Common Real Estate Terms

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1031 Exchange
A 1031 Exchange is a provision in the tax code that allows taxpayers to defer paying capital gains taxes on the sale of an investment property when they reinvest the proceeds into another investment or property of equal or greater value within a specific time frame.
Rule 506(b) provides an exemption under Regulation D of the Securities Act, allowing companies to raise capital by offering investment opportunities to both accredited and a limited number of non-accredited investors. This rule prohibits public advertising of the investment details.
Rule 506(c) permits issuers to solicit and advertise offerings to accredited investors. To comply with this rule, the issuer must verify purchasers' accredited investor status and meet other conditions stipulated in Regulation D.
Absorption Rate
The Absorption Rate measures the net difference in available unit square feet for lease between two specific dates, usually expressed as a percentage.
Accredited Investor
An accredited investor is an individual with an annual income of $200,000, or $300,000 for joint income, for the last two years with an expectation of earning the same or higher in the future. Alternatively, an individual may qualify as an accredited investor if their net worth exceeds $1 million, either individually or jointly with their spouse.
Acquisition Fee
The Acquisition Fee is an upfront payment made by the buyer to the general partner for services such as sourcing, analyzing, and closing the investment deal. The fee amount varies based on the size of the transaction.
Apartment Syndication
Apartment Syndication involves a partnership between general partners and limited partners to collectively acquire and sell an apartment community, sharing in the profits generated through the process.
Appreciation refers to the increase in the value of an asset over time. It can occur through natural market growth or forced appreciation achieved by increasing the asset's net operating income.
Asset Management Fee
An ongoing fee paid annually to the general partner for overseeing and managing a property.
Average Annual Effective Rent
The Average Annual Effective Rent is calculated as the tenant's total effective rent divided by the lease term duration.
Bad Debt
Bad Debt represents the outstanding amount of money owed by a tenant after they have vacated the property and failed to fulfill their financial obligations.
Balance refers to the remaining amount after subtracting the outstanding debt (in the case of a loan) or the total amount already paid (in an account).
Base Rent
Base Rent denotes the fixed amount used as the minimum rental payment in a business lease agreement.
Base Year
The Base Year signifies the initial year when expenses and taxes are established at the time of property purchase. Subsequent annual lease adjustments are based on increases in expenses above the figures set in the base year.
Breakeven Occupancy
Breakeven Occupancy is the occupancy rate required to cover all expenses associated with operating an apartment community. This rate is calculated by dividing the total operating expenses and debt service by the gross potential income.
Bridge Loan
A Bridge Loan is a temporary loan utilized until a company secures permanent financing. Typically lasting from six months to three years, with the option to extend for an additional six months to two years, bridge loans often feature higher interest rates and are primarily interest-only. They are commonly employed for apartment financing and may also be known as swing loans, interim financing, or gap financing.
Building Classifications
Building Classifications categorize properties as Class "A", "B", "C", and "D" based on subjective criteria relative to the sub-market. Class "A" properties are typically newer with high construction quality, superior finishes, and prime locations. The classification considers factors such as age, location, amenities, and construction quality, which may vary across different sub-markets.
Cap Rate
The capitalization rate, or “cap rate,” is a ratio used to convert an income stream into an estimate of value. The cap rate is determined by dividing a property's net operating income by its current value at the time of acquisition. It is a key tool for estimating the potential return on investment.
Capital Expenditures (CapEx)
Capital Expenditures, also known as CapEx, are funds used to upgrade and maintain an apartment community. These expenses are considered capital expenditures when they improve the life of the property and are capitalized over the asset's useful life. Examples include interior and exterior renovations such as rebranding, flooring installations, and painting.
Capital Gain
Capital Gain is calculated as the final sale price of the investment property minus the exchange expenses and the property's adjusted basis. It represents the profit realized from the sale of an asset.
Capitalization is the method of determining the value of real property by examining the net operating income divided by a predetermined annual rate of return. It is a fundamental concept in real estate valuation.
Capitalization Rate (Cap Rate)
Cap Rate reflects the rate of return and is based on the income the property is expected to generate. The cap rate is the NOI (net operating income) divided by the purchase price. Also called "free and clear return". See "Capitalization".
Carrying Charges
Carrying Charges represent the costs incidental to property ownership, such as taxes, insurance, and maintenance, that must be absorbed during the lease-up of a building and periods of vacancy.
