An apartment syndication is 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 the limited partners (i.e. the investors) to acquire, manage and sell an apartment community while sharing in the profits.

An accredited investor is a person that can invest in securities (i.e. invest in an apartment syndication as a limited partner) by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000 or $300,000 for joint income for the last two years with expectation of earning the same or higher or a net worth exceeding $1 million either individually or jointly with a spouse.

A sophisticated investor is a person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.

The general partner (GP) is an owner of a partnership who has unlimited liability. A general partner is also usually a managing partner and active in the day-to-day operations of the business. In apartment syndications, the GP is also referred to as the sponsor, syndicator, or operator. The GP is responsible for managing the entire apartment project.

The limited partner (LP) is a partner whose liability is limited to the extent of the partner’s share of ownership. In apartment syndications, the LP is the passive investor and funds a portion of the equity investment.

Capital expenditures, typically referred to as CapEx, are the funds used by a company to acquire, upgrade and maintain an apartment community. An expense is considered to be a capital expenditure when it improves the useful life of an apartment and is capitalized – spreading the cost of the expenditure over the useful life of the asset.

Capital expenditures include both interior and exterior renovations.

Examples of exterior CapEx are repairing or replacing a parking lot, repairing or replacing a roof, repairing, replacing or installing balconies or patios, installing carports, large landscaping projects, rebranding the community, new paint, new siding, repairing or replacing HVAC and renovating a clubhouse.

Examples of interior CapEx are new cabinetry, new countertops, new appliances, new flooring, opening up or enclosing a kitchen, new light fixtures, interior paint, plumbing projects, new blinds and new hardware (i.e. door knobs, cabinet handles, outlet covers, faucets, etc.).

Examples of things that wouldn’t be considered CapEx are operating expenses, like the costs associated with turning over a unit (i.e. paint, new carpet, cleaning, etc.), ongoing maintenance and repairs, ongoing landscaping costs, payroll to employees, utility expenses, etc.

Operating expenses are the costs of running and maintaining the property and its grounds.

For example, here are operating expenses for our 415 unit apartment community:

Taxes ($167,387)

Insurance ($103,750)

Repairs & Maintenance ($181,850)

General / Admin ($48,680)

Management ($106,290)

Utilities ($118,591)

Marketing ($31,125)

Contract Services ($41,085)

Payroll ($253,980)

Reserves ($103,750)

Asset Management ($48,548)

Total Expenses ($1,205,036)

Debt service is the annual mortgage paid to the lender, which includes principal and interest. Principal is the original sum lent and the interest is the charge for the privilege of borrowing the principal amount.

For example, a $19,800,000 loan with 5.50% interest amortized over 30 years results in a debt service of $1,349,067 annually and $112,422.25 per month.

Net operating income (NOI) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.

For example, a 415 unit apartment community with a total income of $3,033,229 and total operating expenses of $1,032,109 has a NOI of $2,001,120.

Capitalization rate, typically referred to as cap rate, is the rate of return based on the income that the property is expected to generate. The cap rate is calculated by dividing the property’s net operating income (NOI) by the current market value or purchase price of a property (NOI / Current market value = Cap Rate)

For example, a 415 unit property with an NOI of $2,001,120 that was purchased for $24,750,000 has a cap rate of 8.09%.

Price per unit is the cost of purchasing an apartment community based on the purchase price and the number of units. The price (or cost) per unit is calculated by dividing the purchase price by the number of units.

For example, a 415 unit apartment community purchased for $24,750,000 has a price per unit of $59,639.

Cash flow is the revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue

For example:

Total Income $1,859,729

Total Operating Expense $1,107,452

Debt Service $571,080

Asset Mgmt Fee $40,170

Cash Flow $141,027

Closing costs are the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction.

Examples of closing costs are legal fees, insurance, survey, recording fees, 3rd party reports, title endorsements, utility deposit, and due diligence fees.

Financing fees are the one-time, upfront fees charged by the lender for providing the debt service. Also referred to as loan points or loan point cost. Typically, the financing fees are 1% to 2% of the loan amount.

The capital reserves account is a reserves fund, over and above the price of the property, to cover things like unexpected dips in occupancy, lump-sum insurance, or tax payments or higher than expected capital expenditures. The capital reserves account is typically created by raising extra money from the limited partners.

The equity investment is the upfront costs for purchasing an apartment community, which includes the down payment for a loan, closing costs, financing fees, capital reserves account, and the various fees paid to the general partner for putting the deal together. May also be referred to as the total raise.

The sales proceeds are the profit collected at the sale of the apartment community.

For example, here is a how the sales proceeds are calculated for a 415 unit apartment community purchased at $24,750,000 and sold after a five year value-add business plan:

Exit NOI $2,670,812

Exit Cap Rate 7%

Exit Price $38,154,455

Sales Expense ($2,098,495)

Remaining Debt ($19,800,000)

Sales Proceeds $16,255,960

The internal rate of return (IRR) is the rate, expressed as a percentage, needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal pay down) to equal the equity investment. IRR is one of the main factors the passive investor should focus on when qualifying a deal.

A very simple example is let’s say that you invest $100. The investment has cash flow of $10 in year 1, and $40 in year 2. At the end of year 2, the investment is liquidated and the $100 is returned.

The total profit is $50 ($10 year 1 + $40 year 2).

Simple division would say that the return is 50% ($50/100). But since time value of money (two years in this example) impacts return, the IRR is actually only 23.43%.

If we had received the $50 cash flow and $100 investment returned all in year 1, then yes, the IRR would be 50%. But because we had to “spread” the cash flow over two years, the return percentage is negatively impacted.

The timing of when cash flow is received has a significant and direct impact on the calculated return. In other words, the sooner you receive the cash, the higher the IRR will be.

The cash-on-cash (CoC) return is the rate of return, expressed as a percentage, based on the cash flow and the equity investment. CoC return is calculated by dividing the cash flow by the initial investment.

For example, a 415 unit apartment community with a cash flow of $694,934 and an initial investment of $6,804,625 results in a CoC return of 10.21%

Equity Multiplier (EM) is the rate of return based on the total net profit (cash flow plus sales proceeds) and the equity investment. EM is calculated by adding the sum of the total net profit and the gross cash flow and dividing it by the equity investment.

For example, if the limited partners invested $3,645,170 into an apartment community with a 5-year gross cash flow of $2,020,165 and total proceeds at sale of $6,003,028, the EM is ($2,020,165 +$ 6,003,028) / $3,645,170 = 2.2.

The market rent is the rent amount a willing landlord might reasonably expect to receive, and a willing tenant might reasonably expect to pay for a tenancy, which is based on the rent charged at similar apartment communities in the area. Market rent is typical calculated by performing a rent comparable analysis.

The gross potential rent (GPR) is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates.