Real Estate Terms & Definitions Guide

Basis

Basis is essentially all your costs in a Real Estate Deal. Your entry basis is the purchase price divided by either the number of doors or the square footage of the deal. This basis is then compared to the market basis and the replacement cost basis to evaluate the potential of a real estate investment deal. Understand, your basis doesn't end when you purchase the building. Often times you have to add capital expenditures (Capex) into the building as well to turn the real estate into the product you want it to be. So your exit basis (which you compare against the potential sale price to determine whether you should proceed with the sale) includes all of these costs post purchase.

Explain Like I'm 5: Total amount of capital investment in a property.

IRR (Internal Rate of Return)

IRR is the percentage of return achieved on each dollar invested for each period it is invested. Another way of saying this is IRR is the annualized effective compounded return rate. This means that IRR takes into account the time value of money into an investment. Cashflow earned earlier in the hold period of the investment will yield you a higher IRR than cashflow earned in later periods of the investment because of the time value of money. This metric differs from cash-on-cash which measures the return on an annual basis.

Explain Like I'm 5: IRR is expressed as a percentage because it is essentially a discount or interest rate so you can compare two values that happen at different times. Future money is worth less than present money, so if you have $100 today, you may need (for example) $105 in a year to still be in the same position you are today. What an IRR tells you is what a project has to return to be at least as good as your next-best available alternative. The metric is internal because the next best alternative is specific to you.

Equity Multiple

An equity multiple is simply the total realized proceeds of a deal divided by the total investment. The equity multiple is a simple way to analyze the profitability of an investment by analyzing how much money you get back compared to your original investment. Below a 1x equity multiple means you lost money and above a 1x means you made money. A 2x equity multiple means you've doubled your money.

Explain Like I'm 5: A simple way to figure out how many times your initial investment grew.

General Partner (GP)

There are typically two classes of equity investors in a Private Equity deal, limited partners and the general partner. The general partner's job is to source, structure and manage the deal. For these services, the GP receives compensation including an asset management fee and a promote (performance fee). The limited partner is the less involved partner. The limited partner only invests equity and not much else. Typically, limited partners only have voting rights in the deal and have limited exposure to downside scenarios. General partners have all the voting power and make all the deal-level decisions. GPs are more exposed if a deal goes south and they have to sign a recourse provision on the loan (if the deal goes bad the bank can go after their personal assets to remain whole) while LP's can just walk away.

Limited Partner (LP)

There are typically two classes of equity investors in a Private Equity deal, limited partners and the general partner. The general partner's job is to source, structure and manage the deal. For these services, the GP receives compensation including an asset management fee and a promote (performance fee). The limited partner is the less involved partner. The limited partner only invests equity and not much else. Typically limited partners only have voting rights in the deal and have limited exposure to downside scenarios. General partners have all the voting power and make all the deal-level decisions. GPs are more exposed if a deal goes south and they have to sign a recourse provision on the loan (if the deal goes bad the bank can go after their personal assets to remain whole) while LP's can just walk away.

Promote

The promote is a general partner's compensation for sourcing, structuring and managing the deal. The promote incentivizes sponsors to exceed expectations to receive higher compensation.