Acquisition fees are fees charged by a general partner to recoup the upfront costs associated with finding, underwriting, and performing due diligence on a potential commercial investment property. To illustrate the amount of effort that it takes to do this, an example from our process is helpful.
The finding, qualifying and closing on an apartment building using one’s own capital and overseeing the business plan through its successful execution.
The paying off of a mortgage loan over time by making fixed payments of principal and interest.
Most real estate investors get angel funding to have capital to grow their business, for down payment money to buy properties or for straight acquisition and inventory building. Angel investors are perfect for financing real estate because of their lending amounts, timing, and collateral to risk assessments.
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, which 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 limited partners (i.e. the passive investors) to acquire, manage and sell an apartment community while sharing in the profits.
A report created by a certified appraiser that specifies the market value of a property. The value is based on cost, sales comparable and income approach.
An increase in the value of an asset over time. The two main types of appreciation that are relevant to apartment syndications are natural appreciation and forced appreciation. Natural appreciation occurs when the market cap rate naturally decreases over time, which isn’t always a given. Forced appreciation occurs when the net operating income is increased by either increasing the revenue or decreasing the expenses. Force appreciation typically occurs by adding value to the apartment through renovations and/or operational improvements.
The practice of asset management is an example of passive investing, where a person makes an investment but turns the decision-making over to someone else. The asset manager is the decision-maker and usually receives fees for their services.
An ongoing annual fee from the property operations paid to the general partner for property oversight.
A bad debt is the amount owed by a debtor to a creditor which is unlikely to be paid, or the amount of uncollected money that a former tenant owes after moving out.
A common unit of measure for interest rates and other percentages in finance. Basis points are typically expressed with the abbreviations bp, bps, or bips. One basis point is equal to 1/100th of 1%, or 0.01%. In decimal form, one basis point appears as 0.0001 (0.01/100). Basis points (BPS) are used to show the change in the value or rate of a financial instrument, such as 1% change equals a change of 100 basis points and 0.01% change equals one basis point.
When evaluating a commercial real estate investment property, breakeven occupancy is the point at which the property’s operating expenses plus loan payments are equal to the amount of potential rental income the property produces. In other words, breakeven occupancy is the occupancy level at which a property swings from an operating deficit to an operating profit.
A bridge loan is a short-term loan used until a person or company secures permanent financing or pays an existing obligation. It allows the borrower to meet current obligations by providing immediate cash flow. Bridge loans have relatively high interest rates and are usually backed by some form of collateral, such as real estate or the inventory of a business.
A C corporation is a separate taxable entity and pays tax on profits at the corporate level. When a C corporation sells appreciated real estate, it will owe tax on the profit at the corporate tax rate.
The funds used by a company to acquire, upgrade and maintain a property. Also referred to as CapEx. An expense is considered CapEx 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. CapEx included both interior and exterior renovations.
The capital stack refers to the layers of capital that go into purchasing and operating a commercial real estate investment. It outlines who will receive income and profits generated by the property and in what order.
Capitalization rate (or Cap Rate for short) is commonly used in real estate and refers to the rate of return on a property based on the net operating income (NOI) that the property generates. In other words, capitalization rate is a return metric that is used to determine the potential return on investment or payback of capital.
Carried interest is a share of profits earned by general partners of private equity, venture capital, and hedge funds. Carried interest is due to general partners based on their role rather than an initial investment in the fund. As a performance fee, carried interest aligns the general partner’s compensation with the fund’s returns. Carried interest is often only paid if the fund achieves a minimum return known as the hurdle rate. Carried interest typically qualifies for treatment as a long-term capital gain taxed at a lower rate than ordinary income.
The revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue.
The rate of return based on the cash flow and the equity investment. Also referred to as CoC return. Coc return is calculated by dividing the cash flow by the initial equity investment.
A recognized expert in the disciplines of commercial and investment real estate. The designation is awarded by the CCIM Institute. A CCIM is a resource to the commercial real estate owner, investor, and user, allowing them to make the best investment decisions when it comes to real estate.
