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Glossary of Investment and Australian Build to Rent Apartment Development Terms
A glossary of terms and definitions, listed in alphabetical order, used in Build to Rent apartment syndications, projects, and developments, for investors who are not in the property development business so may not usually use some of these terms.
Arbitrage: The spread between the rate of return you are getting and the rate of interest at which you are borrowing. One of the most popular ways to make money in the real estate sector.
Absorption Rate: The rate at which available rentable units are leased in a specific real estate market during a given time period.
Accredited Investor: A person that can invest in certain investments by satisfying one of the requirements regarding income or net worth. The Australian requirements to qualify are generally am investment of A$500K or more, an annual income of A$250,000 for the past 2 years, or net assets in excess of A$2.5 million.
Acquisition Fee: The upfront fee paid by the new buying partnership to the general partner for finding, evaluating, financing and closing the investment.
Alternative Investment: An alternative investment is an asset that is not one of the conventional investment types, such as stocks, bonds and cash. Alternative investments include private equity, hedge funds, managed futures, real estate, commodities and derivatives contracts. Most alternative investment assets are held by institutional investors or accredited, high-net-worth individuals because of the complex natures and limited regulations of the investments.
Amortization: The paying off of a mortgage loan over time by making fixed payments of principal and interest.
Apartment Syndication: 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.
Appreciation: 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.
Asset Management Fee: An ongoing annual fee from the property operations paid to the general partner for property management, oversight, reporting and inspections.
Asymmetric Returns: When the return profile exceeds the incurred risk, making it compelling for an investor to invest on a risk-adjusted basis.
Breakeven Occupancy: The occupancy rate required to cover all of the expenses of a property.
Break-even yield: See "Hurdle rate".
Bridging Loan: A mortgage loan used until a borrower secures permanent financing. Bridge loans are short-term (six months to three years with the option to purchase an additional six months to two years), generally having higher interest rates and are almost exclusively interest only. Also referred to as interim financing, gap financing or swing loans. The loan is ideal for repositioning an apartment community that doesn’t qualify for permanent financing.
Build to Rent (BTR): BTR describes a pool of residential projects built for rent rather than sale. The standard build-to-sell method is where a developer sells all the apartments to individuals for either own use or as a private rental investment. BTR projects are generally owned and managed by a single professional entity. The development can be held for long term rental income or traded as a single asset.
Build to Sell: The standard build-to-sell method is where a developer sells all the apartments to individuals for either own use or as a private rental investment
Capital Expenditures (CapEx): 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.
Capitalization Rate (Cap Rate): One of the metrics most widely used by real estate investors is the capitalization rate, or cap rate. Also referred to as net rental yield. The cap rate is a useful tool to compare market pricing across transactions, markets, sectors, and even publicly traded REITS, and it can serve as a base for real estate investment decisions.
While cap rates alone are not a sufficient basis for making investment decisions, they are a powerful starting point. Fundamentally, cap rates provide investors with signals on the market pricing for investments.
Unfortunately, the world of commercial real estate has not adopted a standardized definition for cap rates that market participants could universally adopt. As such, it’s important to understand that a variety of definitions exist, and also what each one means. 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.
Mathematically, it’s the net operating income (rents minus expenses), or “NOI,” expressed as a percentage of a property’s value. For example, a property that recently changed hands for $100 million and is expected to produce income of $5 million has a cap rate of 5%. Investors who know or can estimate any two of the variables - NOI, asset value, or cap rate – can calculate the third. Cap rates have an inverse relationship to asset value, so when asset values rise, cap rates fall, and vice-versa. Many investors focused outside of real estate often use the inverse of the cap rate to look at the same information; cap rates are essentially an inverse earnings multiple, therefore a cap rate of 5% is analogous to a 20x earnings multiple. Yield and cap rate are two sides of the same valuation coin.
Carried Interest: Carried interest, or carry, is a share of any profits that the general partners receive as compensation, regardless of whether they contributed any initial funds. Carried interest is often only paid if the fund achieves the minimum return known as the hurdle rate.
Cash Flow: The revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue.
Cash-on-Cash Return: 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.
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.
Committed Capital: Committed capital (also known as "commitments") is a contractual agreement between an investor and a fund that obligates the investor to contribute money to the fund. The investor may pay all of the committed capital at one time or make contributions over a period of time.
Concessions: 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.
Cost Approach: 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.
Debt Service: 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.
