FAQs - Regal Capital Partners

FREQUENTLY ASKED QUESTIONS:

#1 Multifamily is One of the Most stable, high performing assets.
It consistently outperforms the stock market with far less volatility and, is considerably safer than investing in single-family homes. Fact- During the great recession in 2008, single-family loan delinquencies peaked at 4% while multifamily loans hovered around .4%. That 90% lower. Why? When times are tough people downsize, they may lose their home but they always need a place to live. Apartment living is the solution. And, most young people can’t afford the down payment to buy a house so they choose apartment living.

#2 Huge Tax Benefits
The depreciation of the property is passed through to our investors and offers considerable tax savings thereby lowering your tax bill. Because… ultimately it’s not how much you make, is how much you keep that matters!

CAN I INVEST WITH MY IRA OR 401K ACCOUNTS?

Yes, you can invest through your IRA. If you currently have a self-directed IRA, please check with your current custodian to ensure that they will allow you to place your investment with Regal Capital Partners. With a company 401K, you have to verify that they will allow you to create a self-directed 401K and that the funds are transferrable. If you need a referral we can connect you with the group we use personally.

WHAT IS AN ACCREDITED INVESTOR?

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.

DO I HAVE TO BE AN ACCREDITED INVESTOR TO INVEST?

We have investment opportunities that are open to both accredited and sophisticated investors. But you will need to register with us in order to see those opportunities.

HOW WILL MY FUNDS BE USED?

Investor funds are used for the total acquisition cost of the property. This includes but is not limited to the down payment for the actual purchase of the property, acquisition fees, legal and transaction costs, capital improvements, and reserves.

WHAT TYPES OF ACCOUNTS CAN I INVEST WITH?

Typical investment accounts are as individuals, joint accounts,tenancy in common, entity accounts (Trusts, Limited Liability Companies, Limited Partnerships, C Corporations, S Corporations) and individual retirement accounts (more info on IRA’s / 401k’s below).

WHAT IS A K1?

As a partner in the LLC that purchases the properties, you will receive a K-1. A K-1 is a tax form used by partnerships to provide investors with detailed information on their share of a partnership’s taxable income. Partnerships are generally not subject to federal or state income tax, but instead issue a K-1 to each investor to report his or her share of the partnership’s income, gains, losses, deductions and credits. The K-1s are provided to investors on an annual basis so that each investor can include K-1 amounts on his or her tax return.

WHAT IS A SOPHISTICATED INVESTOR?

A Sophisticated Investor doesn’t meet the requirements of an Accredited Investor but they have investor experience. This could mean the person believes they have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

HOW FREQUENTLY ARE DISTRIBUTIONS MADE?

Distributions are planned quarterly.

CAN I VISIT THE PROPERTY?

Absolutely! Investors are allowed to visit the property before investing and during the life of the project. If you give us a heads up we can make someone is there to show you around and answer any questions.

KEY TERMS:

Accredited Investor

An accredited investor is an individual who qualifies to invest in real estate syndications by satisfying one of the requirements for of an annual income of $200,000—or $300,000 for joint income—or a net worth of at least $1 million (not including primary residence).

Acquisition Fee

Compensation earned by the general partner in a syndication for sourcing, screening, arranging financing, and closing on an investment asset.

Active Investing

This is the opposite of passive investing. An active investor does all the work of finding, structuring, managing, and exiting investments.

Apartment Syndication

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

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).

Asset Management Fee

Typically a recurring fee paid from property revenues to the general partner for asset management.

Bad Debt

Bad debt is the amount of uncollected money a former tenant owes after move-out.

Breakeven Occupancy

Breakeven occupancy is the occupancy rate required to cover the all of the expenses of an apartment community. The breakeven occupancy rate is calculated by dividing the sum of the operating expenses and debt service by the gross potential income.

Bridge Loan

Typically short-term loans enabling investors to leverage equity in one property to finance another or access cash for a down payment on a new acquisition.

Capital Expenditures (CapEx)

These expenses are funds used by the managing company or partners to acquire, improve, or maintain a property. Also referred to as CapEx. It specifically applies to when these funds improve the useful life of a property.

Capital Reserves Account

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 (Cap Rate)

The cap rate. Calculated by dividing net operating income by current market value of a property to determine an expected rate of return.

Cash Flow

Remaining liquid profit after deducting operating expenses and any debt service payments.

Cash-on-Cash Returns (COC)

A rate of return calculated by dividing the cash flow being produced by a property by the initial cash investment.

Concessions

Concessions are the credits (dollars) given to offset rent, application fees, move-in fees and any other revenue line time, which are generally given to tenants at move-in.

Cost Segregation

This is the process of identifying assets and costs, and their classification for tax purposes. Applies for reducing current tax liability and deferring taxes.

Closing Costs

Costs required to close on a real estate or financing transaction. May include origination, application, processing, underwriting, appraisal, and recording fees.

