What Do These Real Estate Terms Mean?

Every industry has its favorite terms, acronyms and idiosyncrasies and real estate is no different.

This page provides a quick reference for many of them.

Let us know if there’s one you’d like to add or needs more detail!

An accredited investor is a person who qualifies to invest in real estate syndication by satisfying the financial or professional criteria laid out by the Securities and Exchange Commission (SEC).  These people can participate in publicly advertised real estate investments.

The 2022 financial requirements to qualify are: 

EITHER: An annual income of $200,000, or $300,000 for joint income with a spouse, for the last two years with the expectation of earning the same or higher in the future

OR: A net worth exceeding $1 million, either individually or jointly with a spouse (not including the equity in a primary residence).

For professional requirements refer to: SEC

If you do not qualify as an accredited investor, don’t be discouraged!  Take a look at the sophisticated investor definition and give Clover Capital a call.

The fee paid by the new buying partnership at closing to the general partner for sourcing, funding, evaluating, financing, and closing the investment. Fees typically range from 1 to 5% of the purchase price, depending on the size of the deal.  The larger the deal, the smaller the fee generally.

See Ordinary Income definition.

The amount an asset’s value increases over time. The two main types of appreciation that are relevant to group purchased properties are natural appreciation and forced appreciation.

Natural appreciation occurs when the market cap rate naturally decreases over time.  The management team can impact this through picking a solid market to purchase in and proper exit risk planning. 

Forced appreciation occurs when the net operating income (NOI) is increased by either increasing the revenue or decreasing the expenses. The management team can impact this through property improvements and efficient operations management. 

Implementing the business plan for one or more investment assets. This includes working to increase asset value over time while minimizing risk to the owners and investors.

A fee paid to the asset manager for oversight to ensure the business plan is implemented correctly by the operations team. Generally, the fee is 1 to 5% of the gross income per month, depending in part on the asset’s size.  This is separate from the property management fee.

How much uncollected money is owed by a tenant after move-out.

A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.

A tax incentive that allows a business to deduct a large percentage of the purchase price of eligible assets in the first year of ownership, rather than write them off over the “useful life” of the asset.  Helpful in reducing the tax bracket for the current year for some investors.

However, if the asset is sold before the end of the useful life it may be subject to deprecation recapture.  Therefore not all investors choose to take advantage of the full bonus depreciation available on their K-1 tax forms for the property.


The occupancy rate required to cover all the expenses on a property, including debt service.

A rise in the value of a capital asset that gives it a higher value than the purchase price and is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income tax returns. Short-term capital gains are taxed at ordinary income tax rates, while long-term capital gains are taxed separately.

Capital expenditures, or CapEx, are the funds used by a company to acquire, upgrade, and maintain a property. An expense is considered CapEx when it improves the useful life of a property and is capitalized – spreading the cost of the expenditure over the useful life of the asset. CapEx is part of a property’s non-operating expenses. As such, it does not reduce a property’s net operating income or overall value. CapEx includes both interior and exterior upgrades and items such as replacing a parking lot or landscaping renovations.

The rate of return based on the income that the property is expected to generate. The cap rate is calculated by dividing the net operating income by the current market value of a property.

A longer explanation of how this is calculated and used is in this post.

A share of profits that the general partners receive as compensation, regardless of whether they contribute any initial funds. Carried interest acts as a of performance fee, it motivates the general partners to achieve a performing property. When used in a preferred return structure, carried interest is only paid from funds available after all other investors are compensated.

Cash available in a given period of time (cash in minus cash out)

Free cash flow represents liquidity available to pay distributions or invest back into an asset.

The process of identifying property components that are considered “personal property” or “land improvements” under the federal tax code for tax reporting purposes. Have a cost segregation study done on a property accelerates the depreciation schedule to support bonus depreciation.

A way to measure if the cash flow is high enough to pay the debts.

DSCR=NOI/Debt Coverage.

DSCR =1.0 means that there is just enough money to make debt payments. Typically 1.25 is the target ratio so there is a relatively low risk the property won’t be able to pay its debt as the market fluctuates. 

Depreciation is a taxable expense that recognizes that fixed investments, like roofs or machinery, degrade over time and their value therefore goes down.

Depreciation is considered an expense per current tax law, therefore reducing the overall property income and tax payments.

