FAQs
Frequently Asked Questions and Key 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 over $1 million, either alone or together 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 in excess of $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 Private Placement Memorandum is required by the SEC and describes the offering, risks, includes the partnership agreement, investment summary and subscription agreement. It is a lengthy legal document prepared by a syndication attorney. The subscription agreement section includes basic information as to amounts being purchased and percent ownership. The risk section highlights just about every possible risk that could happen.
In a real estate syndication, limited partners invest money in a project managed by a general partner. The tax impact of apartment syndication for the limited partner depends on several factors, such as the structure of the deal, the type of income generated, and the individual's tax situation. Typically, the limited partner will receive a K-1 form from the syndication, which reports their share of the partnership's income, deductions, and credits. The income may be subject to federal and state taxes, including ordinary income tax, capital gains tax, and depreciation recapture. However, the limited partner may also benefit from tax deductions, such as depreciation, which can offset some of their taxable income. Overall, it's important for limited partners to consult with a tax professional to understand their specific tax implications and strategies for optimizing their tax position.
As a limited partner in an apartment syndication, your liability is generally limited to the amount of your investment in the syndication. This means that you are not personally responsible for any debts or obligations of the syndication beyond your investment.
The limited liability protection for limited partners is one of the main advantages of investing in a syndication. It allows you to participate in the potential profits of the investment without assuming the full risk of the project.
It is important to carefully review the syndication agreement and consult with legal and financial professionals before investing to understand your rights and obligations as a limited partner and to assess the potential risks involved.
Multifamily syndication typically has two types of partners: General Partners (GPs) and limited partners (LPs). The GPs are the managing partners or group that lead the syndication and are responsible for the legwork of the investment: sourcing the deal, securing any lending/ debt needed, raising capital, and day-to-day operations after the purchase of the asset are made. The LPs are investors who provide capital but do not have an active role in management or voting and quite often are shielded from most of the day-to-day liabilities of the asset while still participating in the benefits. In most cases, limited partners are passive investors who rely on the experience, expertise, and legwork of the general partner to generate hands-off returns. While this arrangement can provide significant benefits for both parties, it is important to investigate and understand the roles and benefits of each investment.
Build a team of best-in-class industry professionals
Source and discover opportunities for our investors
Analyze and identify hidden value within the community
Produce an achievable business plan that includes physical and operational value-add opportunities
Make and negotiate offer and terms and win the deal
Finalize purchase and sale agreements
Conduct thorough on-site due diligence with our property management team and professional property inspectors
Secure attractive financing via our lending relationships
Coordinate with our attorneys to create the LLC and partnership agreements
Close deal and assume ownership of the property
Execute property business plan with our property management team
Refinance and/or sell property to maximize investor returns
We make our primary returns based on the equity that we invest inside the deal alongside our capital partners. As sponsors we are confident in every deal that we put together and feel the best way to convey this belief is to always invest alongside our capital partners.
As the General Partner, we receive an acquisition fee for identifying the opportunity, performing due diligence and acquiring debt to close the deal. Additionally, we earn an ongoing asset management fee throughout the hold period for ensuring the completion of the capital improvements, overseeing the property management company, communicating monthly and timely updates to the limited partners, and ultimately executing the overall business plan for the property. Furthermore, as the General Partner, we earn a percentage of the upside along with our Limited Partners for executing on our business plan.
The returns forecasted to you are after fees. The most common fee is an acquisition fee based on purchase price and is paid closing. This covers the general partner’s costs to find the deal and get it under contract. The second most common fee is the asset management fee which is compensation for holding the property manager accountable, to ensure execution of the business plan, bookkeeping, and distribution of checks and K1s. The asset management fee is aligned with the investor’s interest as it is based on the property’s revenues. Industry averages are 1-2 % for both fees.
Key Terms
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.
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.
Appreciation is an increase in the value of an asset over time. There are two main types of appreciation: natural and forced. Natural appreciation occurs when the market cap rate “naturally” decreases. Forced appreciation occurs when the net operating income is increased (either by increasing the revenue or decreasing the expenses).
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.
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.
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.
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)
Closing Costs 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.
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
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 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 usually responsible for managing the entire apartment project.
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 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 typically calculated by performing a rent comparable analysis.
The private placement memorandum (PPM) is a document that outlines the terms of the investment and the primary risk factors involved with making the investment. The four main sections are the introduction, which is a brief summary of the offering, the basic disclosures, which includes general partner information, asset description and risk factors, the legal agreement and the subscription agreement.
Property and neighborhood classes is a ranking system of A, B, C, or D given to a property or a neighborhood based on a variety of factors. These classes tend to be subjective, but the following are good guidelines:
Property Classes
Class A: new construction, command highest rents in the area, high-end amenities
Class B: 10 – 15 years old, well maintained, blue & white collar tenant
Class C: built within the last 25 years, shows age, blue collar tenant
Class D: over 30 years old, no amenity package, low occupancy, needs work
Neighborhood Class
Class A: most affluent neighborhood, expensive homes nearby, maybe have a golf course
Class B: middle class part of town, safe neighborhood
Class C: low-to-moderate income neighborhood
Class D: high crime, very bad neighborhood
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.
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.