Debt Investment

A debt investment is the investment in debt. For example, a mortgage loan. Debt investors typically earn interest until the debt is fully repaid. There may be an option to convert to equity.

Debt Service

The amount of loan payments required to be paid back to a lender. Also used to calculate the DSCR for qualifying for commercial real estate financing.

Debt Service Coverage Ratio (DSCR)

The DSCR is the ratio commercial mortgage lenders use to evaluate and qualify a deal for financing. The DSCR measures how much cash flow will be available to cover debt service. A DSCR ratio of 1 means the cash flow should cover the debt payments. Lenders typically expect a minimum DSCR of 1.2 in order to get a loan. A better ratio may qualify the borrower for better terms.

Distributions

These are the funds paid out to investors. These profits may be paid monthly or quarterly or upon a successful exit.

Due Diligence

Due diligence describes a group of tasks to screen and evaluate a property and to satisfy lender underwriting requirements. May include appraisals, surveys, inspections, and title work.

Earnest Money

An earnest-money deposit is placed into escrow by the buyer of an apartment building to demonstrate their commitment to execute on the purchase contract. This will be credited toward the acquisition costs at closing.

Economic Vacancy

The economic vacancy is the rate of tenants who are living at the apartment but not paying you to live there. The economic vacancy is calculated by dividing the actual revenue collected by the gross scheduled rents.

Effective Gross Income (EGI)

The EGI is the effective income derived by subtracting losses due to vacancy, concessions, employees, model units, and any bad debt.

Employee Unit

An employee unit is a unit rented to an employee at a discount.

Equity Investment

The cash put into an investment. In an apartment building syndication this capital may be used toward the down payment, closing costs, borrowing costs, funding an operating account funding, along with any compensation earned by the general partners.

Equity Multiplier (EM)

The EM is a way to calculate a rate of return on commercial investment property. This is calculated by dividing the total cash distributions (cash flow and cash on exit) by the equity investment made.

Exit Strategy

This is how the syndicator plans to cash investors out of their investment in the future. This may be by selling the property, purchasing their shares, or refinancing them out.

Financing Fees

Financing fees are the one-time, upfront fees charged by the lender for providing the debt service. Also referred to as loan points or loan point cost. Typically, the financing fees are 1% to 2% of the loan amount.

Floating Interest Rate

This is the same as a variable or adjustable interest rate loan. The interest rate—and typically the payments—will float and change with the market.

General Partner (GP)

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 responsible for managing the entire apartment project.

Gross Potential Income (GPI)

The potential income a multifamily property could produce if it had no vacancies and all leases were signed at market rates—plus any other revenue.

Gross Rent Multiplier (GRM)

This calculation shows the number of years it would take for the property to pay for itself based upon the gross potential rent. This is calculated by dividing the property purchase price by the annual gross potential rent.

Guaranty Fee

The guaranty fee is a fee paid to a loan guarantor at closing. The loan guarantor guarantees the loan. At closing of the loan, a fee of 0.25% to 1% of the principal balance of the mortgage loan is paid to the loan guarantor.

Holding Period

The holding period is the amount of time the sponsor plans to hold the property.

Interest Rate

The cost charged by a lender for using their funds to finance a deal.

Interest-Only Payment

A monthly mortgage payment that only requires interest, not the principal balance, to be paid. The balance may be due on sale, refinancing, or at the maturity of the loan.

Internal Rate of Return (IRR)

The IRR is calculated based on all future anticipated cash flow, principal pay down of debt, and proceeds on the exit of a property.

Joint Venture (JV)

A “JV” is a partnership between two or more investment partners who collaborate on a deal.

Key Principal

A key principal in an apartment syndication is a vital person to the ongoing success of the investment. It is someone who should be insured to compensate for any interruptions if something happens to them.

Letter of Intent

An LOI is a non-binding agreement drafted by the buyer proposing their purchase terms. Typically used as a faster method to make an offer, without being tied into the deal.

Limited Partner

The LIBOR is a benchmark interest rate that is often used to calculate loan rates and interest rate adjustments on a variable rate loan.

Loan-to-Cost Ratio

The LTC ratio shows the value of the anticipated loan amount against the total costs (acquisition and renovations).

Loan-to-Value Ratio

The LTV calculates the ratio of the loan amount divided by the apartment building’s appraised value.

London Interbank Offered Rate (LIBOR)

The London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. LIBOR serves as the first step to calculating interest rates on various loans, including commercial loans, throughout the world.

Loss to Lease (LtL)

Loss to lease (LtL) is the revenue lost based on the market rent and the actual rent. LtL is calculated by taking the gross potential market rent and subtracting the gross scheduled rents. For example, a 415 unit apartment community with a gross potential market rent of $3,958,680 and gross scheduled rents of $3,166,944 has a LtL of $791,736.

