Question 1

Gross Potential Income

Accepted Answer

The gross potential income is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rates plus all other income.

For example, an apartment community with a GPR of $202,692 and monthly other income of $15,258 from late fees, pet fees and a RUBS program has a gross potential income of $217,950 per month.

Question 2

Loss To Lease (LtL)

Accepted Answer

Loss to lease (LtL) is the revenue lost based on the market rent and the actual rent. LtL is calculated by taking the gross potential market rent and subtracting the gross scheduled rents.
For example, a 415 unit apartment community with a gross potential market rent of $3,958,680 and gross scheduled rents of $3,166,944 has a LtL of $791,736.

Question 3

Bad Debt

Accepted Answer

Bad debt is the amount of uncollected money a former tenant owes after move-out.

Question 4

Concessions

Accepted Answer

Concessions are the credits (dollars) given to offset rent, application fees, move-in fees and any other revenue line time, which are generally given to tenants at move-in.

Question 5

Model Unit

Accepted Answer

A model unit is a representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.

Question 6

Employee Unit

Accepted Answer

An employee unit is a unit rented to an employee at a discount.

Question 7

Vacancy Rate

Accepted Answer

The vacancy rate is the rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.
For example, a 100 unit apartment community that has 10 vacant units has a vacancy rate of 10%

Question 8

Vacancy Loss

Accepted Answer

Vacancy loss is the amount of revenue lost due to unoccupied units.
For example, a 100 unit apartment community that has 10 vacant units that rent for an average of $800 per unit per month has a vacancy loss of $96,000 per year.

Question 9

Effective Gross Income (EGI)

Accepted Answer

Effective gross income (EGI) is the true positive cash flow of an apartment community. EGI is calculated by the sum of the gross potential rent and the other income minus the income lost due to vacancy, loss-to-lease, concessions, employee units, model units and bad debt.
For example, if an apartment community has a gross potential rent of $2,432,304, loses $145,938 due to vacancy (6% vacancy rate) and $149,561 in credit costs (loss-to-lease, concessions, employee units, model unit, bad debt, etc.) and collects $183,096 in other income, then EGI is $2,319,901.

Question 10

Economic Vacancy

Accepted Answer

The economic vacancy is the rate of tenants who are living at the apartment but not paying you to live there. The economic vacancy is calculated by dividing the actual revenue collected by the gross scheduled rents.

Question 11

Breakeven Occupancy

Accepted Answer

Breakeven occupancy is the occupancy rate required to cover the all of the expenses of an apartment community. The breakeven occupancy rate is calculated by dividing the sum of the operating expenses and debt service by the gross potential income.

Question 12

Physical Occupancy Rate

Accepted Answer

The physical occupancy rate is 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.

Question 13

Gross Rent Multiplier (GRM)

Accepted Answer

The gross rent multiplier (GRM) is the number of years the apartment would take to pay for itself based on the gross potential rent (GPR). The GRM is calculated by dividing the purchase price by the annual GPR.
For example, a 415 unit apartment community purchased for $24,750,000 with a GPR of $3,958,680 has a GRM of 6.25.

Question 14

Rent Premium

Accepted Answer

A rent premium is the increase in rent after performing renovations to the interior or exterior of an apartment community. The rent premium is an assumption made by the general partner during the underwriting process based on the rental rates of similar units in the area or previously renovated units.

Question 15

Debt Service Coverage Ratio (DSCR)

Accepted Answer

The debt service coverage ratio (DSCR) is a ratio that is a measure of the cash flow available to pay the debt obligation. 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 ratio is 1.25 or higher. An apartment with a DSCR too close to 1.0 is vulnerable, and a minor decline in cash flow would result in the inability to service (i.e. pay) the debt.

Question 16

Interest Rate

Accepted Answer

The interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of their funds.

Question 17

Interest-Only Payment

Accepted Answer

An interest-only payment is the monthly payment on a loan where the lender only requires the borrower to pay the interest on the principal as opposed to the typical debt service, which requires the borrower to pay principal plus interest.

Question 18

London Interbank Offered Rate (LIBOR)

Accepted Answer

The London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. LIBOR serves as the first step to calculating interest rates on various loans, including commercial loans, throughout the world.

Question 19

Bridge Loan

Accepted Answer

A bridge loan is a mortgage loan used until a person or company secures permanent financing, which are short-term (6 months to three years with the option to purchase an additional 6 months to two years). They generally have a higher interest rate and are almost exclusively interest-only. Also referred to as interim financing, gap financing or swing loan. The loan is ideal for repositioning an apartment community.

Question 20

Permanent Agency Loan

Accepted Answer

A permanent agency loan is a long-term mortgage loan secured from Fannie Mae or Freddie Mac and is longer-term with lower interest rates compared to bridge loans. Typical loan term lengths are 5, 7 or 10 years amortized over 20 to 30 years.

Question 21

Prepayment Penalty

Accepted Answer

A prepayment penalty is 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.

Question 22

Refinance

Accepted Answer

A refinance is the replacing of an existing debt obligation with another debt obligation with different terms. In apartment syndication, a distressed or value-add general partner may refinance after increasing the value of a property, using the proceeds to return a portion of the limited partner’s equity investment.

Frequently Asked Questions

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Key Terms

Apartment Syndication

Accredited Investor

Sophisticated Investor

General Partner (GP)

Limited Partner (LP)

Capital Expenditures (CapEx)

Operating Expenses

Debt Service

Net Operating Income (NOI)

Capitalization Rate (Cap Rate)

Price Per Unit

Cash Flow

Closing Costs

Financing Fees

Capital Reserves Account

Equity Investment

Sales Proceeds

Internal Rate Of Return (IRR)

Cash-On-Cash (COC)

Equity Multiplier (EM)

Market Rent

Gross Potential Rent (GPR)

Gross Potential Income

Loss To Lease (LtL)

Bad Debt

Concessions

Model Unit

Employee Unit

Vacancy Rate

Vacancy Loss

Effective Gross Income (EGI)

Economic Vacancy

Breakeven Occupancy

Physical Occupancy Rate

Gross Rent Multiplier (GRM)

Rent Premium

Debt Service Coverage Ratio (DSCR)

Interest Rate

Interest-Only Payment

London Interbank Offered Rate (LIBOR)

Bridge Loan

Permanent Agency Loan

Prepayment Penalty

Refinance

Appreciation

Residential Utility Billing System (RUBS)

Property And Neighborhood Classes

Preferred Return

Distributions

Subject Property

Underwriting

Pro-Forma

Rent Roll

Profit And Loss Statement

Exit Strategy

Rent Comparable Analysis

Submarket

Metropolitan Statistical Area (MSA)

Acquisition Fee

Asset Management Fee

Property Management Fee

Refinancing Fee

Guaranty Fee

Private Placement Memorandum (PPM)

Subscription Agreement