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.
Commercial real estate lenders can be separated into two broad categories: cash flow lenders and equity lenders.
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.
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.
A strategic process where a cost segregation consultant analyzes commercial real estate to determine whether identifying and segregating certain components of the property as personal property (Section 1245 Property) that are separate and distinct from the real property (Section 1250 Property) will produce any accelerated depreciation benefits for income tax purposes.
Commercial real estate brokers (also known as commercial brokers) are professionals who assist their clients in buying, selling or leasing properties for commercial purposes. A real estate broker is similar to a real estate agent, but the broker is licensed to manage their own real estate business, whereas the agent must work with Real Estate Brokers.
A method for raising money for businesses and an easier way to access such ventures for investors. Crowdfunding utilizes the Internet and social media outlets, such as Facebook, Twitter, and LinkedIn, to reach an audience of potential investors.
The idea behind crowdfunding is that many people are willing to invest a small amount, and when they do, large sums of money can be raised quite quickly.
Crowdfunding offers companies access to capital that they might never be able to raise. Crowdfunding offers investors the ability to become shareholders in a company or in a real estate property.
The interest and principal payments of the loan obtained by or on behalf of Landlord (but not by Tenant) to finance any restoration or repair of the Leased Property pursuant to Sections 10.2 or 11.6 hereof, divided by the initial principal balance of such loan. Sample 1 Sample 2 Based on 2 documents
If you’re a debt partner, you’re loaning money and getting the agreed-upon interest rate in return until the debt is repaid. Unlike an equity partner, you don’t have any ownership interest in the real estate, although you may end up with the real estate if the borrower defaults if it’s the collateral for the loan you made.
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 commercial real estate, the debt service coverage ratio (DSCR) definition is net operating income divided by total debt service: For example, suppose Net Operating Income (NOI) is $120,000 per year and total debt service is $100,000 per year.
A legal agreement between an investor and a third-party trust in which the investor’s real estate is sold to the trust in exchange for predetermined future payments, known as installments, made over an agreed-upon time period. Investors can defer capital gains taxes over time by using a “Deferred Sales Trust.”
A decrease or loss in value due to wear, age or other cause.
Directors and officers (D&O) liability insurance is insurance coverage intended to protect individuals from personal losses if they are sued as a result of serving as a director or an officer of a business or other type of organization. It can also cover the legal fees and other costs the organization may incur as a result of such a suit.
Property Disposition Fee. The Company may pay the Advisor, Director, Sponsor or any Affiliate thereof a real estate disposition fee upon Sale of one or more Properties, in an amount equal to the lesser of Property Disposition Fee.
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.
Real estate distributions are funds paid to individuals as part of a real estate investment. The exact amount of distributions is dependent upon a number of factors including the rental income generated by the property and the operating expenses – property taxes, insurance, maintenance – incurred.
The process of confirming that a property is as represented by the seller and is not subject to environmental or other problems. For apartment syndication, the general partner will perform due diligence to confirm their underwriting assumptions and business plan.
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 sales contract.
The rate of paying tenants based on the total possible revenue and the actual revenue collected. The economic occupancy is calculated by dividing the actual revenue collected by the gross potential income.
The true positive cash flow. Also referred to as EGI. EGI 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.
An apartment unit rented to an employee at a discount or for free.
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.
The rate of return based on the total net profit and the equity investment. Also referred to as EM The EM is calculated by dividing the sum of the total net profit (cash flow plus sales proceeds) and the equity investment by the equity investment.
Equity Partner or “Equity Investor” means a limited partner or investor member who contributes capital to a limited partnership or to a limited liability company that will own and operate the low- income housing Project.
When we purchase a property, we use a mixture of debt and equity to finance it. In return for their equity contribution, our investors receive a claim on the income and profits produced by the property. The terms of the “waterfall” dictate how the income and profits are divided between us and our investors.