Also see Bonus Depreciation definition.

The limited partner’s portion of the free cash flow based on preferred return and percent ownership.  Typically provided via wire or check on a monthly or quarterly basis.

Aka, mailbox money.

Process of confirming that a property is correctly represented by the seller prior to purchasing.

Typically includes:

  • Financials Review
  • Environmental Review
  • Property Walk Through
  • Operations Process Review
  • Survey
  • And so much more!

Performed by the buyer to confirm their underwriting.

Positive cash flow. Aka total income or total revenue.

EGI =Gross Potential Income minus vacancy loss, loss to lease, concessions, and bad debt. 

The rate of return based on the total net profit and the equity investment.

EM = (Total net profit (cash flow plus sales proceeds) + investment) / investment

An EM of 1.0 means the investor gets their initial investment back with no profit.  An equity multiple of 1.9 means the investor gets their initial investment back plus a 90% profit.

When a person’s passive income or cash flow from non-work sources is equal to their total expenses and is expected to continue at that level.

At this point, the person does not “need” employment (i.e., W-2 or 1099 job, or self-employment) income to support their lifestyle. Work becomes a choice, not a necessity.

An owner of a partnership who has unlimited liability.

A general partner is usually a managing partner and is active in the day-to-day operations of the business.

In crowd funded properties or a syndication, the GP is also referred to as the sponsor or syndicator and is responsible for managing the entire project. It can refer collectively to the sponsorship/management team or to each sponsor/manager individually.

The amount of revenue an apartment community could produce if it was 100% leased year-round at market rental rates plus any additional income sources from the property.

Someone or an entity who promises to pay a borrower’s debt in the event that the borrower defaults on the loan obligation.

General Partners typically act as loan guarantors. Additional guarantors who are not sponsors/managers can be used to qualify for a loan.  

Note: A guarantor is different from Key Principle.  See Key Principle definition.

How long a management team plans to keep a property prior to selling it.

Rate needed so that the sum of all future cash flow is equal the investment.

Let’s say you invest $10000. The investment has cash flow of $1000 in year 1 and $4000 in year 2. At the end of year 2, the investment is liquidated and the $10000 is returned.

The total profit is $5000 ($1000 year 1 + $4000 year 2). Simple division would say the return is 50% ($5000/$10000). But since the time value of money (two years in this example) impacts return, the IRR is actually only 23.43%.

If we had received the $5000 cash flow and $10000 investment returned all in year 1, the IRR would indeed 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. The sooner you receive the cash, the higher the IRR will be.

When someone offers a high IRR, make sure to understand the hold period they are using to calculate that – and then ask if that is realistic. 

A team consisting solely of partners who share unlimited liability (general partners).

Requires significantly more personal capital from each partner, but also splits the profits in fewer ways.

Person(s) who control and/or manage the asset, are critical to the successful operation of the asset, and who may be required to guarantee the loan (aka, sponsor or manager). 

A non-binding agreement created by a buyer with their proposed purchase terms; commonly submitted as an initial purchase offer.

The amount of debt used to finance assets.

A tax-deferred transaction that allows for the sale of an asset and the purchase of another similar asset without generating a capital gains tax liability.

Governed by Section 1031 of the Internal Revenue Code (IRC), these are commonly referred to as 1031 exchanges.

Can be either a “forward” exchange when a new property is not yet bought or a “reverse” exchange when a new property is already bought.  Both are complicated and require discussion with a 1031 exchange specialist prior to performing. 

Someone who invests in an asset but their liability is limited to the extent of their share of ownership as they have no active control over the operations.

In crowd funding or a syndication, the passive investors who fund a portion of the equity investment are LPs.

The ratio of total project costs (loan amount plus capital expenditure costs) divided by the asset’s appraised value.

A loan using a loan-to-cost ratio, as opposed to loan-to-value ratio, typically means the ability to include planned CapEx funds in the loan amount.

The ratio of the loan amount divided by the asset’s appraised value.

Revenue lost based on the difference between the market rent and the actual rent.

Often at sale is presented as an opportunity to the buyer for additional income.

The rent a unit might reasonably expect to receive from a tenant , based on the rent charged at similar properties.

The market rent is typically calculated by conducting a rent comparable analysis.

The property’s total income minus the operating expenses, including debt service.

