Multifamily Terms – GDD Invest

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Multifamily investing has it's own terms and phrases.

Below is a list of terms for quick and easy reference.

1031 Exchange – the process of selling one piece of real estate and transferring the proceeds into another one tax free. Governed by a section of the IRS code that allows investors to defer capital gains taxes on any exchange of like-kind properties for business or investment purposes
ABP – All Bills Paid – property pays for all utilities.
Absolute Auctions – An auction where the property will sell for the highest bid regardless of price.
Accredited investor – An individual with either a net worth over $1,000,000, excluding the value of their primary residence, or income of at least $200,000 for the last two years (combined income of $300,000 if married) who has the expectation to make the same amount in the current year
Acquisition – Purchase of a property.
Acquisition Cost – Total costs to acquire a property. Purchase price +closing costs/acquisition fees/etc.
Actuals – A property’s actual financial performance as reflected on an income and expense statement
Amortization Period – Number of years over which the principle payments are spread. Typically 20-30 years.
Appreciation – The increase in the value of the property.
Asset Manager – Person or company responsible for overseeing the overall direction, financing, and strategy of the real estate investment.
Best & Final – Bidding process whereby a seller down-selects buyers to a smaller group and asks them to increase their offer price.
BOMA – Building Owners and Managers Association
BOV – Broker Opinion of Value – Broker provides this to a seller when the broker is trying to get the listing to sell the property.
Brand – A name, term, sign, symbol, or design that identifies and differentiates your business
Break even occupancy – Occupancy level needed to generate enough rental income to pay all expenses and mortgage payments.
Buyer Broker – A broker representing the buyer.
CAP Rate – Net operating income divided by property value (or purchase price). Measures a property’s rate of return for a single year. It does not include debt.
Capital Expenditures – Larger expense items that have longer useful lives – i.e. roof, parking lots, AC unit, etc.
Capital Stack – The combination of funding sources to complete a deal. Includes equity and debt.
CCIM – Certified Commercial Investment Member
CMBS - Commercial Mortgage Backed Security
Commercial Multifamily – 5 units and above
CRM – Customer Relations Management
DD – Due Diligence – inspecting the property’s exterior and interior to determine the condition and deferred maintenance (required maintenance that the current seller has not performed); also includes lease and document audit.
Defeasance – A bank term for very stiff prepayment penalties
Deferred Maintenance – Maintenance and repairs that should have been completed but were deferred in order to increase short term cash flow/NOI.
Demographics – Statistical data relating to the population and particular groups within it
Disposition – Disposing or selling of a property.
Distributable Cash – The amount of cash left after operating expenses, reserves for improvements, and senior debt service are paid, which can be distributed to investors
Door – Industry term for each rentable space. Also referred to as “unit”.
Driving for Dollars – The process of driving around neighborhoods and looking for potential properties to acquire.
DSCR – Debt Service Coverage Ratio (sometimes referred to as DCR)
Duplex – 2 units
Economic Vacancy – This is the % of the rents that is not being collected vs. the rents reflected on the rent roll. Includes vacancy, bad debt/non-payment.
EIN – Employer Identification Number
Elevator Pitch – A short description of your company and mission that you memorize as an answer when someone asks what you do or utilize when seeking partners and/or investors for your real estate investments
EMD – Earnest money deposit – the money you put down on the property at the time of contract.
EMD Hard Money – Money that the seller keeps even if you walk away from a deal.
Expenses per unit – Total expenses divided by total units/doors
Garden Complex – 3 floors or less
Gross Effective Rental Income – The actual rental income collected after netting out bad debt, vacancy, turnover, etc
Gross Potential Rental Income – The rental income that is collected without respect to bad debt, vacancy, or turnover.
Gross Rent Multiplier – the ratio of the price of an investment to its annual rental income.
High Rise – 9 floors and up with elevator
HUD – Department of Housing & Urban Development
Investment Contract – A legal agreement where passive investors no longer control their money and rely on a sponsor to provide a return on their investment
IREM – Institute of Real Estate Management
JV – Joint Venture – When more than one person/entity sponsors a deal.