The waterfall structure can — and does — vary from one transaction to another, so it is important to dig into the details for each transaction to determine if the split is fair and equitable for all parties involved. These details are outlined in a document called the operating agreement, which should be read completely and thoroughly prior to committing funds to a real estate syndication deal.
The general partner’s plan of action for selling the apartment community at the conclusion of the business plan.
The Refinance Test evaluates a borrower’s ability to successfully refinance a balloon balance at maturity. We’re providing you with this tool to:
Make the test results transparent to you early in the underwriting process
Encourage discussion between you and our underwriting staff to assess your deal in relation to the test results
A non-governmental organization that acts as a self-regulatory organization for securities firms that operate in the United States. The goal of FINRA is to protect investors by safeguarding the integrity of the financial markets.
The one-time, upfront fees charged by the lender for providing the debt service. Also referred to as finance charges.
If you are a corporation, limited partnership, limited liability company, or business trust chartered, qualified, or registered in Tennessee or doing business in this state, then you must register for and pay franchise and excise taxes. The franchise tax is based on the greater of net worth or the book value of real or tangible personal property owned or used in Tennessee. The excise tax is based on net earnings or income for the tax year.
The minimum franchise tax of $100 is payable if you are incorporated, domesticated, qualified, or otherwise registered through the Secretary of State to do business in Tennessee, regardless of whether the company is active or inactive.
An owner of a partnership who has unlimited liability. A general partner is usually a managing partner and is active in the day-to-day operations of the business. In apartment syndications, the general partner is also referred to as the sponsor or syndicator and is responsible for managing the entire apartment project.
The hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates plus all other income.
The hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates. Also referred to as GPR.
The number of years it would take for a property to pay for itself based on the gross potential rent. Also referred to as the GRM. The GRM is calculated by dividing the purchase price by the annual gross potential rent.
A hard-money lender provides short-term loans to individuals purchasing residential or commercial real estate. This financing is also available for land purchases. Investors use hard-money lenders to acquire investment properties relatively quickly.
The amount of time the general partner plans on owning the apartment from purchase to sale.
If you need cash and have equity in your home, a home equity loan or a home equity line of credit (HELOC) can be an excellent solution. But the tax aspects of either option are more complicated than they used to be. Interest on a HELOC may be tax deductible—but there are conditions. There are two types of home equity lending: a fixed-rate loan for a specified amount of money, or a variable-rate line of credit. Depending on your need for the funds and how you plan to use them, one option may work better than the other. Interest paid on either loan, like the interest on your first mortgage, is sometimes tax deductible.
In financial transactions, the term “in escrow” indicates a temporary condition of an item, such as money or property, that has been transferred to a third party. This transfer is usually done on behalf of a buyer and seller. “In escrow” is a type of legal holding account for items, which can’t be released until predetermined conditions are satisfied. Typically, items are held in escrow until the process involving a financial transaction has been completed. Valuables held in escrow can include real estate, money, stocks, and securities.
A method of calculating an apartment’s value based on the capitalization rate and the net operating income (value = net operating income / capitalization rate).
Incorporating a legal real estate business entity helps you save money on taxes. It enables you to enjoy the benefits of tax deductions. Without incorporating a business, you’re not eligible to deduct operational expenses such as office rent, insurance, and employee salaries (if any).
Sometimes investment firms or dealers take a debt obligation or pool of obligations—mortgages, Treasury bonds, or other bonds—and after separating their principal and interest portions, sell them as distinct security products to investors, thus creating what’s known as a strip bond. An interest only strip is one of these separated securities—the part that consists only of the interest portion of the monthly payments. Although interest only strips can be created out of any debt-backed security that generates periodic payments, the term is usually associated with mortgage-backed securities (MBS)
The amount charged by a lender to a borrower for the use of their funds.
