Commercial Real Estate Investing 101: The Acronyms You Need to Know

acronymsLike any other investment sector, commercial real estate (CRE) comes with a unique set of concepts and terms that professionals use regularly. If you understand the jargon, you can get comfortable with the basics of a real estate transaction in seconds. If you’re not a commercial real estate expert, however, CRE’s ‘insider’s vocabulary’ may be intimidating and hard to understand.

Since knowledge is power, we’re equipping you with the intel to become an empowered commercial real estate investor – at least when it comes to the industry’s most commonly acronymmed concepts. Here are some of the top terminologies and what they mean for rookie investors diving in to real estate crowdfunding.

LTV: Loan-to-Value

This is exactly what it sounds like: a ratio calculated by weighing the sum of a loan against the appraised value of the property. Financial institutions and other lenders typically examine LTV before approving a mortgage, since high LTV ratios are generally seen as higher risk.

GOI: Gross Operating Income

GOI represents the entire income collected on a property, and is typically assessed in annual or monthly terms. In the commercial real estate market, GOI typically means rent plus ancillary revenue from things like laundry or parking. Importantly, GOI is the actual income – taking into account vacancies and non-paying tenants – whereas gross potential income represents the optimal income performance for a property without regard to losses.

NOI: Net Operating Income

NOI is essentially GOI minus operating expenses. What kinds of costs qualify as operating expenses? Things like repairs and maintenance, insurance, management fees, utilities, supplies, and property taxes do. (Considerations like the loan principal and interest, capital expenditures, depreciation, income taxes, and the amortization of loan points do not fall under the ‘operating’ umbrella.)

CoC: Cash on Cash

Now we get to the fun stuff: The terms that show investors how they’ll make money on their investments. Cash-on-cash – also known as “return on equity” or “equity dividend rate” – is one type of rate of return on a real estate transaction, showing the cash income to be received on the cash invested. The ratio, usually converted to a percentage, represents the pre-tax cash flow (NOI minus the debt service on the mortgage) divided by the amount of equity invested. Long-term, the cash-on-cash figure doesn’t take into account certain considerations – such as income tax effects, property value fluctuations, future cash flows, or reductions in loan principal – but it provides investors a basic framework for returns.

IRR: Internal Rate of Return

There’s one other consideration CoC doesn’t address: time, which IRR factors in. Also discussed as investment “yield,” IRR is the projected rate of growth an investment can potentially generate. Through a complex calculation, IRR incorporates the idea of “discounting” – addressing the present value of both the property’s future cash flows and the expected gains to be made from its ultimate sale – to estimate a project’s overall rate of return.

The EarlyFive: Join us at Crowdfinance 2015

EarlyShareholders: We hope you joined us Wednesday for the webinar on the REVA Raleigh Colonnade investment opportunity. If not, you can watch the archived version on the offering page at any time. A few more updates:

mini-logoSept. 22, 2015
Which U.S. States Have the Most Private Real Estate Deal Activity?
EarlyShares Blog
There were $8.4 billion in private real estate offerings in the U.S. in just the second quarter of 2015, far outpacing the volume seen in recent years. Where is all of that syndication activity taking place? The top ten states on our list accounted for 413 deals and $6.63 billion in volume – almost 80% of the Q2 total.

wsjSept. 23, 2015
Miami Beach Condo Sells for Record $60 Million
Candace Taylor, Wall Street Journal
In the biggest transaction ever for a single-family home in Miami-Dade County, a duplex penthouse at a new condominium complex – the Faena House – sold for a massive $60 million this week. For more images of the stunningly gorgeous space, go to Curbed Miami.

bisnowSept. 18, 2015
5 Spectacular Infrastructure Projects
Kathleen Wong, Bisnow
Whether to replace outdated facilities, improve urban roadways, or protect cities from natural disasters, infrastructure mega-projects are getting bigger and better. We’re loving these five in particular, which could lead to huge new opportunities for real estate investors.

cbsSept. 18, 2015
How China’s Woes Could Boost U.S. Real Estate
CBS MoneyWatch
It’s no news that Chinese investors have been snapping up U.S. real estate of all kinds. Yet in the last few months – amid signs that China’s economy is slowing even more than expected – they’ve stepped up their buying even more, and experts don’t see them pulling back any time soon.

unnamedSept. 18, 2015
Real Estate Outlook Unfazed by Fed Inaction, Observers Say
Sarah Borchersen-Keto,
A wealth of concern and media attention was heaped on the Fed’s recent deliberation over raising interest rates – but was it uncalled for? The jury’s still out, but the real estate experts in this article say that, ultimately, any increase to come may be more symbolic than meaningful.