NOI represents the asset’s profitability (vs free cash flow which represents liquidity)

Expense that is unrelated to its core operations. The most common types of non-operating expenses are interest charges and capital expenditures.

Portion of income that is derived from activities not related to its core business operations.

For example, interest from banking accounts.

A type of loan secured by collateral only. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.

In general, the borrower does not have personal liability for the loan.

Number of occupied units.

Physical occupancy is the number of units with people living in them divided by the total number of units.

Economic occupancy is the number of units people are actively paying to live in divided by the total number of units. 

A document that outlines the responsibilities and ownership percentages for the partners in the limited liability corporation (LLC).

The costs of running and maintaining a business and/or asset.

Any type of income earned by an organization or individual that is taxable at ordinary rates. It includes but is not limited to wages, salaries, tips, bonuses, rents, royalties, and interest income from bonds and commissions.

Earnings from a rental property, limited partnership, or other enterprises in which a person is not actively involved.

As with ordinary income, passive income is usually taxable. However, it is often treated differently by the Internal Revenue Service (IRS).

The return that limited partners are given prior to the general partners receiving payment.

This is commonly referred to as the “pref.”

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.

A document that outlines the terms of the investment and the primary risk factors involved with making the investment.

The PPM typically has four main sections: the introductions (a brief summary of the offering), basic disclosures (general partner information, asset description, and risk factors), the legal agreement, and the subscription agreement.

The ideal projections of the revenue, expenses, and returns for operating a property if everything goes according to the business plan.

A document or spreadsheet containing detailed information about a business’s revenue and expenses.

When it includes the monthly information over the last X months, it is referred to as a trailing X-month P & L, or a T-X.  (T-12 for example is the last 12 months of profit and loss on a business).

A REIT is a company that owns, operates, or finances income-generating real estate.

Modeled after mutual funds, REITs pool the capital of numerous investors.

This makes it possible for individual investors to earn dividends from real estate investments – without having to buy, manage, or finance any properties themselves.

A fee paid to the general partners for the work required to refinance an apartment.

The increase in rent after performing renovations to the interior and/or exterior of an apartment community.

A list with detailed information on each of the units in a commercial property.

For an apartment community, it may include the unit numbers, unit type, square footage, tenant name, market rent, actual rent, other recurring amounts due, deposit amount, move-in date, lease-start, and lease-end dates, and the tenant balance.

Measures the amount of return on a particular investment relative to its cost.

ROI =  investment’s return / cost of the investment

Aka total return

A security is a financial instrument that holds some type of monetary value.

Securities can be broadly categorized as either equities or debt.

An investment in a real estate syndication is an equity security guided by the regulations—in the United States—of the Securities and Exchange Commission (SEC), as well as applicable state agencies. This is why the SEC is involved in crowd funded properties where some investors are not active and liable partners.

An equity security represents ownership interest and entitles the holder to some control of the company on a pro-rata basis via voting rights.

A person who does not qualify as accredited, but is deemed to have sufficient investing experience and knowledge to be able to weigh the risks and merits of an investment opportunity.

Typically can only invest in private real estate offerings with a managing team they have known before the offer was available.  

If you are a sophisticated investor, please reach out so we can get that relationship documented before the next deal is available.

See Accredited Investor definition.

See General Partner.

A contract between the LLC purchasing a property and the limited partner purchasing shares in that property to pay a specific price.

A partnership which allows investors to pool their resources and share risks and returns. 

The SEC defines two classes of investors in a syndication. 

  1. The management team is active and labeled “General Partners” since they take on the general liability.
  2. The investors are passive and labeled as “Limited Partners” since they have limited liability.

These two groups form a partnership called a syndication, where the investors can invest in real estate deals targeting good returns while knowing their risk is capped and that they don’t have to do anything active once the property is purchased. 

The management team earns more for all their time and effort, and also takes on the risk that if things go badly, they have to cover that from their own pocket.

See General Partner.

See Return on Investment (ROI).

The proportion of unoccupied units.

Also the opposite of Occupancy Rate above.

A stabilized apartment community where the NOI can be increased significantly through a change in business plan.

Typical business plan changes for value-add include:

  • Physical improvements (CAPEX)
  • Raising income
  • Decreasing operating expenses
  • Increasing occupancy
  • Decreasing turnovers

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