An appraised value or mortgage valuation pertains to the assessed value of real property in the opinion of a qualified appraiser or valuer. It is usually used as a pre-qualification & risk-based pricing factor related to the issuance of mortgage loans by a financial institution
An increase in the value or price of an asset.
property (Ie. land and/ or design of the future project) owned by a person or company, regarded as having value and available to meet debts or commitments. Real estate is an asset form with limited liquidity relative to other investments.
The risk that a borrower will not be able to make a balloon (lump sum) payment at maturity due to a lack of funding.
The capitalization rate, often referred to as the cap rate, refers to the net operating income (NOI) divided by an income property’s sale price (or asking price – whichever figure is lower). A cap rate can be used to help figure out your potential return on investment before factoring in potential mortgage financing. Typically, a low cap rate comes with a higher price point and less risk than a higher one.
The revenue remaining after all cash expenses are paid.
The relationship, expressed as a percentage, between the net cash flow of a property and the average amount of invested capital during an operating year
Asset(s) pledged to a lender to secure repayment of a loan in case of default.
Common Equity is the riskiest and most profitable portion of the real estate capital stack. Typically the General Partner investor (the developer or sponsor) will be required – by the lender and/or by other equity investors – to invest their own money as some portion of the equity to have skin in the game. As an investor in equity your risk is the greatest because every other tranche of capital is entitled to get paid before you. However, if the property does well equity investors usually have no cap on their potential returns. In real estate, equity is typically structured so that all investors earn a preferred return until they hit a certain annual return hurdle (i.e., 8%). After that, the developer will earn a disproportionate share of the profits (i.e., 40% of all the remaining profit), while investors receive the rest of what’s left pro rata.
A construction loan is a short-term loan used to finance the building of a real estate project. The developer takes out a construction loan to cover the costs of the project before obtaining long-term funding. Because they are considered fairly risky, construction loans usually have higher interest rates than traditional mortgage loans.
When investing in real estate debt instruments, the investor is acting as a lender to the property owner or the deal sponsor. The loan is secured by the property itself and investors receive a fixed rate of return that's determined by the interest rate on the loan and how much they have invested. In a debt deal, the investor is at the bottom of the capital stack which means they have priority when it comes to claiming a payout from the property.
Debt service coverage ratio (DSCR)
The annual net operating income from a property divided by annual cost of debt service. A DSCR below 1 means the property is generating insufficient cash flow to cover debt payments.
This fee is built into the calculation of the development costs because a developer uses it to pay all the costs of doing business: hiring staff, running an office, finding new opportunities, and more. Affordable housing developers can choose to defer a portion of the fee, leaving more money to cover development costs. The developers then recoup the deferred portion of the fee as rents are paid over time.
An Equity investor is a shareholder in a specific property, and typically their stake is a precentage related to the amount they have invested. Returns are realized in the form of a precentage of the rental income the property generates. Investors may also be paid out a % of the sale value if the property is sold.
The senior mortgage that, by reason of its position, has priority over all junior encumbrances. The holder has a priority right to payment in the event of default.
The position in a security that will suffer the first economic loss if the underlying assets lose value or are foreclosed on. The first-loss position carries a higher risk and a higher yield.
Fixed Interest Rate
A fixed interest rate is an interest rate on a liability, such as a loan or mortgage, that remains the same either for the entire term of the loan or for part of the term. A fixed interest rate is attractive to borrowers who do not want their interest rates to rise over the term of their loans, increasing their interest expenses.
An interest rate that remains constant over the term of the loan
A fee paid to an adviser or manager for managing a portfolio of real estate assets, typically stated as a flat percentage of gross asset value, net asset value or invested capital.
General Partner (GP)
who contributes capital and share in profits and have unlimited liability. A general partner is also usually a managing partner and active in the day-to-day operations of the business. The GP typically will need to offer a personal guarantee, meaning his or her personal assets may be subject to liquidation in the case of a default.
Gross expenses is the sum of the cost to keep a property operating and in good standing. Operating expenses are the costs associated with operating and maintaining a commercial property.
In short, potential gross income is the total rent a property could generate if 100% of the units are leased at market rent, while effective gross income is a net figure that considers expense reimbursements, vacancy and collection loss, and other income.
A hard preffered position where the investors is out of the deal when a specific interest hurdle is achieved. There is a hard cap on how much the investor can make.
