Terminology

Investors in entities fundraising under the SEC's 506(b) and 506(c) exceptions must meet certain conditions.

a) Individuals with income over $200,000 ($300,000 with spouse), in each of the last two calendar years, and who reasonably expect to have such income in the current calendar year; OR with a net worth over $1,000,000 (with or without spouse, excluding primary residence); OR who are holders of Series 7, Series 82, or Series 65 licenses.

b) Trusts with assets over $5 million that were not formed specifically to make the investment and are directed by a Sophisticated Investor; OR that are revocable (even if formed specifically to make the investment) and the grantor or settlor is an Accredited Investor.

c) Other entities with assets over $5,000,000 and not formed specifically to make the investment; OR in which each equity owner is an Accredited Investor.

See "General Partner."

Bonus depreciation allows businesses to accelerate depreciation deductions for assets that have a useful life of 20 years or less. So, assets with useful lives of 5, 7, or 15 years identified in a cost segregation study are eligible to be deducted at a faster rate than 5, 7, or 15 years as the case may be. Before 2023, 100% of the depreciation on 5-, 7-, and 15-year property could be deducted in the first year. Congress is reducing bonus depreciation rates to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027 and beyond.

The Capitalization Rate (Cap Rate) is the Net Operating Income divided by the property’s fair market value or purchase price. It is the annual rate of return on a real estate investment property based on the income that the property is expected to generate without regard for debt service payments. The cap rate is most useful as a comparison of relative value of similar real estate investments.

The cash-on-cash return is a property's net cash flow from operations net of debt service payments divided by invested capital. It is the equivalent of a stock's dividend yield. The cash-on-cash return does not include changes in the property's value.

A cost segregation study identifies the cost of each interior and exterior component of a building to identify those that can be depreciated over 5, 7, or 15 years instead of 27.5 years. Some examples are parking lots, windows, carpets, and landscaping. A shorter depreciable life means a higher income tax deduction.

One of two primary measures a lender uses to determine the loan amount is a minimum DSCR. The DSCR is a property's Net Operating Income for the period being measured divided by the debt payment(s) for that period. For example, if a loan requires a minimum DSCR of 1.25, then NOI must be 1.25 times the debt payment amount (or alternatively, the debt payment amount cannot be more than 80% of NOI). Put another way, the lender in this example is requiring a NOI cushion of 25%. This gives the lender some comfort that if NOI decreases because of a drop in occupancy, negative rent growth, or unexpected expenses, then it's likely the property owner could still make the loan payments.

Depreciation expense is an annual reduction of taxable income that allows for the wear and tear, deterioration, or obsolescence of property used in a trade or business.

Effective Gross Revenue (EGR) is calculated by adding Gross Potential Revenue with other income and subtracting rent lost to under-market leases, non-revenue units, concessions, collections, and physical vacancy.

See "Value-Add Strategy."

This is Volhawk. The GP team sources the property, analyzes the deal, negotiates terms, raises equity, obtains the loan, secures property management, and executes the business plan.

Gross Potential Revenue (GPR) is the hypothetical amount of rent a property would earn not considering other income or rent lost to under-market leases, non-revenue units, concessions, collections, and physical vacancy. It assumes 100% of units are rented out at current market prices.

The IRR is a widely used method of valuing a property’s annual cash flow stream by converting future cash flows into present-day dollars. It represents the average annual return required to convert today's investment dollars into those future cash flows and is computed by starting with the future cash flows and working backwards. Mathematically, the IRR is the percentage rate that discounts (reduces) the sum of future cash flows to a present value that equals the investment amount.

A Limited Partner is an investor with no management responsibility who provides equity capital to acquire and operate the property, and in return receives a portion of operating cash flow and sale/refinance proceeds.

One of two primary measures a lender will use to determine the loan amount is a maximum LTV. The LTV is the loan balance divided by a property's value. For example, if a loan amount is limited to 70% LTV, it means the loan amount cannot exceed 70% of the property's value (usually the purchase price at loan origination). A maximum LTV gives a lender some comfort that if the loan goes into default, it is likely that the value will be worth at least as much as the loan balance.

Net Operating Income (NOI) is a property’s Effective Gross Revenue reduced by all expenses except for loan payments, income taxes, mortgage insurance premium (MIP) payments, and sometimes funded replacement reserves.

See "Limited Partner."

A Preferred Return is a distribution preference whereby proceeds from operations, refinancing, and sale are first distributed exclusively to one class of equity (typically limited partners / passive investors) until they receive a specified rate of return on investment. This preference provides some comfort to investors because it subordinates the sponsor’s profits participation up to a certain return threshold.

A Private Placement Memorandum outlines the business plan, deal structure, fees, organizational chart, sponsor bios, and any known disclosures or risks of a deal.

A Sophisticated Investor is someone with sufficient knowledge and experience in financial and business matters such that the person is capable of evaluating the merits and risks of a prospective investment. Entities fundraising under the SEC's 506(b) exception may admit up to 35 non-accredited Sophisticated Investors.