Amortization. This term typically applies to debt. A fully “amortizing” debt in one whose entire debt principal is paid by the end of the debt term. While debt service payments are equal, which are typically paid monthly or quarterly, the portion of a debt payment which is attributable to principal versus income differs across time. Initial debt service payments are distributed more heavily towards interest rather than principal; final debt service payments are distributed more heavily towards principal rather than interest. Asset Management Fee. This fee, which is typically calculated as a percentage of effective gross income. Asset management is paid to the Sponsor for managing the investment asset. Cap Rate. The “Cap Rate” or “Capitalization Rate” is expressed as a percentage and is mathematically equivalent to Net Operating Income (NOI) divided by the Acquisition, Market, or Purchase Price. The cap rate provides a rough estimate of one’s potential return on an investment asset or property. Primarily used in the real estate investment sector, the cap rate’s analog in the broader investment sector is the discount rate. On a relative basis and holding the NOI constant, lower cap rates are related to more expensive properties and higher cap rates are related to cheaper properties. Please note that NOI used in calculating the cap rate should be expressed on an annual basis. In other words, if one is provided with quarterly NOI, then it is multiplied by 4 to achieve the annualized number. If one is provided with monthly NOI, then it is multiplied by 12 to achieve the annualized number. Capital Expenditures. In the commercial real estate (CRE) sector, “Capital Expenditures” or “CapEx” are expenses related to upgrading, replacing, and/or developing property. CapEx includes a gamut of expenses ranging from roof repair to swimming pool installation. Unlike operating expenditures, CapEx items are typically long-term improvements that meaningfully improve the quality and existing life of the property and qualify under accounting rules to be capitalized across the useful life of the asset. Carried Interest. Carried interest is the share of profits earned by the Sponsor. In this particular offering, there is a three-tier hurdle rate. First, the Sponsor is entitled to 20% of any profits after investors receive an 8%, but below a 15%, return. Second, after investors receive Comparables. Whether used in the context of sales or rent, “comparables” or “comps” are other assets with similar characteristics. Sales “comps” are properties which are sold or are in the process of being sold approximately during the same time period, have similar physical characteristics, and are located in or near the same submarket/market as the asset in question. The sales “comps” approach may be used to determine the “market value” of the targeted property. Similarly, in the multifamily context, rent “comps” are units, similar in both physical attributes and submarket/market location, which help establish the “market rent” for a unit in question. Debt Service Coverage Ratio. The “Debt Service Coverage Ratio” or “DSCR” underlies some of the primary covenants typically set forth in a loan agreement document. Conceptually, it analyses the ratio between the income generated from the asset and the debt service to ascertain whether there is enough cash flow to pay the requisite debt service payment. Typically, the DSCR set by the loan agreement is above 1x and, when triggered, alerts the lender and borrower about potential vulnerabilities to current and future cash flows, i.e. potential default. Depending on the DSCR level, certain lenders may require the borrower to implement cash protection measures such as a lockbox account upon breaching the established DSCR; others, however, may view the breach as a default event. Effective Gross Income. “Effective Gross Income” is gross rental income from full (100%) occupancy plus supplemental income less vacancy and uncollected rent. Equity. At acquisition, equity is equivalent to the purchase price of the asset less debt. It is what investors initially contributed. At disposition, equity is equivalent to the disposition price of the asset less debt. General Partner. “General Partner” or “GP” in a partnership manages the business, which in this case, is the investment asset. a 15% return, the Sponsor is entitled to 35% of profits. Lastly, after investors receive a 20% return, the Sponsor is entitled to 50% of profits. Common Area. These are areas used by, and functions available to, all residents such as lobbies, pools, landscaping, and garbage collection. Gross Potential Rent. It represents the total income generated by a property assuming full occupancy (100%) and assuming all units are rented at market rent. Investment. This is the investment vehicle that the Sponsor is offering. For this particular CIM, what is being offered are Membership Interests in Berkeley Family Group LLC. Investment Multiple. Mathematically, this is the ratio between “Net Return” and “Equity Investment”. A multiple of 1.0x signifies the return of the original investment. A multiple above 1.0x signifies return of the original investment plus profit. Internal Rate of Return. Mathematically, the “Internal Rate of Return” or “XIRR” or “IRR” is the required discount rate that sets the initial investment, which is expressed as a negative number, and the sum of a stream of future cash flows to zero. XIRR is commonly used to measure investment performance, assuming that intermediary cash flows are reinvested at the XIRR rate. Leverage. A leveraged asset is one in which debt is used as part of the capitalization strategy. Typically, because debt is typically less expensive than equity, a leveraged asset often provides higher returns to equity than an asset that is financed with 100% equity. Limited Partner. The “Limited Partner” or “LP” in a partnership are the investors who do not manage the business and whose passive participation to the partnership is limited to capital commitment/contribution. With regard to this particular opportunity, the LPs are the investors who have purchased Membership Interest(s) in the Investment. Loss to Lease Rent. This represents the difference between market rents and actual rents (a.k.a. marked-to-market) and is often used to also capture the loss in rent due to downtime between leases during which apartments are marketed and cleaned up for new renters.
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