Which U.S. States Have the Most Private Real Estate Deal Activity?

2145676_4351be8d83_bReal estate crowdfunding is a relatively new industry, but it’s an evolution of a longstanding concept: private real estate syndication.

For decades, real estate developers and sponsors have divvied up portions of the equity or debt in their projects to investors through Regulation D ‘private placement’ offerings. Real estate crowdfunding under Regulation D Rule 506(c) is simply another way to execute a private placement deal – a better way, given that it enables real estate dealmakers to execute the capital raise process using online tools (and to publicly advertise their deals to accredited investors outside their existing networks).

How popular is private real estate syndication? More so than you may realize. According to intelligence firm Monetarex, there were $8.4 billion in private real estate offerings in the U.S. in just the second quarter of 2015. (Monterex bases its figures on Form D filings submitted to the Securities and Exchange Commission.) Monetarex found that most of the private placement offerings came from the commercial sector (38.5), followed by the residential property sector (19.2 percent), other real estate (23.4 percent), REITs (17.0 percent) and the construction sector (1.5 percent).

That $8.4 billion total far outpaces the kind of volume we’ve seen in years past. From 2009-2012, aggregate capital raised for real estate private placements accounted for $63 billion – averaging out to around $4 million a quarter. The mammoth Q2 numbers double that, indicating increasing use of syndication among developers and rapidly growing interest in real estate among investors.

So where is all of the syndication activity taking place? Largely, in one fifth of the country: The top ten states for private real estate offerings accounted for 413 deals and $6.63 billion in volume (almost 80% of the $8.4 billion Q2 total) with the top state claiming more than the next nine combined:

  1. California: $3.39 billion
  2. Maryland: $770 million
  3. Ohio: $600 million
  4. Texas: $540 million
  5. New York: $440 million
  6. Illinois: $340 million
  7. Virginia: $190 million
  8. Colorado: $160 million
  9. Washington: $100 million
  10. Massachusetts: $98 million

California has been one of the top outposts for real estate crowdfunding since the industry’s inception in 2013, so we can’t help but wonder if the rise of online platforms like EarlyShares is contributing to the state’s monster $3.39 billion total. (To access a vetted investment in California real estate, underwritten by a top institutional lender, click here.)

Either way, we think the increase in private offering activity across the country is a positive trend for the real estate industry across the board. Here’s hoping the other 40 states catch up soon!

The EarlyFive: EarlyShares wins ICON Real Estate Award

We just saw the close of an exciting, event-filled week for Miami’s real estate community – and we loved being a part of it! Here’s the rundown, as well as some of our latest deal news:
  • It was an honor for our team to accept an ICON Real Estate Award Friday at the Miami Real Estate Symposium & Expo! Thanks to the organizers for the recognition and congratulations to our fellow winners.
  • The Crittenden Real Estate Finance Conference was  an excellent networking and education opportunity. We’d like to thank the Crittenden team for naming EarlyShares one of the ‘Hottest Crowdfunding Companies’ in their Summer Real Estate Report. (Subscribe here to access the report and other Crittenden resources.)
  • Magnus Capital hosted their exclusive EarlyShares Investor Webinar on Wednesday to great success. To watch the archived webcast on demand, check out the video on the East 3rd Street offering page.
  • Lastly, don’t forget that Accordia’s Shoppes at Godwin deal is closing up soon. Check out this estimated 24.3-29.1% IRR investment opportunity before it’s too late.

supraSept. 17, 2015
Crowdfunding and Real Estate Development
David Carroll, JD Supra Business Advisor
Even as the real estate  market continues to open up to crowdfunding, most developers have only a baseline understanding of their new options. This article is the key to rectifying that, since the author provides a thorough overview to the new market – including a mention of EarlyShares.