Cash Flow
Cash Flow refers to the revenue provided to investors after all expenses are paid. It is calculated by subtracting operating expenses and debt service from the collected revenue, providing insight into the property's profitability.
Cash-On-Cash (CoC)
Cash-On-Cash (CoC) measures the rate at which cash is returned in relation to the original investment, expressed as a percentage. It is calculated by dividing the cash flow by the initial investment, offering insights into the property's cash returns.
CBD: Central Business District
The Central Business District is the primary business and commercial area of a town or city, typically housing major corporate offices, retail centers, and financial institutions.
Certificate of Insurance
A Certificate of Insurance is issued by an insurance company or its agent to verify the existence of an insurance policy, including coverage amounts and insured parties.
Closing Costs
Closing Costs refer to the additional expenses incurred by buyers and sellers beyond the property's price to complete a real estate transaction. These may include legal fees, title insurance, and transfer taxes.
Commencement Date
The Commencement Date marks the effective start date of a lease agreement, outlining the beginning of the tenant's occupancy period.
Common Area
The Common Area encompasses the shared spaces of a building and its premises available for use by all tenants, such as lobbies, corridors, and parking lots.
Concessions are incentives offered to prospective tenants to encourage lease agreements, such as discounts for extended lease terms or waived fees.
The Consumer Price Index (CPI) is an economic indicator measuring inflation, influencing changes in rental rates and lease agreements
Debt Service
The Debt Service refers to the periodic payments required to cover the interest payments, and usually also including a portion of the principal amount, of a loan.
Debt Service Coverage Ratio (DSCR)
The Debt Service Coverage Ratio (DSCR) measures the cash flow available to cover the property's debt obligation. This ratio is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 indicates there is enough net operating income to cover 100% of the debt service.
Depreciation involves allocating an asset's cost over its useful life. By depreciating assets, companies expense a portion of the asset's cost each year the asset is in use while earning revenue on the investment.
Distributions are made based on the cash flow of the property and profits made when it is refinanced or sold. The limited partner's portion of the profits is paid through these distributions, which are sent monthly, quarterly, or annually, and when a property is refinanced or sold.
Earnest Money
Earnest Money is an advance of a portion of the purchase price to indicate the buyer's ability to fulfill the contract.
Effective Gross Income (EGI)
Effective Gross Income (EGI) reflects the positive cash flow of the multifamily property. This number comprises the sum of the income minus any lost income, typically due to vacancy, concessions, and bad debt.
Effective Rent
The Effective Rent is the actual rental rate achieved by the landlord after deducting any concessions from the base rental rate paid by a tenant, usually expressed as an average rate over the lease term.
Employee Unit
An Employee Unit is a unit rented at a discounted rate to employees.
Equity Investment
The Equity Investment reflects the initial cost associated with purchasing an apartment community, including the down payment, closing costs, and fees.
Equity Multiple (EM)
Equity Multiple (EM) demonstrates the rate of return based on the total net profit and the initial investment. This value is calculated by adding the total net profit and the gross cash flow divided by the equity investment. An equity multiple of 2X means that you are doubling your money throughout the project.
Exit Strategy
The Exit Strategy is the last stage of the business plan, defining the timeline and process to refinance or sell the property.
Fair Market Value
The Fair Market Value is defined as the most probable price that a property should fetch in a competitive and open market, assuming all conditions necessary for a fair sale are present. This value assumes that the price is not affected by undue stimulus and that both the buyer and seller are acting prudently and knowledgeably. In essence, it represents the theoretical highest price a buyer would pay and the lowest price a seller would accept, given that both parties are willing (but not compelled) to act.
Financing Fees
Financing Fees refer to the charges imposed by the lender at the beginning of the debt service. These fees are also known as finance charges and are typically associated with the processing and initiation of a loan.
Fixed Costs
Fixed Costs are expenses that do not fluctuate with business activities or changes in the level of sales or production. In the context of real estate investment, fixed costs may include loan servicing fees and other recurring expenses that remain relatively constant over time.
General Partner (GP)
A General Partner is a person who has responsibility for the company's actions, can legally bind the business, and is liable for the business's debts and obligations personally.
Gross Potential Income (GPI)
Gross Potential Income (GPI) represents the total potential rental income that a multifamily community could generate under ideal circumstances. It is calculated based on the assumption of 0% vacancy and no rental payment issues, using the average market rent in the same geographic area. This metric is also known as Gross Potential Rent (GPR).