Market Rent

The market rent refers to the market value of a rental unit for lease based upon comparable rental rates for similar units in close proximity to the subject. Used to calculate value, cash flow, and potential loan amounts.

Metropolitan Statistical Area (MSA)

A MSA is a geographic region with a substantial population. These are cities pooled together with neighboring communities that have high degrees of integration. An example is the Miami Metropolitan Area. This MSA actually encompasses Miami, Fort Lauderdale, and West Palm Beach, three counties, dozens of cities, and even more neighborhoods.

Model Unit

A model unit is a representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.

Net Operating Income (NOI)

The NOI of a property is calculated by adding up all of the incoming revenue from a property and subtracting the operating expenses.

Non-Recourse Loan

A non-recourse loan is a loan on which the borrower is not personally signing a guarantee. The lender generally has no recourse to pursue the borrower in a default, beyond the pledged real estate collateral the loan was made on.

Operating Expenses

Operating expenses are what it costs to run and maintain an investment property. In apartment syndications, these operating expenses usually include payroll, maintenance, repairs, contractors, marketing, admin, utilities, management fees, property taxes, insurance, and capital reserves.

Offering Memorandum

Also known as the private placement memorandum, this document lays out the risks, terms, and objectives of an investment, as well as documents the syndicators’ business operations and condition.

Passive Investing

The strategy of placing your capital into a real estate syndication that is managed for you.

Permanent Agency Loan

This is a long-term mortgage loan guaranteed by government-sponsored agencies Fannie Mae or Freddie Mac. Loans may be amortized for as many as 30 years.

Physical Occupancy Rate

The physical occupancy rate is the rate of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units.

Preferred Return

Investors with preferred shares or preferred returns receive their distributions and returns up to an agreed upon percentage before the sponsor. This holds them accountable and ensures interests are aligned.

Prepayment Penalty

A penalty for paying off a loan balance early. These clauses can be especially complicated calculations in commercial mortgage lending.

Private Placement Memorandum (PPM)

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.

Pro-Forma

A pro-forma is the projected budget of an apartment community with itemized line items for the income and expense for the next 12 months and 5 years, which is an output of the underwriting.

Property Management Fee

The property management fee is an ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property. This fee ranges from 2% to 8% of the total monthly collected revenues of the property, depending on the size of the deal.

Profit and Loss Statement (P&L)

The profit and loss statement is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement or a T12.

Property and Neighborhood Classes

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: 1. Class A: new construction, command highest rents in the area, high-end amenities 2. Class B: 10 – 15 years old, well maintained, blue & white collar tenant 3. Class C: built within the last 25 years, shows age, blue collar tenant 4. Class D: over 30 years old, no amenity package, low occupancy, needs work Neighborhood Class: 1. Class A: most affluent neighborhood, expensive homes nearby, maybe have a golf course 2. Class B: middle class part of town, safe neighborhood 3. Class C: low-to-moderate income neighborhood 4. Class D: high crime, very bad neighborhood

Purchase and Sale Agreement (PSA)

The Purchase and Sale Agreement (“PSA”) is the game plan and overarching playbook to the transfer of a commercial real estate asset. The PSA is the critical contract between a Purchaser and Seller and is legally binding.

Refinance

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.

Refinancing Fee

The refinancing fee is a fee paid for the work required to refinance the property. At closing of the new loan, a fee of 0.5% to 2% of the total loan amount is paid to the general partner.

Rent Comparable Analysis

The rent comparable analysis is the process of analyzing similar apartment communities in the area to determine market rents of the subject apartment community.

Rent Premium

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.

Rent Roll

The rent roll is a document or spreadsheet containing detailed information on each of the units at the apartment community, along with a variety of data tables with summarized income.

Residential Utility Billing System (RUBS)

Residential Utility Billing System (RUBS) is a method of calculating a tenant’s utility bill based on occupancy, apartment square footage or a combination of both. Once calculated, the amount is billed back to the resident, which results in an increase in revenue.

Sales Proceeds

The sales proceeds are the profit collected at the sale of the apartment community. For example, here is a how the sales proceeds are calculated for a 415 unit apartment community purchased at $24,750,000 and sold after a five year value-add business plan:

Sophisticated Investor

A sophisticated investor is a person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.

Subject Property

The subject property is the apartment the general partner intends on purchasing.

Submarket

The submarket is a geographic subdivision of a market. For example, Mooresville is a submarket of Charlotte.

Subscription Agreement

A subscription agreement is an agreement between a company and investor(s) that sets out the price and terms of a purchase of shares in the company. The subscription agreement details the rights and obligations associated with the share purchase.

Vacancy Rate

The vacancy rate is the rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units. For example, a 100 unit apartment community that has 10 vacant units has a vacancy rate of 10%

Vacancy Loss

Vacancy loss is the amount of revenue lost due to unoccupied units. For example, a 100 unit apartment community that has 10 vacant units that rent for an average of $800 per unit per month has a vacancy loss of $96,000 per year.

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