Debt Service Coverage Ratio (DSCR): The ratio that is a measure of the cash flow available to pay the debt obligation. 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 vulnerable, and a minor decline in revenue or minor increase in expenses would result in the inability to service the debt.
Depreciation: A decrease or loss in value due to wear, age or other cause.
Develop to core: Buying land and building assets on it, to own and manage for the long-term or to sell – rather than buying existing buildings, in order to pursue higher yields.
Distressed Property: 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.
Distributions: The limited partner’s portion of the profits, which are sent on a monthly, quarterly or annual basis, at refinance and/or at sale.
Distribution Waterfall: The distribution waterfall is the order in which a private equity fund makes distributions to limited and general partners.
A distribution waterfall describes how capital is distributed to a fund's investors as underlying investments are sold. Investment waterfalls are detailed in the distribution section of the private placement memorandum (PPM). There are two common types of waterfall structures, American and European, and they can exist in either an individual deal or fund structure.
Due Diligence: The process of confirming that a property is as represented by the seller and is not subject to environmental or other problems. For apartment syndications, the general partner will perform due diligence to confirm their underwriting assumptions and business plan.
Earnest Money: 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.
Economic Occupancy Rate: 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.
Effective Gross Income (EGI): 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.
Employee Unit: An apartment unit rented to an employee at a discount or for free.
Equity Investment: 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.
Equity Multiple (EM): 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. In commercial real estate, the equity multiple is defined as the total cash distributions received from an investment, divided by the total equity invested. Essentially, it’s how much money an investor could make on their initial investment. An equity multiple less than 1.0x means you are getting back less cash than you invested. An equity multiple greater than 1.0x means you are getting back more cash than you invested. For instance, an equity multiple of 2.50x means that for every $1 invested into a project, an investor could be expected to get back $2.50.
It is a useful measure when used in conjunction with the IRR to determine the return on investment (ROI).
Exit Strategy: The general partner’s plan of action for selling the project at the conclusion of the business plan.
Financing Fees: The one-time, upfront fees charged by the lender for providing the debt service. Also referred to as finance charges.
Forward Contracts: A forward contract is a customized derivative contract obligating counterparties to buy (receive) or sell (deliver) an asset at a specified price on a future date. A forward contract can be used for hedging or speculation, although its non-standardized nature makes it particularly useful for hedging. In real estate projects, in its most simple form, the party that is long the forward contract position will pay the party that is short the position when the asset is actually delivered and the transaction is finalised.
Forward Purchase: In a forward purchase structure, the parties agree to sign a sale and purchase agreement, either for the shares of the company owning real estate under development of for the real estate itself, under the condition precedent of the completion of the works (being in most cases the provisional acceptance). Transfer of ownership therefore occurs only after provisional acceptance, meaning that the investor-buyer will neither bear the construction risk nor the risk of insolvency of the developer-seller.
Forward Funding: In a forward funding structure, the parties agree to sign a sale and purchase agreement, either for the shares of the company owning real estate under development of for the real estate itself, without condition precedent of completion of the works. Contrary to the forward purchase, the sale - and thus the transfer of ownership – occurs prior to the completion of the construction works and the price is paid upfront, most of the time in installments over the construction process.
General Partner (GP): 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.
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.
Gross Potential Rent (GPR): The hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates. Also referred to as GPR.
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.
Hard Money Loan: Generally, refers to debt collaterised by a "hard" asset, the most common being real estate.
High Net Worth Individual: Financial services regulators and financial institutions generally define a high net worth individual (HNWI) as having liquid assets over a specific figure. For example, in the US, an accredited/qualified investor is one with an annual income of at least $200,000 in each of the past two years ($300,000 for joint income) or a net worth of at least $1 million, excluding a personal residence.
Holding Period: The amount of time the general partner plans on owning the apartment from purchase to sale.
Hurdle Rate: A hurdle rate is a benchmark that developers or property fund managers can set as requirements for collecting incentive or performance fees from investors. A hurdle rate is the minimum amount of profit or return a property fund manager must earn for their investors before it can charge an incentive fee.
Income Approach: A method of calculating an apartment’s value based on the capitalisation rate and the net operating income (value = net operating income / capitalisation rate).
Institutional Investor: An institutional investor is an organization that invests on behalf of its members. Institutional investors face fewer protective regulations because it is assumed they are more knowledgeable and better able to protect themselves. There are generally six types of institutional investors: endowment funds, commercial banks, mutual funds, hedge funds, pension funds and insurance companies.
Interest Rate: The amount charged by a lender to a borrower for the use of their funds.
