Definition of Real Estate Syndication Terms

Nov 25, 2019

Definition of Terminology used in Apartment and Real Estate Syndication

Passive Real estate investing is full of specific terminology and words which you should be comfortable with. Understanding what the words mean is important as you participate in deal offerings over conference calls and as you read the private placement memorandums. This is all part of becoming a sophisticated investor. Being a sophisticated investor is key to gaining confidence and understanding the investment and business plan associated with the passive investment deals.


Accredited Investor: accredited investor is a title given to a person who satisfies the criteria regarding income or net worth. The current requirements to qualify as an accredited investor is having an annual income of $200,000 (filing single status) or $300,000 for joint income. A net worth of at least $1 million (not including primary residence) will also earn you the status of accredited investor.

Acquisition Fee: an upfront fee paid by the new buying partnership to the general partner for finding, evaluating, financing and closing the investment. This is paid once the deal has closed.

Active Investing: Active investing entails finding, qualifying, arranging financing, and closing on an apartment building. Active investing is the opposite of passive investing and is a full time job. Active investors make it possible for passive investors to enjoy the same benefits while having freedom of time.

Amortization: The paying off of a mortgage’s principle balance over time. As the loan is amortized, the bank’s debt position in the property is lowered. Consequently, the ownership group’s equity position is increased.

Apartment Syndication: The formation of a private equity group involving limited partners (passive investors) and general partners (operators) with the goal of buying large apartment complexes that are outside the individual’s ability to purchase. Apartment syndication allows for pooling of money from the investors for the purchase of the apartment and is legally governed by the SEC and involves legal contracts.

Appraisal: A report created by a certified appraiser that specifies the market value of a property. The value is based on cost, sales comparables and income approach.

Appreciation: An increase of an asset’s value over time. In real estate investing, we have two main types of appreciation (1) natural appreciation and(2) forced appreciation. Natural appreciation occurs when the market value naturally increases over time (e.g. inflation). Forced appreciation, special to apartments , but much lesser extent to single family residences, occurs when the net operating income is increased. Increasing NOI is done by increasing the revenue and/or lowering expenses.

Asset Management Fee: An annual fee from the property operations paid to the general partner(s) for property oversight, reporting and expenses due to running and managing the deal.


Bad Debt: The amount of uncollected rental income owed by a tenant after move-out.

Breakeven Occupancy: The occupancy rate required to cover all of the expenses of a property. This does not include paying interest to the investors. Rather this is a number important for wealth preservation.

Bridge Loan: A type of mortgage loan used until a borrower secures permanent financing. Bridge loans are typically short-term (six months to three years with the option to purchase an additional six months to two years). Bridge loans have higher interest rates and are almost exclusively interest only. Also referred to as interim financing, gap financing or swing loans. This type of loan is typically used when the syndication group needs do deep value add / reposition an apartment and the apartment does not quality for the better permanent financing.


Capital Expenditures (CapEx): A type of expense and also a line item in the financials. CapEx refers to money used by a company to acquire, upgrade and maintain a property. An expense is considered CapEx when it improves the useful life of a property and is capitalized.

Capitalized: Capitalized means spreading the cost of an expenditure over the useful life of the expenditure (taxation depreciation rules) rather than expensing the expenditure on the current P&L

Capitalization Rate (Cap Rate): The rate of return based on the income that the property is expected to generate. Also referred to as the cap rate. The cap rate is calculated by dividing the net operating income by the current market value of a property.

Cash Flow: The revenue remaining after paying all expenses for the property. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue this is the same as subtracting debt service from the net operating income (NOI).

Cash-on-Cash Return: The rate of return based on the amount of cash an investor put into a deal. For example a cash on cash return of 10% would mean an investor who invested $100,000, would receive $10,000 a year in cash flow.

Closing Costs: 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.

Concessions: The credits given to offset rent, application fees, move-in fees and any other cost incurred by the tenant. These are typically used to entice tenants into moving into your property. An example is 50% off the first month’s rent.

Cost Approach: A method of calculating a property’s appraised value based on the cost to replace (or rebuild) the property from scratch. Also referred to as the replacement cost approach.


Debt Service: The annual mortgage amount paid to the lender (bank), which includes principal and interest. Principal is the original sum lent to a borrower and the interest is the amount paid to the bank for the use of the bank’s money. This is a percentage of the principle amount.

Debt Service Coverage Ratio (DSCR): A financial ratio which shows the ability of the property to generate sufficient cash flow to pay the debt service. Also referred to as the DSCR. The DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 means that there is enough net operating income to cover 100% of the debt service. Ideally, the DSCR is 1.25 or higher. A property with a DSCR too close to 1.0 is shaky and will struggle with minor increases in expenses or decreases in occupancy. Banks will typically not loan on property with a DSCR under 1.25. In these situations, Bridge loans are typically used.