KP (Key Principle) / Sponsor – someone who provides the necessary financial statements, liquidity, or experience required by a lender.
Leverage – The use of debt to finance an acquisition.
LIHTC – Low Income Housing Tax Credit. The federal government’s primary program for encouraging investment of private equity in the development of affordable rental housing for low-income households.
Liquidity – The availability of cash or cash equivalents.
Listing Broker – The broker that is listing (seller’s agent) the property.
LLC – Limited Liability Company
LOI – Letter of Intent (non-binding offer to purchase – 1 or 2 pages with key terms) This document starts the negotiation process on a property.
LTV – Loan to Value. Mortgage amount divided by property value. The percentage of the value of the property the bank is willing to finance.
Maintenance Expenses – Smaller recurring expenses such as pressure washing, lightbulb replacement, plumbing repairs, etc.
Mid Rise – 4-8 floors with elevator
NMHC – National Multifamily Housing Council
NOI – Net Operating Income.
NOI – Net operating income. Gross effective rent less operating expenses (not including debt)
Nondisclosure Agreement – A legal document whereby someone agrees to keep information confidential (also referred to as NDA)
Nonrecourse Debt – Loans where the loan is secured by the collateral (property) but the the borrower is not personally liable. If the borrower defaults, the lender can seize and sell the collateral but not go after the borrowers personal assets (subject to bad boy clauses).
OA – Operating Agreement – The main agreement for an LLC governing how the LLC’s business will be operated.
OM – Offering Memorandum – broker document describing the property.
Operating Expense Ratio – Operating expenses divided by the gross effective rental income
PFS – Personal Financial Statement – Required by most lenders and will list your assets, liabilities, and net worth.
Points – Prepaid interest, paid at the time of closing
PPM – Private Placement Memorandum – A document describing the property, listing various disclosures and/or disclaimers for potential investors, and presenting a pro forma and business plan of the property. Used as a marketing tool to raise money from investors.
Price per unit – The purchase price divided by the number of units.
Price TBD – A price that is to be determined. Contact the broker and they will typically let you know the target price.
Primary Market – A geographic area with 5 million or more people and high investment activity. Detroit, MI has more than 5 million people but has low investment activity so it is considered a secondary market.
Pro Forma – A financial projection.
Proof of Funds – Bank or investment statements proving that the buyer has the available cash to close a deal (sometimes referred to as POF).
Property Traded For – Term used to represent what a property sold for.
PSA – Purchase and Sale agreement – Contract between the buyer and seller.
Quadplex – 4 units
Recourse Debt – Loans where the borrower is personally liable for the debt, applies to most commercial bank loans
REIT – Real Estate Investment Trusts
Repositioning – The process of turning a property from one “class” to another by performing needed upgrades, changing the tenant base, etc
Reserve Auctions – A minimum bid amount that must be met at an auction before the seller is required to accept the bid and sell the property
Residential Multifamily – 2-4 units
Re-Trade – The process of re-negotiating a deal after it is under contract. Typically happens during due diligence when a buyer finds information that negatively impacts the financials of the property versus the information originally presented.
Risk Fee – A fee charged to a tenant that has lower credit score.
RR – Rent Roll – lists all tenants, their lease amount and lease start/end date.
RUBS – Ratio Utility Billing System – Billing back the tenants for utilities.
Secondary Market – A geographic area with 2-5 million people and high investment activity. Austin, TX has less than 2 million people but is considered secondary due to investment activity.
Syndication – The process where one person or company (the sponsor) raises funds from a group of investors to purchase a piece of real estate. Typically requires SEC registration.
T3 – Trailing 3 months P&L (Profit & Loss Statements).
TI2 –Trailing 12 months P&L (Profit & Loss Statements).
Tertiary Market – A geographic area with less than 2 million people and/or low investment activity.
Triplex – 3 units
Underwriting – Industry term referring to analyzing an investment.
Unit –Industry term for each rentable space. Also referred to as “door”
Value add – Industry term for upgrading a property to increase its value
Walk Up – 4-6 floors, no elevator
Working Capital – Funds used for the ongoing operation of the property. Typically need to have at least 1 months of rent in working capital.