Improvements refer to enhancements made to a property to enhance its physical appearance, both internally and externally. This can encompass renovations, modifications, and additions such as playgrounds, gates, and carports, aimed at improving the overall quality and functionality of the property.
Indirect Costs
Indirect Costs, also known as Soft Costs, are development expenses that do not encompass material and labor costs. These costs typically include expenses related to design, permits, legal fees, and other non-material or non-labor elements of a project.
Interest Rate
The Interest Rate is the proportion of a loan or deposit balance charged as interest per period, typically expressed as a percentage. It determines the amount of interest due per period, based on the principal sum, compounding frequency, and the duration for which it is borrowed or lent.
Interest-Only Loan
An Interest-Only Loan is a type of loan in which the borrower is only required to pay the interest for a specified period, with the principal balance remaining unchanged during the interest-only period. After this period, the borrower typically begins paying both principal and interest.
Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the annualized rate of return at which the net present value of all cash flows from an investment equals zero. It considers the timing of when returns are received, providing insight into an investment's potential profitability. For example, if an investment of $100,000 yields a total of $100,000 in returns over five years, the average annual return would be 20%, but the IRR would consider the timing of the payouts, potentially resulting in a different rate of return.
A Lease is a legally binding agreement between a tenant and a landlord, granting the tenant exclusive possession or use of a property in exchange for periodic payments, commonly referred to as "rent."
Letter of Intent (LOI)
A Letter of Intent (LOI) is a non-binding document that outlines the preliminary understanding between parties engaged in a potential transaction. It serves to clarify key points and intentions, paving the way for more detailed negotiations and agreements.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure that offers limited liability protection to its owners, shielding them from personal liability for the company's debts and obligations. LLCs typically pass through their profits and losses to their members, who report them on their individual tax returns.
Loss To Lease (LtL)
Loss To Lease (LtL) refers to the disparity between the actual rent specified in a lease and the prevailing market rental rate for a unit. For instance, if a unit's market rent is $2,000 per month but the actual rent is $1,800 per month, the loss to lease would amount to $200 per month.
Market Rent
Market Rent denotes the prevailing rental rate that a property could command in the current real estate market, reflecting the price range at which similar properties are leased.
Market Value
Market Value represents the highest price that a property could achieve in a competitive and open market, highlighting the optimal value of the property under favorable market conditions.
Metropolitan Statistical Area (MSA)
Metropolitan Statistical Area (MSA) refers to an area comprising a major city and its adjacent cities or urban areas. It serves as a geographical and sociodemographic unit for statistical and analytical purposes.
Mid-Rise pertains to a building characterized by having 4 to 8 stories above ground level. However, in a Central Business District, the definition of Mid-Rise may encompass buildings with heights extending up to twenty-five stories.
Model Unit
A Model Unit serves as a showcase unit utilized as a sales tool to exhibit the layout, amenities, and construction features of the actual units available for lease or purchase.
Multifamily Dwelling
A Multifamily Dwelling refers to a residential housing classification where multiple individual housing units are situated within a single building or a complex comprising several buildings. This housing arrangement is commonly observed in apartment buildings and multifamily communities.
Net Absorption
Net Absorption refers to the net square footage leased within a specific geographic area or defined sub-market over a fixed period. It is calculated by offsetting the leased space against the vacated space within the same area during the same period.
Net Operating Income (NOI)
Net Operating Income (NOI) encompasses all revenue generated from a property, excluding operating expenses. This metric does not include capital expenditures and debt service in its computation.
Normal Wear and Tear
Normal Wear and Tear denotes the natural deterioration or loss in value resulting from regular and reasonable use by a tenant. Typically, a tenant is not held responsible for normal wear and tear upon vacating the premises.
Operating Expenses
Operating Expenses encompass the cash required to maintain and operate a property. Examples include property insurance, real estate taxes, property management fees, maintenance expenses, utilities, and accounting expenses. Operating expenses exclude debt service, capital expenditures, and cost recovery.
Pari-Passu Preferred Return
Pari-Passu Preferred Return describes a preferred return structure where both the sponsor and investor receive the same preferred return, distributed simultaneously.
Permanent Agency Loan
A Permanent Agency Loan is a loan secured by a commercial property with a term of at least five years and some amortization. Most commercial permanent loans are amortized over 25 years.