Any development costs associated with the physical construction of a building. These costs are easy to quantify and typically include items such as raw materials, labor, and interior finish, etc. Hard costs are also referred to as Direct Costs.
Preferred Return Hurdle or “hurdle rate” is a minimum contract threshold (typically a % of investment or a % of the net income) that must be received before the other investors higher in the capital stack can receive their interest.
Development costs other than direct material and labor costs that are directly related to the construction of improvements, including administrative and office expenses, commissions, architectural, engineering and financing costs.
Interest is the charge for the privilege of borrowing money, typically expressed as annual percentage rate (APR). Interest can also refer to the amount of ownership a stockholder has in a company, usually expressed as a percentage
The use of credit to finance a portion of the costs of purchasing or developing a real estate investment. Positive leverage occurs when the interest rate is lower than the capitalization rate or projected internal rate of return. Negative leverage occurs when the current return on equity is diminished by the employment of debt.
Limited Partner (LP)
An owner of an equity partnershio who contributes capital and share in profits, but who take no part in running the business and incur no liability above the amount contributed.
Liquidity determines whether assets will be sold quickly or slowly and if the price will be above or below market value. Property that is easy to sell and purchased at market value is liquid. Conversely, assets that are harder to sell and transact for a discounted price are considered illiquid.
Loan to Value (LTV)
The ratio of the value of the loan principal divided by the property's appraised value. So, if a property is appraised at $1M and the bank is willing to lend $700K that is a 70% LTV. This would mean that other sources would need to provide the other 30% (this is typically the equity of the project
Maturity is the date on which the life of a loan ends, after which it must either be renewed, or it will cease to exist. Typically Debt investments require repayment of principal and interest at maturity.
Mezzanine Debtsits below the senior debt in order of payment priority. Once the developer pays operating expenses and the senior debt payment all income must go to pay the fixed return of the mezzanine debt. If the developer is unable to pay (assuming they aren’t also in default under the senior debt), the Mezzanine Debt lender typically has the ability to quickly take control of the property. The senior debt and mezzanine lenders will usually enter into an agreement, called an intercreditor agreement, where they spell out how their rights interact (i.e., what happens if a developer stops paying both of them). Mezzanine debt typically has a higher rate of return than senior debt but lower than equity.
A mortgage is a debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire purchase price up front. Over many years, the borrower repays the loan, plus interest, until he or she owns the property free and clear. Mortgages are also known as "liens against property" or "claims on property." If the borrower stops paying the mortgage, the lender can foreclose.
A personal guarantee is an individual’s legal promise to repay credit issued to a business for which they serve as an executive or partner. Providing a personal guarantee means that if the business becomes unable to repay a debt then the individual is personally responsible. The personal guarantee provides an extra level of protection to credit issuers, who want to make sure they will be repaid.
Preferred Equity differs from Common Equity in that certain investors (i.e. a “class of shares”) are given preference relative to the Common Equity in the distribution of cash flows. Typically in a Preferred Equity investment, all cash flow or profits are paid back to the preferred investors (after all debt has been repaid) until they receive the agreed upon “preferred return,” for example, 12%.
The original sum of money borrowed in a loan, or put into an investment.
A promissory note, sometimes referred to as a note payable, is a legal agrremet in which one party (the maker or issuer) promises in writing to pay a determinate sum of money to the other (the payee), either at a fixed or determinable future time (maturity).
Senior Debt is secured by a mortgage or deed of trust on the property itself, so if the borrower fails to pay the the lender can take title to the property or the guarantor of the deal might need to pay the lender personaly with his or her personal assets. This greatly reduces risk on the principal invested because, at worst, the lender owns the property and will look to maximize value by selling the property or selling the non-performing loan. The “cost” of this lower level of risk is a lower yield on the money invested.
A soft preffered position is where there are terms for an exit either out of the deal or into a common equity position. its a soft exit.
Any indirect development costs (i.e. not labor or materials). These costs range from architecture and engineering fees to project management and developer fees and can affect hard costs significantly (e.g. an architect’s efficient building design may reduce the need for structured parking hard costs). Soft Costs are also referred to as Indirect Costs.
Tax credit syndicator
Is an intermediary between the developer and equity investors managing the investments in exchange for tax credits
The waterfall is a type of payment structure in which certain investors/ creditor positions recieve principle and/ or interest payments before other investors/ creditors. The creditors position in the waterfall will be determined in their agreement.