Deferred Maintenance: Term used to indicate the normal maintenance required to keep a property in good shape has not been done. Deferred maintenance can be visible (cracked parking lots, cracks in cement, etc) or hidden (water leaks, roofing problems). Deferred maintenance requires CapEx expenditures to bring the property back into good shape.

Depreciation: A decrease or loss in value due to usage or age. A building and the interior objects can be depreciated, but land cannot be depreciated.

Distressed Property: A non-stabilized apartment community, which means the economic occupancy is below 85%. Distressed properties are objects requiring deep value add and typically resulting from poor operations, tenant problems, outdated interiors, exteriors and amenities, mismanagement and often deferred maintenance.

Distributions: The limited partner’s portion of the profits from the property. These distributions to limited partners are sent on a monthly, quarterly or annual basis. Additional distributions are made when a loan is refinanced or when the property is sold.

Due Diligence: Doing your homework! The process of confirming that the facts are as represented. For apartment syndications, the general partner will perform the due diligence on the property to confirm their underwriting assumptions and business plan. Investors should perform due diligence on the property syndication team to assure they are comfortable with the general partners.


Earnest Money: A payment made by the buyers that is a portion of the purchase price. This money provides firm intent and ability to the seller that the buyer is able and willing to fulfil the sales contract.

Economic Occupancy Rate: The percentage of paying tenants. The economic occupancy is calculated by dividing the actual revenue collected by the gross potential income. This number is useful because it is possible that all units in an apartment complex are full, but some of the tenants are not paying.

Effective Gross Income (EGI): The actual income collected from the property. 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.

Employee Unit: An apartment unit rented to an employee at a discount or for free.

Equity Investment: The upfront costs for purchasing a property that the limited and general partners use to buy the apartment building. For apartment syndications, the equity investment is used to cover the costs related to 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.

Equity Multiple (EM): a metric designed to compare the cash that an investor has put into an investment to the amount of cash that the investment has generated over a specific period of time. Equity Multiple is calculated as the total distributions / total equity invested. For example, the property has an equity multiple of 1.8, this means: For every dollar an investor puts into a deal, they will get 1.8 dollars back. This includes all distributions (monthly distributions and distributions from sale).

Exit Strategy: The general partner’s plan(s) for selling the apartment investment and returning invested equity to the limited partners.


Financing Fees: one-time fees charged by the lender for providing the loan. These fees are also known as finance charges.


General Partner (GP): The owner / owners of a partnership who carry unlimited liability for the deal. The general partner is usually a managing partner and is the active investor. They are responsible for overseeing the operations and executing the business plan. In apartment syndications, the general partner is also referred to as the sponsor or syndicator and is responsible for managing the entire apartment project.

Gross Potential Income: The hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates plus all other income (e.g. laundry machines, preferred parking, etc.).

Gross Potential Rent (GPR): The hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates. Very similar to Gross Potential income, however GPR looks only at rental income and not other income that is generated via apartment communities.

Gross Rent Multiplier (GRM): 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.

Guaranty Fee: A fee paid to a loan guarantor at closing for signing for and guaranteeing the loan. Key principles are often used as loan guarantors.


Holding Period: The amount of time the investors and syndication will own the apartment community.


Income Approach: A appraisal method used to calculate the value of an apartment. It follows the formula: value = net operating income / capitalization rate.

Interest-Only Payment: The monthly payment for a mortgage loan where the borrower to only has to pay the interest on the principal balance. There is no principle reduction (amortization) on these types of payment.

Internal Rate of Return (IRR): The rate needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal paydown on the mortgage loan) to equal the equity investment.



Key Principle (KP): Key Principals (KPs) are also known as Guarantors. This is a term used by Agency lenders (e.g. Freddie Mac and Fannie Mae). There are a number of criteria that an investment group needs to meet to qualify for a agency loan. One key critieria is the net worth of the key principles is greater than the balance of the loan and there are certain liquidity requirements as well. The General Partners are typically key principles. They may bring in others to be key principles as well.


Lease: 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.

Letter of Intent (LOI): A non-binding agreement between a buyer and seller used to express a proposed purchase price and terms for the acquisition of an apartment complex. Also referred to as the LOI.

Limited Partner (LP): A partner whose liability is limited to the extent of their share of ownership (limited to the amount invested). In apartment syndications, the LP is a passive investor who funds a portion of the equity and receives ownership in the company which buys the property.

London Interbank Offered Rate (LIBOR): 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.

