Multifamily real estate has its own language and acronyms frequently used within the industry. As you consider adding multifamily properties to your portfolio, you will likely encounter unfamiliar terminology.
Here we discuss the most frequently used terms in multifamily commercial real estate syndications.
The Sponsor is the individual or group creating the syndication and becomes the managing partner in a deal.
General or Managing Partners (GP) are responsible for managing the property. The GP finds the asset, secures financing, raises capital, and manages the acquisition after closing. They handle the day-to-day operations and work with third-party specialists to ensure operations run smoothly.
Limited Partners (LP) have a passive role in the investment. An LP provides capital but does not participate in the day-to-day decisions making.
Capital Stack describes the layers of financial sources required to secure and operate commercial real estate. Buying your home generally requires two forms of capital, the down payment you provide and a loan from the bank. Multifamily properties involve securing millions of dollars and often need multiple loans and sources of capital.
A senior loan covers the most significant portion of the cost. Equity capital from managing partners and passive investors typically contributes between 10 and 40% of the purchase price. When there is remaining capital needed to close the deal, the sponsor adds mezzanine debt to bridge the gap. These sources of funds create a capital stack that accounts for the property’s total purchase price.
Distressed Assets describe underperforming properties that list and sell below market value. The lack of performance could be from mismanagement, deferred maintenance, lack of property improvements, too much debt, or other circumstances that create a need for the owner to sell. Distressed properties can provide an excellent opportunity to increase the return rate for investors by addressing the cause of the property’s failure. However, not every distressed asset is a good investment.
Value-add Real Estate describes an investment strategy that involves buying underperforming properties and completing rehabilitation projects to force appreciation. Correcting neglect, deferred maintenance, below-average occupancy rates, or subpar amenities are a few value-add projects that can magnify returns.
Capital Expenses or expenditures are the funds required to acquire and improve the useful life of a property. The expenditures are above the cost of maintaining and managing the asset, which falls under operational expenses.
Offering Memorandum, also called a private placement memorandum is a critical part of vetting an opportunity because it provides the necessary details of the investment. In addition to the fact sheet with raw numbers, it lays out the terms, objectives, risks, projected returns, and pay-out structure.
Due Diligence consists of tasks the sponsor or managing partners take to vet the property and establish the potential profitability of an investment. Investors also complete due diligence to verify projections and ensure the investment meets their long-term financial goals.
Equity Investment is the cash put into the property. In multifamily complexes, the equity investment is the down payment.
Distributions are profits paid to investors. Multifamily housing with value add strategies tend to begin distribution payments within a year of ownership, providing investors monthly or quarterly cash flow.
Exit Strategy describes how and when the sponsor plans to pay out profits to investors. In most cases, the managing partners sell or refinance the property to repay investors.
To learn more about investing in multifamily real estate syndications with McKee Capital Group, watch our introductory video here.