a property’s position in a market by adding value and/or rebranding it.
Return Hurdle: also known as the minimum acceptable rate of return (MARR) refers to the minimum rate of return an investment must acquire to offset its costs. Comparing this to the project’s internal rate of return allows general partners to determine the risk and potential profit of a property.
Return on Equity (REO): a metric used to calculate the amount of net income returned as percentage of a shareholder’s equity, allowing investors to determine how efficiently the property is generating profit. This is calculated by dividing the property’s net income by the shareholder’s equity.
Return on Investment (ROI): a metric used to calculate the probability of gaining a return on an investment by adding the property’s cumulative cash flow and net resale proceeds, then dividing that figure by the investor’s equity contribution.
Reversion Cap: the expected CAP rate at the exit or sale of the investment/property, which reflects the benefit investors can expect to receive at the time of sale.
S
Sales Comparison Approach: an appraisal method to determine a property’s value by comparing it to other similar properties sold in the region.
Sales Proceeds: the cash received upon the sale of the property.
Self-Directed IRA (SD-IRA): a type of IRA that is managed by the account owner and provide a unique set of investment options, such as real estate, notes, and private placements, in addition to options offered in the average IRA (ex. approved stocks, bonds, and mutual funds).
Sensitivity Analysis: a method used to predict the potential outcome of uncertain variables, such as potential returns on a property in the event of a market downturn. These are “what-if” scenarios investors use prior to purchase to determine if a subject property can meet their investment goals.
Sophisticated Investor: an individual deemed knowledgeable and experienced enough to assess the risks and merits an investment opportunity.
Subject Property: a residential unit or commercial building that a buyer (the general partner) is interested in purchasing/financing or refinancing.
Submarket: a geographic boundary that outlines a highly competitive region within an overarching market, such as a particular neighborhood.
Subscription Agreement: A document used as 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.
T
The Promote: a private equity deal where general partners an extra disproportionate share of returns when the apartment syndication property exceeds return expectations.
U
Underwriting: a process conducted by general partners to evaluate an apartment building community to determine its status, value, risks, and potential returns.
V
Vacancy Loss: the amount of potential revenue and cash flow lost by a property due to vacant units.
Vacancy Rate: the percentage of vacant units in a property or multifamily community.
Value-Add Property: a term used to describe a property or apartment community that either requires corrective actions to reach its potential value, or has an economic occupancy above 85%, and is therefore, offers an opportunity for increase cash flow through renovations and other upgrades.
W
Waterfall Structure: a method for distributing cash flows between partners within a syndication. In this particular structure, profits are distributed unevenly as payouts change when specific return hurdles are met. For examples, limited partners might receive 100% of profits until preferred return of 8%, as stated in the deal, is met. Afterward, the profits are split 70/30 between the limited partners and the general partner respectively.
X
Y
Yield Maintenance: a prepayment penalty paid by the borrower that ensure the mortgage lender fully receives all scheduled interest payments up until the maturity date.