Sage Equity

FAQ

FREQUENTLY ASKED QUESTIONS

WHAT IS PASSIVE INVESTING?

syndication is simply a pooling of resources toward a common purpose—in this case, to buy a property.

Think of one of our syndications as a plane ride. The deal sponsors are the pilots. They deal with the property’s day-to-day operations.

Exponential Equity is the travel agent, helping people find the right flights and determine their destinations. We’re helping fly the plane as deal sponsors, too! (we’re overworked, lol)

You’re one of the passengers. You choose a flight, buy the ticket, and enjoy the ride.

The plane itself is the business entity (an LLC) we form to hold the property we’re buying. Every investor owns part of the plane. (Try telling that to an actual airline!)

As a passive investor, you just invest your money, then sit back and start receiving returns. We take care of the rest and provide you regular updates.

WHAT ARE THE RISKS INVOLVED?

Let’s be real. There are risks in any investment. Bottom line, there’s always a possibility you could lose a portion of—or all of—the principal you invest, just like with any other investment. Since we’re buying a business anchored by a piece of real estate (e.g., an apartment complex, self-storage facility, etc.), anything that might jeopardize its profitability constitutes a risk. Many of these are foreseeable and are mitigated by our purchase criteria, our education, and our experience, as well as that of the partners we work with. But unexpected things can happen, despite the best planning. A few hypothetical examples include:

  • A large insurance loss, such as a fire or natural disaster, that reduces the property’s potential income for some time.
  • A significantly higher-than-planned-for increase in expenses like taxes or insurance.
  • New public policy (perhaps after an election) that negatively affects the type of business or real estate as a whole.

But…there’s good news. Commercial real estate assets like apartment buildings and self- storage facilities operate independently of the stock market. In fact, most segments tend to fare far better in recessions than stocks do. A sudden plummet in the stock market has little bearing on the value of our property. Our properties also tend to be safer investments than single family homes because if one tenant moves out, you still have others to pay down the mortgage, and we have more control over the property’s value than investors do with single family homes.

Through our education, we’ve learned how to pick properties and markets that are less susceptible to many of these risks and are likely to perform better than average during bad times, as well as to structure and capitalize the projects to outlast them until times are good again. In most cases, the worst this means to you is that we might have to suspend distributions for a while and hold the property a year or two longer than intended before we can sell for a profit.

Compared to investing in stocks, where a recession might mean the market takes a huge drop and companies go under (losing your investment in them), we feel this is much better!

CAN I INVEST WITH RETIREMENT FUNDS?

Yes! You can use retirement funds to invest in a syndication without earning penalties for early withdrawal (because it’s not a withdrawal). This is one of the best little-known strategies for investing capital in a retirement account, and lets you invest it in recession-resistant real estate instead of more volatile stocks or mutual funds.

To invest your retirement funds in one of our properties, the first step is opening a self-directed account with a qualified provider (we can recommend a few) and rolling an existing retirement account into it. This new account may be a Self-Directed IRA or a Solo 401k (a version of which is marketed and branded as an “eQRP”). This step can take some time, so it’s best to do this before you decide to invest in a specific property. Once it’s done, investing from your retirement account into one of our properties is nearly the same as investing cash.

Note that investing in a project through a retirement account can have unique tax consequences. We recommend scheduling a call with us about it and consulting your tax advisor before making a decision to invest this way. However, it can be quite advantageous, and is one way we invest as well.

Note: Exponential Equity does not provide tax advice. Please consult your own financial or tax advisor for your personal tax situation.

HOW LONG WILL MY MONEY BE INVESTED?

Most projects plan for a 5-year holding period, so you should plan to have your money in the investment for at least that long. However, it may be less than that if the project is going well, or more than that if we enter a recession late in the holding period. These are illiquid investments…you’ll receive regular distributions while we hold the property, but your initial investment cannot be withdrawn until sale.

That said, we know 5 years can be a long time, and unexpected events happen in life. If a major life event happens and you need out, talk to us. We’ll do everything in our power to help you out, including buying out your shares ourselves if need be.

HOW OFTEN SHOULD I EXPECT TO GET DISTRIBUTIONS?

Distributions are typically made quarterly, though they might be made monthly, based on how we organize for the deal.