NREIonlineSept. 18, 2015
Investors Chase Value-Add Opportunities in the Office Sector
Robert Carr, National Real Estate Investor
With demand for office properties strong in most major markets, firms are scooping up value-add office properties for turnaround projects and seeing massive interest from investors. (To get your piece of office-building investment action, check out our REVA Raleigh Colonnade deal.)

moneySept. 17, 2015
Here’s How Much You Should Pay for a Rental Property
Jash Garskof, Time-Money
Here’s some valuable Q&A insight for those of you using our sister site to browse for a new income property investment. Learn how to run the numbers on cap rates and operating expenses and how to assess your potential return on investment.

yah-finSept. 11, 2015
No risk of real estate bubble, market ‘in a very good place’
Susannah Lee, Yahoo!Finance
Commercial real estate prices in some parts of the U.S. are surpassing records set before the financial crisis, but most leading figures in the market see little reason to worry. In this article and video, one top real estate expert advises why he sees several real estate sectors, including multifamily rentals, on solid ground.

inmanSept. 16, 2015
Why real estate is overdue for technological evolution
Michael Episcope, Inman
Inefficiency is a catalyst for disruption – and historically, real estate has had a lot it. But that’s beginning to change as technology and the JOBS Act regulations converge to alter the landscape of real estate investing. As the author puts it: “Access to institutional quality real estate investments and fair investment management fees will become the norm over the next decade.”

3 Keys of Real Estate Crowdfunding: Understanding New Capital Formation Options


Through new capital raising regulations implemented in September 2013 under the JOBS Act, “real estate crowdfunding” has become a highly active sector of the private finance market. According to a recent report from Massolution, a research and advisory firm serving the crowdfunding industry, over $1 billion of capital was infused into the real estate space through various crowdfunding platforms in 2014.

Crowdfunding – the practice of raising funds from a group of people, leveraging online tools – has evolved beyond its origins in donation-based fundraising into the world of sophisticated equity and debt capital raising. Through so-called “equity crowdfunding,” business owners can raise investment capital online from individual investors who pool their funds with others to buy shares in private ventures.

Real estate is the fastest growing sector of the emerging equity crowdfunding market, and its attractiveness to “crowd” investors is unsurprising. Though the JOBS Act – short for “Jumpstart Our Business Startups” – was originally designed to increase capital allocation from individual investors into early-stage companies, the high level of risk inherent in startup investing has made investors hesitant to participate in growth opportunities under the new regulations. Real estate, on the other hand, is a more tangible and familiar asset for investors to understand.

“When investors are presented with different opportunities on a crowdfunding platform, I believe the majority prefer to co-invest with a sponsor who has been in business for a long time, rather than in a start-up business,” Jack Glottman, President of Saglo Development Corporation, told CRE Finance World. Saglo is a Miami-based retail shopping center investment and management company that owns, leases and manages 800,000 SF of shopping centers and provides third party management and leasing for an additional 230,000 SF of commercial property in Florida. Saglo conducted two successful $3+ million capital raises on EarlyShares.

“They’re not without risk, but real estate investment opportunities come with firm time horizons and yield projections,” Glottman continued. “When investors can get 7-9% returns on a project that they can invest in online, that’s a pretty appealing prospect for them.”

Crowdfunding’s appeal for investors is matched by its appeal for capital raisers. Most real estate developers, project sponsors, and operators are already well-acquainted with deal syndication – the process of pooling investments from a group of investors to finance a portion of the equity for a project. Today’s crowdfunding (or “private investing”) platforms provide tools, resources, and services designed to make the syndication process more efficient.

It’s crucial, however, to understand the background and nuances of the new real estate crowdfunding market before utilizing it as a tool for real estate capital formation or investing. This includes gaining familiarity with the current regulatory environment, the types of platforms in the market, and sponsors’ options for raising capital – all of which are highlighted below.

#1: Regulations: Making the Private Market Public

The real estate crowdfunding industry has arisen thanks to the enactment of Title II, which is one of the seven titles of the JOBS Act. Enacted in September 2013, Title II lifted the ban on the public advertising or “general solicitation” of private investment opportunities.

The regulatory exemption for general solicitation is Regulation D Rule 506(c). Prior to the rule’s implementation, all real estate syndications were traditional private placements under the longstanding Rule 506(b) securities exemption. 506(b) stipulated that capital raisers (“issuers”) could only raise funds from those investors with whom they had “substantive, pre-existing” relationships.