Loan-to-Cost Ratio (LTC): The ratio of the value of the total costs (loan amount + capital expenditure costs) divided by the apartment’s appraised value.

Loan-to-Value Ratio (LTV): The ratio of the value of the loan amount divided by the apartment’s appraised value. Typically banks will loan up to 75% -80% LTV.

Loss-to-Lease (LtL): The revenue lost based on the difference between market rent and the actual rent. The LtL is calculated as (the gross potential rent minus the actual rent collected) / the gross potential rent.


Market Rent: The rent amount the apartment could be expected to to rent for and the amount a tenant might reasonably expect to pay. This is based on rents charade for similar apartments in the nearby area.

Metropolitan Statistical Area (MSA): A geographical region which has a substantial population size, together with nearby communities which possess a high degree of economic and social integration with that core community. These Metropolitan statistical areas are defined by the United States Office of Management and Budget (OMB).

Model Unit: A representative apartment unit which is used by the apartment community as a demo unit to show prospective tenants.

Mortgage: A legal contract between the owner (syndication) and lender (bank) for which the bank provides money to help the syndication group buy an apartment community.


Net Operating Income (NOI): All the revenue from the property minus the operating expenses. This is a key performance indicator (KPI) and a financial metric that the general partners manage to ensure a profitable business case.


Operating Account Funding: A fund of reserves used to cover things like unexpected dips in occupancy, lump sum insurance, tax payments or higher than expected capital expenditures. The operating account funding is typically created by raising extra capital from the limited partners.

Operating Agreement: A document that outlines the responsibilities and ownership percentages for the general and limited partners in an apartment syndication.

Operating Expenses: The costs of running and maintaining the property. With 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.


Passive Investing: Placing capital into an apartment syndication that is managed in its entirety by a general partner. As a passive investor, you receive a sizeable return without needing to do any efforts associated with managing and operating the investment.

Permanent Agency Loan: A long-term mortgage loan secured from Fannie Mae or Freddie Mac – governmental agencies. Typical loan terms lengths are 3, 5, 7, 10, 12 or more years amortised over a period of time which extends up to 30 years.

Physical Occupancy Rate: 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 available for rent at the property.

Preferred Return: The return that limited partners are offered and paid prior to the general partners receiving payment.

Prepayment Penalty: A penalty or fee stated in the mortgage contract, that will be assessed if the mortgage is paid down or paid off within a certain period.

Price Per Unit: The cost per unit. The price per unit is calculated by dividing the purchase price of the property by the total number of units. If purchasing a 100 unit apartment complex for $1 million, the cost per unit is $10,000.

Private Placement Memorandum (PPM): A document that outlines the terms of the investment and the primary risk factors involved with making the investment. The PPM typically has 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.

Pro-forma: The projected budget with itemized line items for the revenue and expenses for the next 12 months and also on a five year basis.

Profit and Loss Statement (T-12): 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.

Property and Neighborhood Classes: A common system of classification to grade neighborhoods – A, B, C or D. This is 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.

Property Management Fee: An ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property.



Ratio Utility Billing System (RUBS): A method of calculating and allocating utility consumption to tenant based on occupancy, square footage or a combination of both. Once calculated, the amount is billed back to the tenant.

Recourse: The right of the lender to go after personal assets above and beyond the collateral if the borrower defaults on the loan.

Refinance: The replacing of an existing debt obligation with another debt obligation with different terms.

Refinancing Fee: A fee paid to the general partner for the work required to refinance an apartment.

Rent Comparable Analysis (Rent Comps): The process of analyzing the rental rates of similar properties in the area. This is done to estimate for the proforma and business plan the reasonable market rents that can be realized for the investment property.

Rent Premium: The increase in rent demanded after performing renovations to the interior and/or exterior of an apartment community.

Rent Roll: 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’s balance.


Sales Comparison Approach: A method of calculating an apartment’s value based on similar apartments recently sold.

Sales Proceeds: the profit made at the sale of the apartment community.

Sophisticated Investor: A person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity. This is usually obtained through education and a working knowledge of the type of investments being undertaken.

Subject Property: The apartment the general partner intends on purchasing.

Submarket: A geographic subdivision of a market area.

Subscription Agreement: 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.



Underwriting: The process of evaluating an apartment community for investment and determining the offer price by validating assumptions and projected investor returns.


Vacancy Loss: The amount of rental revenue lost due to units which are unoccupied.

Vacancy Rate: The rate of unoccupied rental units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.

Value-Add Property: A stabilized apartment community with an economic occupancy above 85% and has an opportunity to be improved by adding value. Adding value is achieved by making improvements to the operations and the physical property through exterior and interior renovations. This leads to increased rental income and decreased expenses which improves overall NOI.