Interest-Only Payment: The monthly payment for a mortgage loan where the lender only requires the borrower to only pay the interest on the principal.
Internal Rate of Return (IRR): The Internal Rate of Return (IRR) is the rate at which each invested dollar is projected to grow for each period it is invested. It differs from other metrics in that it accounts for the concept of the “time value of money”, or the fact that a dollar received and reinvested elsewhere today is worth more than a dollar expected to be received and reinvested next year. The IRR is one of the best ways for an investor to compare various investments based on their yield while holding other variables constant.
For a detailed explanation go here to read "IRR EXPLAINED".
Investment horizon: Is the term used to describe the total length of time that an investor expects to hold a development or a project. Real estate investment horizons can range from short-term, just a few years, to much longer-term, potentially spanning decades
The length of an investment horizon will often determine how much risk an investor is exposed to. Generally, when projects have a longer investment horizon, that means investors are willing to take on more risk.
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 created by a buyer with their proposed purchase terms. Also referred to as the LOI.
Limited Partner (LP): A partner whose liability is limited to the extent of their share of ownership. Also referred to as the LP. In Build to Rent apartment syndications, the LP is often the passive investor who funds a portion of the equity investment.
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 project 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.
Loss-to-Lease (LtL): 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.
Market 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.
Mortgage: A legal contract by which an apartment is pledged as security for repayment of a loan until the debt is repaid in full.
Net Operating Income (NOI): All the revenue from the property minus the operating expenses. Also referred to as the NOI.
Net Rental Yield: See Capitalisation Rate.
Operating Account Funding: 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.
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 and its grounds. For BTR 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 one’s capital into an syndication that is managed in its entirety by a general partner.
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 at the property.
Preferred Return: The threshold return that limited partners are offered prior to the general partners receiving payment.
Prepayment Penalty: 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.
Price Per Unit: 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.
Private Equity: Private Equity is capital – specifically, shares representing ownership of or an interest in an entity – that is not publicly listed or traded. It is composed of funds and investors that invest in private companies, or that buyout public companies with the intention to take them private. (See "Real Estate Private Equity")
Private Investment Fund: A private investment fund is an investment company that does not solicit capital from retail investors or the general public.
Private Placement Memorandum (PPM): A document that outlines the terms of the investment and the primary risk factors involved with making the investment. Also referred to as the PPM. 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 five years.
Profit and Loss Statement : 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 .
Property Management Fee: An ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property.
Real Estate Private Equity: Typical areas where funds are deployed are commercial real estate and real estate investment trusts (REIT). Real estate funds require higher minimum capital for investment than other funding categories in private equity. Investor funds are also locked away for several years at a time in this type of funding. Read more on Private Equity.
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 analysing the rental rates of similar properties in the area to determine the market rents of the units at the subject 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 balance.
Rental Yield: The gross rental yield for an individual property can be found by dividing the annual rent collected by the total property cost, then multiplying that number by 100 to get the percentage. The total property cost includes the purchase price, all closing costs, and renovation costs.
A more valuable number than the gross rental yield is the capitalisation rate, also known as the cap rate or net rental yield because this figure includes operating expenses for the property.
Sales Comparison Approach: A method of calculating an apartment’s value based on similar apartments recently sold.
Sales Proceeds: the profit collected 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.
Subject Property: The apartment the general partner intends on purchasing.
Submarket: A geographic subdivision of a market.
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.
Targeted Metrics: A "targeted" or "projected" metric represents a developer's best estimate of that data point. A targeted metric is typically calculated by means of financial modelling and based on a set of assumptions. Some examples are : Targeted IRR (internal rate of return): Targeted Equity Multiple; Targeted Cash Yield; Targeted Investment Period;
Underwriting: The process of financially evaluating an apartment community to determine the projected returns and an offer price.
Vacancy Loss: The amount of revenue lost due to unoccupied units.
Vacancy Rate: The rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.
Valuation: A report created by a certified valuer that specifies the market value of a property. The value is based on cost, sales comparable and income approach.
Value-Add Property: A stabilised 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.
Venture capital: A form of private equity, in which investors, also known as angels, provide capital to entrepreneurs.
Yield: See Rental Yield.
Yield Maintenance: A penalty paid by the borrower on a loan is the principal is paid off early.
Disclaimer: The views and opinions expressed in this glossary post are provided for informational purposes only, and should not be construed as an offer to consider any investment or course of action, and should not be relied upon when making investment decisions. You should not invest unless you can sustain the risk of loss of capital, including the total loss of capital.
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