Distributions are not guaranteed, but are made as long as the sponsors determine they can be without undue risk to the project overall. There may be times, such as after an unexpected large expense, an insurance claim event, or during economic recession, when the sponsors determine we’re unable to make a distribution without unduly risking your principal. If a situation like this arises, rest assured we’ll be in communication with you.

WHAT TAX REPORTING WILL I RECEIVE?

Each individual, trust, entity, or retirement plan investor receives an IRS K-1 form for use preparing your tax returns. The K-1 is issued annually for an investment in partnership interests and reports earnings, losses, deductions, and credits. They are typically distributed in March. Your K-1 may show a “paper loss” even though you received cash flow because of depreciation. This is one of the great tax advantages when investing with real estate syndications.

Note: Exponential Equity does not provide tax advice. Please consult your own financial or tax advisor for your personal tax situation.

WHAT ARE THE BENEFITS OF INVESTING IN OUR SYNDICATIONS?

The direct benefits of investing with us are cash flowequity growth (capital gains), and tax benefits.

During the time we own the property (the holding period), its cash flow is returned regularly to you through distributions.

The equity you initially invest grows during the holding period as the property’s value increases (capital appreciation). When we sell, you get your investment back plus this equity growth — this is the largest payout, but is less predictable than cash flow.

Part of the magic of real estate is its tax benefits, including depreciation. Thanks to depreciation, our taxes may reflect a “paper loss” for the year even though we’ve made money. This means your income tax for the year may be lower  despite having made more money! And if not, the income from a passive investment is usually taxed as passive income or long-term capital gains, which have lower tax rates than ordinary income. Depreciation may be particularly high early in an investment because of cost segregation and bonus depreciation.

One of the key indirect benefits of investing in a real estate syndication is leverage, which is based on the loan we take on a property. The debt acts as a lever that increases profits.

Note: Exponential Equity does not provide tax advice. Please consult your own financial or tax advisor for your personal tax situation.

WHO CAN INVEST WITH US?

We accept Accredited Investors in our projects. We may also accept Sophisticated Investors with whom we have pre-existing relationships, based on the syndication structure, per Securities and Exchange Commission (SEC) regulations. We also accept accredited investors as key principals (KPs) or guarantors, which is valuable for those who want to purchase larger properties on their own or as syndicators in the future.

  • A large insurance loss, such as a fire or natural disaster, that reduces the property’s potential income for some time.
  • A significantly higher-than-planned-for increase in expenses like taxes or insurance.
  • New public policy (perhaps after an election) that negatively affects the type of business or real estate as a whole.

But…there’s good news. Commercial real estate assets like apartment buildings and self- storage facilities operate independently of the stock market. In fact, most segments tend to fare far better in recessions than stocks do. A sudden plummet in the stock market has little bearing on the value of our property. Our properties also tend to be safer investments than single family homes because if one tenant moves out, you still have others to pay down the mortgage, and we have more control over the property’s value than investors do with single family homes.

Through our education, we’ve learned how to pick properties and markets that are less susceptible to many of these risks and are likely to perform better than average during bad times, as well as to structure and capitalize the projects to outlast them until times are good again. In most cases, the worst this means to you is that we might have to suspend distributions for a while and hold the property a year or two longer than intended before we can sell for a profit.

Compared to investing in stocks, where a recession might mean the market takes a huge drop and companies go under (losing your investment in them), we feel this is much better!

CAN I INVEST THROUGH A TRUST OR BUSINESS ENTITY?

Yes, you can invest through a family trust (or other type) or business entity (LLC or corporation). You can invest cash or through a self-directed retirement account.

To invest your retirement funds in one of our properties, the first step is opening a self-directed account with a qualified provider (we can recommend a few) and rolling an existing retirement account into it. This new account may be a Self-Directed IRA or a Solo 401k (a version of which is marketed and branded as an “eQRP”). This step can take some time, so it’s best to do this before you decide to invest in a specific property. Once it’s done, investing from your retirement account into one of our properties is nearly the same as investing cash.

Note that investing in a project through a retirement account can have unique tax consequences. We recommend scheduling a call with us about it and consulting your tax advisor before making a decision to invest this way. However, it can be quite advantageous, and is one way we invest as well.

Note: Sage Equity does not provide tax advice. Please consult your own financial or tax advisor for your personal tax situation.

WHAT IS THE MINIMUM AMOUNT I CAN INVEST?

While the minimum investment can vary, the typical minimum is $50,000.

WHAT COMMUNICATIONS DO INVESTORS RECEIVE?

