Glossary of Terms

In the context of this website, a multifamily investment property is any residential building that meets the following basic criteria:

• It is more than four units (5+ units).
• Each unit is offered individually to the market for rent.
• The units are typically rented on 12 to 14-month leases.

Market rent is the amount the property could reasonable get TODAY for any unit. Properties capture this because typically lease terms extend up to a year. During that year, the market could move significantly…in either direction…and, it is important to track that movement so preparations can be made for the lease to turn over. The market rent is typically tracked by the property and can be set wherever they think is appropriate. Many properties conduct a market study / lease analysis to produce the top line potential market rent. However, in the end, the Potential Market Rent always seemed to me to be the properties “budgeted” rent in a “best-case” situation.

Loss to Lease is the difference between the average effective in-place rents and the average market rent assigned to the property. This metric shows the different between what the property thinks they could achieve in rental income and what they are achieving. This becomes a bit more clear on an individual unit basis: • Let say we have Unit A with a Sally currently occupying the unit and paying $1,500 / month in rent. • Louis, the property manager, does a rental survey and realizes he could rent the unit out for $2,000 / month. • Unit A would have a stated “loss to lease” of $500 / month (Actual: $1,500 – Potential: $2,000 = Loss to Lease: $500)

Net market rent is the potential market rent minus the loss to lease. This metric expresses the different between what the property would produce if it was 100% occupied at their current average rents and what it could produce if the rents were all moved to what the property has decided is “market”.

This is a measure of how of the net market rent is actually collected and is made up of several different accounts. 1. Vacancy 2. Concessions 3. Non-Rev Units 4. Bad Debt

This is simply the count of units occupied verses the total units on site. The reason people often-times look at “economic vacancy” instead of physical vacancy is unit mix variance. For example, if you have 100 units that are 1-bedroom with rents at $500/month and 25 units that are 4-bedroom with rents at $4,000 / month. - 1-Bedroom Stats: o Income from 1-Bedroom Units (monthly): $50,000 / month o As a percentage of total units: 80% o As a percentage of monthly revenue: 33% - 4-Bedroom Stats: o Income from 4-Bedroom Units (monthly): $100,000 / month o As a percentage of total units: 20% o As a percentage of monthly revenue: .67% What this simply means is that the property could be 80% occupied and still be losing 67% of its revenue. This a bit of a hyperbolic example but it illustrates the main concept well.

Concessions come in two main flavors: Upfront and recurring. As a property manager or developer, it is typically more advantageous to give large upfront concessions verses smaller recurring ones. It cleans up the operating statement and removes future ownership from the liability of carrying your recurring concessions until they burn off. Essentially, you shoulder the whole burden of the lease up. This is often shown in the market as “X-Months Off” or potentially visa gift cards, free appliances upon move in, or other things of that nature. A recurring concession would be $50 / month off your rent for all 12 months. Now a $50 / month recurring concession and a $600 upfront concession impact the property’s yearly NOI in the same way. In real terms, from the property level, over the course of a year, it really does not matter. The propensity to offer up-front concessions is typically more for optics than anything else.

This is lost revenue attributable to employees living on-site. Sometimes the entire monthly rent is provided, sometimes its partial, or a set dollar discount, but its always recorded under this line item and separated out from other economic loss. This makes it easy to see potential upside if current / future ownership come up with a business plan that does not require offering that benefit. Non-revenue units are very common in larger properties, starting around 80 – 100 units, as it becomes very much a full-time job to manage the community and there are benefits to having the manager on-site.

This is the amount of revenue loss attributable to people not paying their rent or various property level fees. This is usually tracked and written off at some point, so you may see a positive “bad debt” number when the revenue has been written off at a partnership level but was able to be collected at a later date.

Effective Rental Income is the “powerhouse of the cell”, so to speak, and is the primary revenue driver at the property. This is a metric that details how much revenue was actually collected from rent checks every month after accounting for economic vacancy. There are some other small revenue sources, which we will cover next.

Other income is a widely variable category depending a lot on the types of amenities and programs offered at the property. For the sake of this high-level guide, I want to provide some visibility on the some of the more common “other income” items I have seen over the years. - Misc Other Income o This a catch all for income collected by the property not really attributable to any program or incentive. This is typically a small amount. - Utility Reimbursements o If a property is on RUBs or utility rebilling, it is common to see this show up to balance out the utility expense further down the operating statement. o It is good practice to keep track of how much the property is collecting here verses how much they are spending on utilities later. - Cable / Internet Income o This will show up when the property offers a bulk cable / internet package through a local provider. o This is typically advantageous for both parties as the property can negotiate much lower bulk pricing, make a profit, and still offer the tenant discounted rates on their service. - Parking Income o Things like dedicated parking spots, garage spaces, or covered parking are all examples of income that could be put in this category. - Storage Income o Many properties will have small storage areas on-site and charge fees from $20 - $100 / month (maybe even more…really depends on the offering). - Washer / Dryer Income o This is where revenue from a laundry facility will be categorized. o If you lease washer / dryers to tenants it would be good to consider added that line item here - Smart Home Tech o This would be revenue generated from a unit that has smart features like a thermostat, lights, or ring camera…really any number of smart upgrades. This is also typically a $10 or less change…but could be anything.

This is the total amount of revenue the property has collected over the entire month. This is the gross potential rent minus loss to lease and economic vacancy plus all other income items. This is an exhaustive metric that captures all revenue generated by the property for the review period.