Physical Occupancy Rate
The Physical Occupancy Rate indicates the percentage of available rental space occupied by paying tenants. It is calculated by dividing the number of rented units by the total number of units available for rent, multiplied by 100.
Preferred Return (Pref)
A Preferred Return is a profit distribution arrangement in which proceeds are allocated to one class of equity before another until a specific rate of return on the initial investment is achieved.
Prepayment Penalty
A Prepayment Penalty is an additional fee some lenders charge if you pay off your loan early. A Prepayment Penalty is an additional fee imposed by some lenders if a borrower pays off their loan before the agreed-upon term.
Price Per Unit
Price Per Unit refers to the cost per apartment in relation to the total investment in a multifamily property, calculated as the total investment divided by the number of units.
Pro Forma
The Pro Forma statement presents anticipated financial results to investors, utilizing specific projections or assumptions to assess potential earnings.
Profit and Loss Statement
The Profit and Loss Statement outlines the revenues and expenses over a specific period, demonstrating how revenues are translated into net income or net profit.
Property Management Fee
The Property Management Fee is a compensation paid for professional property management services associated with the properties.
Ration Utility Billing System (RUBS)
RUBS, short for Ratio Utility Billing System, is a cost-effective and equitable alternative to submetering utility usage. This popular utility management solution distributes the total utility bill among residents based on specific criteria, such as square footage or number of occupants. The type of RUBS formula employed may vary depending on the different types of utilities used at the property.
Refinance (Refi)
Refinance, often abbreviated as Refi, refers to the process of amending and replacing an existing loan agreement with a new one. Businesses opt for refinancing to negotiate more favorable terms, such as lower interest rates, revised payment schedules, or improved contractual conditions. Upon approval, the new contract supplants the original agreement.
Refinancing Fee
During refinancing, businesses incur various fees associated with repaying an existing loan and obtaining a new one, including attorney fees, application fees, and other loan-related expenses.
Rehab, short for rehabilitation, pertains to the comprehensive renovation of a building or project aimed at enhancing its overall appearance, functionality, and market value.
Rent Comparable Analysis
The Rent Comparable Analysis forms an integral part of the due diligence process, comparing similar apartment communities within the same sub-market to evaluate how the market rents align with the subject apartment community.
Rent Roll
A Rent Roll serves as a comprehensive record listing the residents by unit along with the corresponding rent paid by each tenant in a multi-tenant property. This document is essential for property managers to track rental income and monitor occupancy trends.
Rental Concession
Rental Concessions are incentives that landlords may offer to tenants in order to secure tenancy. These concessions may include move-in bonuses, temporary rent reductions, or other perks provided to attract and retain tenants.
Sale Proceeds
The Net Sale Proceeds represent the amount earned by the seller from the sale of an asset, calculated by deducting the costs and expenses incurred from the gross proceeds.
Soft Cost
Soft Costs encompass the project expenses related to the development, construction, marketing, leasing, operation, and maintenance of improvements. These costs are typically not directly tied to physical construction but contribute to the overall project expenditure.
Sophisticated Investor
A Sophisticated Investor is a high-net-worth individual with substantial knowledge and experience in financial and business matters, enabling them to effectively evaluate the merits and risks associated with prospective investments.
A Submarket denotes a distinct segment or area within a larger geographic market, delineated by specific attributes that set it apart from other submarkets or locations.
A Tenant, also known as a lessee, refers to an individual who holds possession of a property through a lease agreement, entitling them to the use and enjoyment of the premises for a specified period.
The Term denotes the duration of a lease agreement, outlining the period during which the tenant has the right to occupy the property under the agreed-upon terms and conditions.
Underwriting encompasses the investor or business process of assessing, researching, and quantifying the financial risks linked to a specific investment, thereby informing investment strategies and risk management.
Vacancy Loss
Vacancy Loss, also referred to as vacancy and credit loss, signifies the revenue that a property owner foregoes due to unoccupied units or non-payment of rent, highlighting the financial impact of vacancy on property income.
Vacancy Rate
Yield, synonymous with the internal rate of return (IRR), quantifies the investment's return rate while accounting for the time value of money, providing a comprehensive measure of the investment's financial performance.
Another term for the internal rate of return (IRR), a measure of an investment's return rate that takes account of the time value of money.
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