Investors will receive a monthly report that provides property updates and performance indicators, property financials, and what it means for our business plan.

TERMINOLOGY

ACCREDITED INVESTOR

An accredited investor is a person that can invest in securities (i.e. invest in an apartment syndication as a limited partner) by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000 or $300,000 for joint income for the last two years with expectation of earning the same or higher or a net worth exceeding $1 million either individually or jointly with a spouse.

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

The asset management fee is an ongoing annual fee from the property operations paid to the general partner for property oversight. Generally, the fee is 2% of the collected income or $250 per unit per year.

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.

CAPITAL EXPENDITURES (CAPEX)

Capital expenditures, typically referred to as CapEx, are the funds used by a company to acquire, upgrade and maintain an apartment community. An expense is considered to be a capital expenditure when it improves the useful life of an apartment and is capitalized – spreading the cost of the expenditure over the useful life of the asset.

Capital expenditures include both interior and exterior renovations.

Examples of exterior CapEx are repairing or replacing a parking lot, repairing or replacing a roof, repairing, replacing or installing balconies or patios, installing carports, large landscaping projects, rebranding the community, new paint, new siding, repairing or replacing HVAC and renovating a clubhouse.

Examples of interior CapEx are new cabinetry, new countertops, new appliances, new flooring, installing fireplaces, opening up or enclosing a kitchen, new light fixtures, interior paint, plumbing projects, new blinds and new hardware (i.e. door knobs, cabinet handles, outlet covers, faucets, etc.).

Examples of things that wouldn’t be considered CapEx are operating expenses, like the costs associated with turning over a unit (i.e. paint, new carpet, cleaning, etc.), ongoing maintenance and repairs, ongoing landscaping costs, payroll to employees, utility expenses, etc.

CASH-ON-CASH (COC)

The cash-on-cash (CoC) return is the rate of return, expressed as a percentage, based on the cash flow and the equity investment. CoC return is calculated by dividing the cash flow by the initial investment.

For example, a 238-unit apartment community with a cash flow of $320,285 and an initial investment of $3,645,170 results in a CoC return of 8.8%

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.

DEBT SERVICE

Debt service is the annual mortgage paid to the lender, which includes principal and interest. Principal is the original sum lent and the interest is the charge for the privilege of borrowing the principal amount.

DISTRIBUTIONS

Distributions are the limited partner’s portion of the profits, which are sent on a monthly, quarterly or annual basis, at refinance and/or at sale.

EFFECTIVE GROSS INCOME (EGI)

Effective gross income (EGI) is the true positive cash flow of an apartment community. EGI is calculated by the sum of the gross potential rent and the other income minus the income lost due to vacancy, loss-to-lease, concessions, employee units, model units and bad debt.

EQUITY INVESTMENT

The equity investment is the upfront costs for purchasing an apartment community, which includes the down payment for a loan, closing costs, financing fees, operating account funding, and the various fees paid to the general partner for putting the deal together. May also be referred to as the initial cash outlay or the down payment.

EXIT STRATEGY

The exit strategy is the plan of action for selling the apartment community at the end of the business plan.

GROSS POTENTIAL RENT (GPR)

The gross potential rent (GPR) is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates.

GROSS POTENTIAL INCOME

The gross potential income is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rates plus all other income.

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.

INTERNAL RATE OF RETURN (IRR)

The internal rate of return (IRR) is the rate, expressed as a percentage, needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal pay down) to equal the equity investment. IRR is one of the main factors the passive investor should focus on when qualifying a deal.

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 dividing the gross potential rent minus the actual rent collected by the gross potential rent.

METROPOLITAN STATISTICAL AREA (MSA)

metropolitan statistical area (MSA) is a geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core, which are determined by the United States Office of Management and Budget (OMB).

NET OPERATING INCOME (NOI)

Net operating income (NOI) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.

OPERATING EXPENSES

Operating expenses are the costs of running and maintaining the property and its grounds.

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.

PREPAYMENT PENALTY

prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain period.

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.

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, little deffered maintenance
  3. Class C: built within the last 30 years, shows age, some deferred maintenance
  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
RATIO UTILITY BILLING SYSTEM (RUBS)

Ratio 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.

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 PREMIUM

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.

SALES PROCEEDS

The sales proceeds are the profit collected at the sale of the apartment community.

SOPHISTICATED INVESTOR

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.

