FAQs

Effective Gross Income EGI  is rent collected (market rent less vacancy and concessions) and all other income including income from tenant reimbursements, vending machines, laundry machines, valet trash, storage, rserved parking, pet fees, and late fees.

operating expenses include real estate taxes, property insurance, property  management and maintenance expenses, utilities, and  legal or accounting  expenses. Operating  expenses do not include capital expenditures, debt service, or cost  recovery.

Net Operating Income NOI = Gross potential ( market rent)  rental income – vacancy –  concessions (incl credit losses) + Other Income  – operating
expenses

Caprate is a measure of rate of return of commercial real estate property

Caprate = Capitalization rate = Net Operating Income NOI /price

Net Operating Income NOI / annual debt service ADS. Lenders typically require a minimum of 1.2 DCR or higher. 

Debt yield is the return that a lender would receive if the borrower defaulted on the loan and the lender had to foreclose on property.  Debt Yield = NOI / Loan

Cashflow is the annual net income remaining after debt service. CF = NOI – ADS

Equity multiple measures the expected or achieved total return on initial equity investment.

EQM = total distributions /  equity investment

AKA levered Cashflow, 
Cash on cash = annual cash flow after debt service/equity

Unlevered cashflow is percentage cashflow before debt service (NOI) to Equity. Unlevered cashflow = Annual NOI / equity

levered cashflow is percentage cashflow after debt service CF to Equity. Levered cashflow = Annual CF / equity

IRR or Internal rate of return esttimates the profitability of investment quoted as the percentage rate of return on investment. It is the discount rate at which the sum of the present value of future cash flows equals the initial capital investment or simply the discount rate at Net Present Value NPV of zero.

Average annual growth rate (AAGR) is the average increase. It is a linear measure and does not take into account
compounding. Meanwhile, the compound annual growth rate (CAGR) does and it smooths out an investment’s returns,
diminishing the effect of return volatility.
AAGR =[(FV/BV)^(1/n)] – 1

FV=final value
BV=beginning value
n=number of years

The preferred return is a minimum annual return that the limited partners are entitled to before the general partners may begin receiving any cashflow distribution

The exit aka reversion or terminal cap rate is the projected cap rate at the end or sale of asset. Conversvative underwriting uses 10 bps rate escalation per year of  hold time.

Replacement reserves are funds sourced from a property’s normal operating cash flow to pay for the
eventual replacement of obselete or out of service building components

The interest reserve account allows a lender to periodically advance loan funds to pay interest charges on the
outstanding balance of the loan. The interest is capitalized and added to the loan balance.

The operating expense ratio (OER) is percentage operating expense to effective gross income (EGI).

OER = Operating Expense /  Effective Gross Income

Accounting concept to depreciate the property value annually through a non-cash expense that reduces
taxable income on all equity partners.

Normal commercial real estate is
depreciated across 27.5 years
using the straight line method
(1/27.5 of the value taken each
year). Cost segregation allows us
to accelerate the depreciation
much faster and maximize early
time depreciation, boosting
returns dependent on the time
value of money. A third party
report determines which parts of
the property can be depreciated
in 5-15 year windows.

The 2017 Tax Cuts and Jobs act allows new and used qualified 5-year personal property and 15 -year land improvements to be eligible for 100% bonus depreciation in year 1. 

The yield on total acquisition cost compares value add return to core market cap rate. Actual Rate = NOI/Acquisition Cost. 

Development Spread is the  difference between market yield (market cap rate) and actual rate.
Development Spread = Actual rate – Market cap rate

The pooling of cash to buy real estate. Each investor becomes a partner with capital interest proprtional to their investment in the title LLC. The syndication is an SEC security and must file Form D to be exempt from registering with SEC.

SEC Regulation D Rule 501 defines an accredited investor as one having one of three conditions: a net worth of $1milion excluding primary residence, has individual/married income of $200k/$300k or greater of the two most recent years, or holds a Series 7, 65, or 82 licenses. Accredited investors can invest in both 506b & 506c syndications.

SEC Regulation D Rule 506  defines a sophisticated investor as one who does not have the financial resources of an Accredited Investor, but does have
the knowledge and experience to evaluate risks
of a prospective investment and are only allowed to invest in 506(b)  syndications.

                   506b                                                                                506c
Up to 35 Non-Accredited Investors allowed                          Zero Non-Accredited Investors allowed
Unlimited Accredited Investors allowed                               Unlimited Accredited Investors allowed
Unlimited Raise                                                               Unlimited Raise
No Advertising                                                                Advertising Allowed
No general solicitation                                                     General solicitation allowed
Need preexisting relationship with prospective investor         No need of preexisting relationship with prospective investor
Investor check the box verification                                     Take reasonable streps to verify investors