This glossary from L5 Legacy Capital, a veteran-led real estate investment firm in Frisco, Texas, defines the terms you'll meet in any private real estate offering, from accredited investor and cap rate to preferred return and waterfall.
Because the terms decide who gets paid, when and how much. A preferred return, a promote and a waterfall can sound like jargon. Together they decide whether you are paid before the sponsor or after.
An individual or entity that meets the SEC's tests in Rule 501(a) of Regulation D. For individuals, that generally means income above $200,000 in each of the past two years ($300,000 with a spouse or spousal equivalent) with the same expected this year, net worth above $1 million excluding a primary residence, or a Series 7, 65 or 82 license in good standing. Only accredited investors can invest in a Rule 506(c) offering.
A one-time fee the sponsor earns for finding, negotiating and closing a purchase, usually stated as a percentage of the purchase price in the offering documents.
A hotel's room revenue divided by the number of rooms sold. It measures the average price guests pay per occupied room night. See also RevPAR.
An ongoing fee the sponsor earns for overseeing the investment, usually a percentage of invested capital or revenue, disclosed in the offering documents.
A fund in which investors commit capital before every investment is identified. The sponsor then selects projects that fit the fund's stated strategy. L5 publishes every project it places in the L5 fund.
A tax rule that lets owners deduct a large share of the cost of qualifying shorter-life property in the first year instead of over several years. Under 2025 federal tax law, 100% bonus depreciation applies to qualifying property acquired after January 19, 2025.
A request that investors contribute more money after their initial investment, if the operating agreement allows it.
The layers of money that fund a property, ranked by who is repaid first: senior debt, then any mezzanine debt or preferred equity, then common equity.
A property's net operating income (NOI) divided by its value or price. A quick measure of a property's yield. When cap rates fall, values rise for the same income, and the reverse.
Annual cash distributions divided by the cash you invested. If you invest $100,000 and receive $7,000 in a year, your cash-on-cash return for that year is 7%.
The sponsor's own capital invested in the deal alongside investors. It aligns the sponsor's outcome with yours. At L5, our money goes in first.
An engineering-based study that identifies parts of a property with shorter tax lives (such as fixtures, furniture, carpeting and site work) so they can be depreciated over 5, 7 or 15 years instead of 27.5 or 39.
A non-cash tax deduction for the wear on a building over time. Residential rental property is generally depreciated over 27.5 years and nonresidential property (including most hotels) over 39 years.
Tax due at sale on gain attributable to depreciation already taken. Gain from depreciation on real property (unrecaptured Section 1250 gain) is taxed at up to 25%; personal property at ordinary income rates.
Cash paid to investors from operations, a refinance or a sale, in the order set by the waterfall.
The investigation of a property, a market and a sponsor before committing capital. For a passive investor, the most important diligence is on the sponsor.
Total cash returned divided by cash invested. In a hypothetical example, if you invest $100,000 and receive $150,000 in total over the life of the investment, your equity multiple is 1.5x. Compare IRR.
The sale or refinance that returns investors' capital and profits at the end of a business plan. Disciplined sponsors plan the exit before they buy.
The movable items in a property, especially significant in hotels: beds, furniture, lighting, kitchen equipment. FF&E is often a large part of a hotel renovation budget.
Value created by raising net operating income (NOI) through renovation, repositioning and better management, independent of whether the overall market rises.
A pooled vehicle that raises capital from investors under one set of offering documents and invests it across several properties or projects selected by the sponsor.
The party that finds, finances and manages the investment and makes the operating decisions. Investors are limited partners (LPs).
How long the sponsor plans to own a property, or how long a fund plans to hold its investments, before the exit.
An annualized return that accounts for the timing of every cash flow in and out. Money returned sooner scores higher. Compare equity multiple, which ignores timing.
The tax form a partnership issues to each investor reporting that investor's share of income, deductions and credits.
An investor in a partnership who contributes capital, receives distributions and reports, has liability generally limited to the amount invested, and takes no role in management.
The loan amount divided by the property's value. Lower LTV means less leverage and more cushion if values fall.
A property's revenue minus its operating expenses, before loan payments, depreciation and income taxes. Commercial real estate is valued on NOI, so raising NOI raises value.
The share of units or rooms that are occupied over a period. In hotels, occupancy times ADR equals RevPAR.
The legal document that governs an LLC: who decides what, how cash is distributed, what investors can and can't do, and how the investment ends.
A business activity in which you don't materially participate, including most limited partner interests in real estate.
The disclosure document for a private offering. It describes the business plan, terms, fees, conflicts and risks.
A threshold return paid to limited partners before the general partner shares in profits, usually stated as an annual percentage in the offering documents.
The sponsor's share of profits above the preferred return. Rewards the sponsor for performance.
A tax status that can let a qualifying taxpayer treat rental real estate losses as non-passive.
Replacing a property's loan with a new one, often after value has been increased, returning part of investors' capital while the property is still owned.
Room revenue divided by available rooms, or ADR times occupancy. The hotel industry's key performance measure.
A Regulation D exemption that permits a sponsor to market an offering publicly, provided every investor is an accredited investor and the sponsor takes reasonable steps to verify that status.
An IRA held with a custodian that permits alternative assets, such as private real estate funds.
The firm or team that finds the deal, raises the equity, executes the business plan and reports to investors.
The order in which cash is distributed between investors and sponsor: typically return of capital, then preferred return, then a profit split.
Homes priced for working households with moderate incomes, such as teachers, nurses, first responders and skilled tradespeople.