multifamily glossary Terms

An accredited investor, in the context of a natural person, includes anyone who:

earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years and reasonably expects the same for the current year, OR

has a net worth of over $1 million, alone or with a spouse (excluding the value of the person’s primary residence).

In addition, entities such as banks, partnerships, corporations, nonprofits, and trusts may be accredited investors. Of the entities that would be considered accredited investors and depending on your circumstances, the following may be relevant to you:

any trust, with total assets over $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or

any entity in which all of the equity owners are accredited investors.

In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

The increase in value of a property over time due to various factors, including inflation, demand, and improvements.

A fee paid to the general partner or sponsor for managing the investment property's day-to-day operations and strategy.

A document that allows a new buyer to assume the seller’s responsibilities and liabilities in an existing mortgage.

A short-term loan until permanent financing is secured or an existing obligation is removed.

Class A (luxury, high-end properties), Class B (middle-market), and Class C (older properties needing repair).

A request from the syndicate or partnership for additional funds from investors.

Funds a company uses to acquire or upgrade physical assets such as property, buildings, or equipment.

A ratio used to estimate the value of income-producing properties, representing the expected return on an investment.

The net amount of cash transferred in and out of the investment, often monthly or annually.

A rate of return on a real estate investment property based on the income earned by the property divided by the cash invested.

Fees and expenses, aside from the property cost, incurred by the buyer and seller during a real estate transaction.

Property used solely for business purposes, including multifamily residential buildings with five or more units.

(CAM) - Fees paid by tenants to cover the costs associated with areas common to all tenants.

The total amount of principal and interest paid on a loan.

An income tax deduction that allows an investor to recover the cost of property due to wear and tear over time.

The comprehensive appraisal of a business or property to establish its assets and liabilities and evaluate its commercial potential.

Payments made by the syndicate or partnership to investors from income generated by the property.

The difference between the current market value of the property and the amount the owner still owes on the mortgage.

An account held by a third party on behalf of the two principal parties in a transaction, holding funds until certain conditions are met.

The price that a property would sell for on the open market.

Government-sponsored enterprises that provide liquidity, stability, and affordability to the mortgage market.

A year as reckoned for taxing or accounting purposes, differing from a calendar year.

In a syndication, the party responsible for managing the investment, making decisions, and assuming liability.

A rough measure of the value of an investment property, calculated as property price divided by gross rental income.

A loan secured by real property and provided by private investors or companies.

The amount charged by a lender to a borrower for the use of assets, expressed as a percentage of the principal.

An estimate of the profitability of an investment over the expected holding period, typically used in capital budgeting to assess potential investments.

A property not occupied by the owner but used to generate rental income or profit from appreciation.

Using borrowed capital (debt) to increase the potential return on an investment.

A legal right or interest that a lender has in the property, typically used as collateral for a debt.

A business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

In a syndication, an investor who contributes capital and shares in the profits but has limited liability and is not involved in the day-to-day management.

A lending risk assessment ratio that financial institutions examine before approving a mortgage, calculated by dividing the mortgage amount by the appraised property value.

The price an asset would fetch in the marketplace or the value the investment community gives to a particular equity or business.

A hybrid of debt and equity financing typically used to finance the expansion of existing companies.

A residential building with multiple housing units for residential inhabitants.

A calculation used to analyze the profitability of income-generating real estate investments, totaling all property revenue and subtracting all reasonably necessary operating expenses.

An Operating Agreement in the context of a multifamily real estate investment is a legal document that outlines the structure, operations, and guidelines of the investment entity, usually a Limited Liability Company (LLC), that owns and operates the multifamily property. This agreement is particularly crucial when the investment involves multiple investors or partners. Here are the key elements typically included in such an agreement:

Ownership Structure: It specifies the ownership percentages of each member or investor in the LLC. This is often proportional to their investment contribution. Management and Decision-Making: The agreement details how the LLC will be managed, whether by the members (investors) themselves or by appointed managers. It also outlines the process for making significant decisions, including buying or selling property, financing, or major renovations.

Capital Contributions: This section covers the initial and any future financial contributions required from the members and how additional funding needs will be handled.

Distribution of Profits and Losses: The agreement defines how and when profits and losses will be distributed to the members. This typically includes operational income, proceeds from property sales, and loss-sharing mechanisms.

Roles and Responsibilities: If the members are actively involved in the management, their roles and responsibilities will be outlined. This can include property management, financial reporting, and compliance duties.

Transfer of Interest: The operating agreement usually includes clauses that govern the transfer of an ownership interest, covering scenarios such as the sale of a member’s share, death, or bankruptcy.

Dissolution and Exit Strategy: The terms under which the LLC can be dissolved, and the procedure for winding up its affairs and distributing assets are outlined.

Dispute Resolution: Methods for resolving member disputes are specified to avoid legal conflicts.

Meetings and Voting: Procedures for holding meetings, voting thresholds for different types of decisions, and how votes are allocated among members are defined.

Amendments: The process by which the Operating Agreement itself can be amended is outlined, usually requiring a majority or supermajority vote.

An Operating Agreement is essential as it provides a clear framework for the operation and management of the investment, helps prevent misunderstandings among investors, and offers legal protection for all parties involved. It should be tailored to the specific needs and structure of the investment and is typically drafted by a legal professional experienced in real estate and business law.

The costs of running and maintaining the property and its premises.

Earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved.

(PPM) - A legal document provided to prospective investors when selling stock or another security in a business.

A method by which financial results are calculated based on specific projections or presumptions.

(REIT) - A company that owns, operates, or finances income-producing real estate and allows investors to buy shares in commercial real estate portfolios.

Replacing an existing loan with a new one, typically with better terms.

A measure used to evaluate the efficiency or profitability of an investment, calculated as net profit divided by the cost of the investment.

An individual investor's ability to tolerate declines in the value of their investment portfolio.

The individual or company responsible for finding, acquiring, and managing the real estate property on behalf of the partnership or syndication.

A legal document evidencing a person's right to or ownership of a property.

A fully renovated property ready to be rented immediately.