SUBMARKET

The submarket is a geographic subdivision of a market.

UNDERWRITING

Underwriting is the process of financially evaluating an apartment community to determine the projected returns and an offer price.

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.

ACQUISITION FEE

The acquisition fee is the upfront fee paid by the new buying partnership entity to the general partner for finding, analyzing, evaluating, financing and closing the investment. Fees range from 0.5% to 5% of the purchase price, depending on the size of the deal.

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.

BAD DEBT

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

BRIDGE LOAN

bridge loan is a mortgage loan used until a person or company secures permanent financing, which are short-term (6 months to three years with the option to purchase an additional 6 months to two years). They generally have a higher interest rate and are almost exclusively interest-only. Also referred to as interim financing, gap financing or swing loan. The loan is ideal for repositioning an apartment community.

CAPITALIZATION RATE (CAP RATE)

Capitalization rate, typically referred to as cap rate, is the rate of return based on the income that the property is expected to generate. The cap rate is calculated by dividing the property’s net operating income (NOI) by the current market value or acquisition cost of a property (cap rate = NOI / Current market value)

CASH FLOW

Cash flow is the revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue

CLOSING COSTS

Closing costs are the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction.

Examples of closing costs are origination fees, application fees, recording fees, attorney fees, underwriting fees, credit search fees and due diligence fees.

DEBT SERVICE COVERAGE RATIO (DSCR)

The debt service coverage ratio (DSCR) is a ratio that is a measure of the cash flow available to pay the debt obligation. DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 means that there is enough net operating income to cover 100% of the debt service. Ideally, the ratio is 1.25 or higher. An apartment with a DSCR too close to 1.0 is vulnerable, and a minor decline in cash flow would result in the inability to service (i.e. pay) the debt.

ECONOMIC OCCUPANCY RATE

The economic occupancy rate is the rate of paying tenants based on the total possible revenue and the actual revenue collected. The economic occupancy rate is calculated by dividing the actual revenue collected by the gross potential income.

EMPLOYEE UNIT

An employee unit is a unit rented to an employee at a discount or for free.

EQUITY MULTIPLIER (EM)

Equity Multiplier (EM) is the rate of return based on the total net profit (cash flow plus sales proceeds) and the equity investment. EM is calculated by adding the sum of the total net profit and the gross cash flow and dividing it by the equity investment.

FINANCING FEES

Financing fees are the one-time, upfront fees charged by the lender for providing the debt service. Also referred to as a finance charge. Typically, the financing fees are 1.75% of the purchase price.

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 or syndicator. The GP is responsible for managing the entire apartment project.

GROSS RENT MULTIPLIER (GRM)

The gross rent multiplier (GRM) is the number of years the apartment would take to pay for itself based on the gross potential rent (GPR). The GRM is calculated by dividing the purchase price by the annual GPR.

INTEREST-ONLY PAYMENT

An interest-only payment is the monthly payment on a loan where the lender only requires the borrower to pay the interest on the principal as opposed to the typical debt service, which requires the borrower to pay principal plus interest.

INTEREST RATE

The interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of their funds.

LIMITED PARTNER (LP)

The limited partner (LP) is a partner whose liability is limited to the extent of the partner’s share of ownership. In apartment syndications, the LP is the passive investor and funds a portion of the equity investment.

MARKET RENT

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

MODEL UNIT

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

OPERATING ACCOUNT FUNDING

The operating account funding 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 operating account fund is typically created by raising extra money from the limited partners.

PERMANENT AGENCY LOAN

permanent agency loan is a long-term mortgage loan secured from Fannie Mae or Freddie Mac and is longer-term with lower interest rates compared to bridge loans. Typical loan term lengths are 5, 7 or 10 years amortized over 20 to 30 years.

PREFERRED RETURN

Preferred Return: the threshold return that limited partners are offered prior to the general partners receiving payment.

PRICE PER UNIT

Price per unit is the cost of purchasing an apartment community based on the purchase price and the number of units. The price (or cost) per unit is calculated by dividing the purchase price by the number of units.

PROFIT AND LOSS STATEMENT

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 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.

REFINANCE

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.

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 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.

SALES PROCEEDS

The sales proceeds are the profit collected at the sale of the apartment community.

SUBJECT PROPERTY

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

SUBSCRIPTION AGREEMENT

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 LOSS

Vacancy loss is the amount of revenue lost due to unoccupied units.

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