IRR, or the internal rate of return, is defined as the discount rate at which the net present value of a set of cash flows (ie, the initial investment, expressed negatively, and the returns, expressed positively) equals zero. In more simple terms, it is the rate at which a real estate investment grows (or, heaven forbid, shrinks).
A joint venture in real estate is when two or more investors combine their resources for a property development or investment. Despite working together, each party maintains their own unique business identity while working together on a deal. Therefore, even though a joint venture sounds like a partnership, it’s a little bit different.
A marketing term for a free item or service that is given away for the purpose of gathering contact details; for example, lead magnets can be trial subscriptions, samples, white papers, e-newsletters, and free consultations. Marketers use lead magnets to create sales leads. The marketers attempt to convert the leads into paying customers of a product or service, or they may market unrelated offerings to the sales leads.
A formal legal contract between a landlord and a tenant for occupying an apartment unit for a specified time and at a specified price with specified terms.
A contract between the lessor and the lessee permitting the latter to optionally purchase the estate during or after the lease period ends. It aids both entities in managing a mutually beneficial property agreement. The purchase lease option is a lawful method in real estate for buying a home, workplace, or personal property like cars.
A document declaring the preliminary commitment of one party to do business with another. The letter outlines the chief terms of a prospective deal. Commonly used in major business transactions, LOIs are similar in content to term sheets. One major difference between the two, though, is that LOIs are presented in letter formats, while term sheets are listicle in nature.
A popular business structure for real estate companies involved in the business of buying, selling, or renting commercial or residential real estate.
A limited partnership is usually a type of investment partnership, often used as investment vehicles for investing in such assets as real estate. LPs differ from other partnerships in that partners can have limited liability, meaning they are not liable for business debts that exceed their initial investment.
A partner whose liability is limited to the extent of their share of ownership. Also referred to as the LP. In apartment syndications, the LP is the passive investor who funds a portion of the equity investment.
A guarantor is a financial term describing an individual who promises to pay a borrower’s debt in the event that the borrower defaults on their loan obligation. Guarantors pledge their own assets as collateral against the loans. On rare occasions, individuals act as their own guarantors, by pledging their own assets against the loan. The term “guarantor” is often interchanged with the term “surety.”
Loan Guarantor Fee means a fee equal to 1% of the total loan amount paid to loan guarantors at loan inception of each loan. Sample 1 Based on 1 documents
The ratio of the value of the total project costs (loan amount + capital expenditure costs) divided by the apartment’s appraised value.
The ratio of the value of the loan amount divided by the apartment’s appraised value.
The London Interbank Offered Rate (LIBOR) is a benchmark interest rate at which major global banks lend to one another in the international interbank market for short-term loans.
LIBOR, which stands for London Interbank Offered Rate, serves as a globally accepted key benchmark interest rate that indicates borrowing costs between banks. The rate is calculated and will continue to be published each day by the Intercontinental Exchange (ICE), but due to recent scandals and questions around its validity as a benchmark rate, it is being phased out.
A benchmark rate that some of the world’s leading banks charge each other for short-term loans. Also referred to as LIBOR. The LIBOR serves as the first step to calculating interest rates on various loans, including commercial loans, throughout the world.
The revenue lost based on the market rent and the actual rent. Also referred to as LtL. The LtL is calculated by dividing the gross potential rent minus the actual rent collected by the gross potential rent.
The rent amount a willing landlord might reasonably expect to receive and a willing tenant might reasonably expect to pay for tenancy, which is based on the rent charged at similar apartment communities in the area. The market rent is typically calculated by conducting a rent comparable analysis.
Marketing, especially in the real estate industry, is one of the most important things a business can do. Without any deals in your actual pipeline, all of the passion in the world won’t get you anywhere. On the other hand, too many investors make the mistake of thinking that any marketing will do. You need to have a clear plan of what you want to achieve, and how you will get there. Fortunately, there are many subtle, but important, things that can help you maximize your real estate marketing results. If you want to separate yourself from the pack, there are several things you can do to get noticed.