As such, the pool of investors for a given real estate deal was largely limited to the sponsor or developer’s network. With general solicitation, however, dealmakers can now solicit investments from any accredited investor. The key stipulation is that the issuer is required to verify that all investors qualify as accredited according to the SEC’s income or net worth criteria – $200,000 in annual individual income ($300,000 joint) or $1 million in net worth, not counting the value of primary residence.

By moving the capital raising process online and broadening issuers’ access to potential investors, 506(c) “crowdfunding” is helping facilitate an evolution for the real estate industry. Bringing dealmaking out of the country club and into the 21st century is a significant change for the industry – one that may have the potential transform the real estate finance landscape.

#2 Platforms: Powering Real Estate Through Technology

Despite the relative newness of the real estate crowdfunding market, investors and sponsors can already choose from a multitude of platforms to fit their needs.

At their core, most platforms offer largely the same tech-driven features and benefits. For deal sponsors (“issuers”), platforms help streamline capital formation through deal monitoring tools, transaction management functionality, privacy controls, and access to a database of registered investor users. For investors, they provide transparent access to all of the tools and the information needed to review, evaluate, and invest in a variety of opportunities.

Yet that doesn’t mean all platforms are created equal. Beyond the technology benefits, platforms vary across seven key variables:

Focus: Does the portal concentrate on a specific type of real estate asset or a particular geographic region?

  1. Due Diligence: Does the platform vet its deals? If so, how? What are its investment selection criteria?
  2. Products: Does the platform offer debt or equity investment opportunities?
  3. Regulatory Profile: Does the platform operate as a registered broker-dealer or just an intermediary?
  4. Service Range: Does the platform help issuers craft their investment offerings or is it self-service?
  5. Deal Structure: Do investors receive notes or make direct investments into the deals on the platform? Or, are investments pooled into a special purpose fund?
  6. Portal Compensation: Is the platform paid via profit participation, points, or a flat fee?

Issuers and investors should research a platform to understand its niche in the overall market before investing or pursuing a capital raise. The most reputable platforms – among them EarlyShares, RealCrowd, Fundrise, and several others – offer a wealth of educational materials and resources to help you make the most of their products and services.

#3 Capital Raises: Options for Streamlined Syndication

Given the vast number of real estate crowdfunding platforms on the web – now estimated at over 100 – there are variety of fundraising vehicles available to developers and sponsors to help them capitalize on the crowdfunding trend. Investors and issuers alike should understand the different options, since they can impact the structure of the investment offerings.

Private Raise-506(b): Leverage technology to conduct a tech-powered private placement

Many platforms offer issuers the option to utilize their transaction management and deal tracking tools without making the deal public (and thus incurring the legal requirements that come with initiating a 506(c) raise). With a private raise, sponsors can leverage the benefits of technology without having to go through the investor verification process. Issuers simply invite members of their existing networks to view and invest in their deal(s). The drawbacks: no marketing exposure beyond their existing network, and no investments from new audiences.

Direct Crowdfunding: Raise funds publicly and directly from accredited investors

In this model, an issuer posts a deal to a platform – triggering 506(c) – and accepts investments from members of his or her network and new investors who contact the issuer through the platform. The sponsor publicly syndicates a portion of the debt or equity (usually between $1 and $5 million) and accepts 5-40 new investors into the deal (on average, depending on offering size and minimum investment). Typically, the platform takes care of investor verification and furnishes the sponsor with documentation for his or her records.

‘Fund’ Crowdfunding: Raise capital into a fund and share profits with your platform

This option is largely the same as the one above, but involves slightly different structure. The platform will pool all investor commitments into an LP or LLC and then use the fund to invest directly in the issuer’s deal. As such, the sponsor only has one new investor in the offering: the fund. Some platforms pre-fund the deal by underwriting it up front and syndicating it to investors after the fact. Others open the fund directly to investors and close the offering once the target goal is reached. The platform typically acts as the fund manager and shares a percentage of the profits after investors receive their take.

No matter which approach appeals to you, it’s a smart move for all constituents in the real estate market to familiarize themselves with the concept of crowdfunding, given its growing popularity and its potential to fundamentally change the way real estate dealmakers do business. Now is the time to act, because the real estate crowdfunding industry is expected to grow to more than $2.5 billion in 2015.

This post by EarlyShares CEO Joanna Schwartz originally appeared in CRE Finance World-The Voice of Commercial Real Estate Finance.

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