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.

• 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!

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.

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.

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.

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.

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 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).

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 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.

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 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 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 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) 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.

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.

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

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

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.

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.

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) 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.

A 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) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.

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

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.

A 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.

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 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) 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.

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.

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

A 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.

The submarket is a geographic subdivision of a market.

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