A master lease is an agreement by which a Tenant leases a property a period of time from an Owner of a commercial property who may be inclined to relinquish control of the asset. The agreement provides the Tenant with the ability to then sub-lease portions of the property to other individual tenants.
A geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core. Also referred to as the MSA. MSAs are determined by the United States Office of Management and Budget (OMB).
Mezzanine debt is when a hybrid debt issue is subordinate to another debt issue from the same issuer. Mezzanine debt bridges the gap between debt and equity financing and is one of the highest-risk forms of debt—being subordinate to pure debt but senior to pure equity.
A representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.
A legal contract by which an apartment is pledged as security for repayment of a loan until the debt is repaid in full.
In real estate, a wrap-around mortgage is a sort of junior loan that wraps around, or encompasses, the current note due on the property. The wrap-around loan will include the previous loan balance plus an amount to meet the property’s new purchase price.
All the revenue from the property minus the operating expenses. Also referred to as the NOI.
Non-recourse loans are often used to finance commercial real estate ventures and other projects that involve a long lead time to completion. In the case of real estate, the land provides the collateral for the loan. They also are used in the financial industry, with securities used as collateral.
A reserves fund, over and above the purchase price of an apartment, to cover things like unexpected dips in occupancy, lump sum insurance or tax payments or higher than expected capital expenditures. The operating account funding is typically created by raising extra capital from the limited partners.
An LLC operating agreement is a document that customizes the terms of a limited liability company according to the specific needs of its members. It also outlines the financial and functional decision-making in a structured manner. It is similar to articles of incorporation that govern the operations of a corporation.
Although writing an operating agreement is not a mandatory requirement for most states, it is nonetheless considered a crucial document that should be included when setting up a limited liability company. The document, once signed by each member (owner), acts as a binding set of rules for them to adhere to.
The costs of running and maintaining the property and its grounds. For apartment syndications, the operating expense are usually broken into the following categories: payroll, maintenance and repairs, contract services, make ready, advertising/marketing, administrative, utilities, management fees, taxes, insurance and reserves.
Placing one’s capital into an apartment syndication that is managed in its entirety by a general partner.
The return hurdles are the rates of return at which the cash-flow split between the GP and the LP changes. They are structured to incentivize the GP to manage the property as profitably as possible. The higher the return that a property produces, the more money the GP stands to make relative to their initial investment.
A long-term mortgage loan secured from Fannie Mae or Freddie Mac. Typical loan terms lengths are 3, 5, 7, 10, 12 or more years amortized over up to 30 years.
The rate of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units at the property.
The threshold return that limited partners are offered prior to the general partners receiving payment.
A clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain period.
The cost per unit of purchasing a property. The price per unit is calculated by dividing the purchase price of the property by the total number of units.
A person or entity that is providing funding for investment purposes. This can be to the likes of real estate investors who are wanting to purchase investment properties.
Also known as a private offering document and confidential offering memorandum, is a securities disclosure document used in a private offering of securities by a private placement issuer or an investment fund (collectively, the “Issuer”). From an investor’s point of view, the purpose of the PPM is to obtain needed information about the Issuer and its securities, both good and bad, to make an informed decision about whether to purchase the security. The investor wants to know the parameters of investing in the Issuer and the potential rights, risks, and rewards of its investment. For the Issuer, the purpose of the PPM is to provide the necessary disclosures about the risks, strategies, management team, investment criteria, and other information about its securities to protect itself and its managers against claims of misstatements or omissions.
The projected budget with itemized line items for the revenue and expenses for the next 12 months and five years.
A document or spreadsheet containing detailed information about the revenue and expenses of a property over the last 12 months. Also referred to as a trailing 12-month profit and loss statement or a T-12.
A ranking system of A, B, C or D assigned to a property and a neighborhood based on a variety of factors. For property classes, these factors include date of construction, condition of the property and amenities offered. For neighborhood classes, these factors include demographics, median income and median home values, crime rates and school district rankings.
An ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property.
Real estate prospecting is the process of initiating new business opportunities by targeting potential real estate clients. This involves personal outreach, time, and leveraging real estate technology to build a sales pipeline. From choosing a real estate niche to asking for referrals and joining community events, our 18 real estate prospecting tips below will empower you to consistently attract and identify prospective clients. This helps you build a strong pipeline of leads to fuel your real estate business in the long term.
Quitclaim deed: Used when a real estate property transfers ownership without being sold. No money is involved in the transaction, no title search is done to verify ownership, and no title insurance is issued. A quitclaim deed real estate transaction sometimes occurs between family members.
A method of calculating a tenant’s utility usage based on occupancy, unit square footage or a combination of both. Once calculated, the amount is billed back to the tenant.
The right of the lender to go after personal assets above and beyond the collateral if the borrower defaults on the loan.
The replacing of an existing debt obligation with another debt obligation with different terms.
A fee paid to the general partner for the work required to refinance an apartment.
The process of analyzing the rental rates of similar properties in the area to determine the market rents of the units at the subject property.
The increase in rent demanded after performing renovations to the interior and/or exterior of an apartment community.
A document or spreadsheet containing detailed information on each of the units at the apartment community, including the unit number, unit type, square footage, tenant name, market rent, actual rent, deposit amount, move-in date, lease-start and lease-end date and the tenant balance.
A property’s Return on Cost is similar to the Cap Rate, but it is forward looking and takes into account potential changes to Net Operating Income. Return on Cost is calculated as Purchase Price plus Renovation Expense, divided by Potential Net Operating Income.
An S-Corp is a pass-through entity, meaning the corporation’s earnings and losses pass through to the owner’s tax return. It offers many benefits for real estate agents who decide to incorporate. Let’s take a look at each one.
A method of calculating an apartment’s value based on similar apartments recently sold.
The profit collected at the sale of the apartment community.
A self-directed individual retirement account (SDIRA) is a type of individual retirement account (IRA) that can hold a variety of alternative investments normally prohibited from regular IRAs. Although the account is administered by a custodian or trustee, it’s directly managed by the account holder, which is why it’s called self-directed. Available as either a traditional IRA (to which you make tax-deductible contributions) or a Roth IRA (from which you take tax-free distributions), self-directed IRAs are best suited for savvy investors who already understand alternative investments and want to diversify in a tax-advantaged account.
Seller Financing is a real estate agreement in which the seller handles the mortgage process instead of a financial institution. Instead of applying for a conventional bank mortgage, the buyer signs a mortgage with the seller. Owner financing is another name for seller financing. It is also called a purchase-money mortgage.
A sensitivity analysis is a useful method of assumption, one that many investors use before they purchase a property to determine if a commercial property is likely to meet their investment goals. It is a visual what-if analysis of the unknown variables and how they can change throughout the life of the investment.
A simplified employee pension (SEP) is an individual retirement account (IRA) that an employer or a self-employed person can establish. The employer is allowed a tax deduction for contributions made to a SEP IRA and makes contributions to each eligible employee’s plan on a discretionary basis. Additionally, under the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted on Dec. 20, 2019, small employers get a tax credit to offset the costs of starting a 401(k) plan or SIMPLE IRA with auto-enrollment. That’s on top of the start-up credit they already receive.
The term independent 401(k) refers to a tax-advantaged retirement savings plan available to individual small business owners and their spouses. It is a variation of the 401(k) plan that many large employers offer their workers. Since it is a small business owner 401(k), the employer and employee are one and the same, which means that the retirement contribution limits are higher than traditional plans. The contributions made as an employer are tax-deductible, which can save the sole proprietor a great deal in taxes. Independent 401(k)s are also called one-participant 401(k)s, solo 401(k)s, indie Ks, or self-employed 401(k)s.
A sophisticated investor is a classification of investor indicating someone who has sufficient capital, experience and net worth to engage in more advanced types of investment opportunities.
A Special Purpose Vehicle (SPV) is a separate legal entity created by an organization. The SPV is a distinct company with its own assets and liabilities, as well as its own legal status. Usually, they are created for a specific objective, often to isolate financial risk. As it is a separate legal entity, if the parent company goes bankrupt, the special purpose vehicle can carry on.
The apartment the general partner intends on purchasing.
The term “Subject To” is often used in reference to a property that is sold subject to an existing loan. The seller’s existing mortgage remains in place after the property is sold, while the new buyer continues making payments for the remaining life of the loan.
A geographic subdivision of a market.
A document that is 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.
A real estate syndication is when a group of investors pools together their capital to jointly purchase a large real estate property. Apartments, mobile home parks, land, self-storage units and other real estate assets are some of the investment opportunities available through real estate syndications.
Doing your legal due diligence is crucial when you’re using other people’s money to buy property. A real estate syndication attorney is there to help the syndicator with everything involving the law along the way.
They can provide appropriate guidance for syndication structure and advise which type of partnership would be ideal in a specific situation. They can also assist with putting the deal together for the investors.
If you own investment property and are thinking about selling it and buying another property, you should know about the 1031 tax-deferred exchange. This is a procedure that allows the owner of investment property to sell it and buy like-kind property while deferring capital gains tax. On this page, you’ll find a summary of the key points of the 1031 exchange—rules, concepts, and definitions you should know if you’re thinking of getting started with a section 1031 transaction.
Tax deferral refers to instances where a taxpayer can delay paying taxes to some future period. In theory, the net taxes paid should be the same. Taxes can sometimes be deferred indefinitely, or may be taxed at a lower rate in the future, particularly for deferral of income taxes.
A tax offset reduces the tax you pay (known as your tax payable) on your taxable income. Your taxable income is your total income minus any deductions you claim.
When a buyer makes an offer on a prospective house, they typically work directly with their own real estate agent to come up with an appropriate offer and present their preapproval letter showing they are capable of purchasing the home. Based on this, the agent will create what is called an “offer letter” or “offer to purchase and contract” to send to the seller’s agent. There are many things buyers need when buying a house and anything can go wrong during the purchase process, though ‘under contract’ all starts with the seller’s acceptance of the buyer’s offer.
The process of financially evaluating an apartment community to determine the projected returns and an offer price.
Stress testing for real estate loans is a risk management tool designed to analyze current and emerging risks and vulnerabilities by assessing the impact of changing economic conditions on a borrower’s performance to determine future loss rates.
Unrelated business taxable income (UBTI) is income earned by a tax-exempt entity that’s not related to the tax-exempt purpose of the entity. More precisely, the Internal Revenue Service (IRS) defines unrelated business taxable income for most organizations as “income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.”
Unrelated Debt Financed Income, or UDFI, occurs when an IRA or LLC in which an IRA has an ownership interest, borrows money to purchase real estate. (This is also known as using leverage or debt-financing.) The net profits attributable to the leveraged portion is considered UDFI and is subject to tax.
The amount of revenue lost due to unoccupied units.
The rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.
A stabilized apartment community with an economic occupancy above 85% and has an opportunity to be improved by adding value, which means making improvements to the operations and the physical property through exterior and interior renovations in order to increase the income and/or decrease the expenses.
Wholesale real estate refers to a short-term business strategy that investors can use to make quick and steady income in the real estate market.
In wholesale real estate transactions, the wholesaler enters into a purchase contract for a home from a seller, for a small earnest money deposit. The contract spells out the amount the wholesaler will sell the property for and the required time period for the sale.
A penalty paid by the borrower on a loan is the principal is paid off early.
Yield on Cost Definition Yield on cost is a real estate financial metric that helps investors quantify the risk taken to purchase an asset. Yield on cost is calculated as a property’s stabilized Net Operating Income (NOI) divided by the total project cost.