In Over Their Heads?

[Chris Seveney]

Background: Last week Arbor Realty Trust foreclosed on four apartment buildings in Houston. The Unpaid balance was $229M and the sale went for approx. $197M (15% discount). The borrower had short term bridge debt on each of the properties that was maturing in 2024. 

Questions to consider:

1. Was this due to market conditions?

2. Was this due to inexperience?

3. Could this have been avoided?

My two cents is the answer to all of these questions is YES. These assets were bought in 2021 and 2022 and you did not need to have a crystal ball to understand interest rates would be rising. Could you have predicted a rise that we have had, most likely not - but interest rate risk is one of the greatest factors in MF investing. Which leads to was the sponsor inexperienced? Looking at the bio on their website, the CEO does not mention they have ANY real estate experience, nor does the asset manager. The analysts are also Virtual Assistants out of the phillipines. The only experience in real estate is the investor relations representative who had 20 single family units (note this information is based on the website of the sponsor). Should someone with little experience be acquiring thousands of units?

As I have stated in the past, investing in real estate the past five years is like shooting fish in a barrel, now we are heading back to fishing in the ocean with a storm brewing. The experiene of the sponsor is going to be extremely critical in understanding some of the deals. This is not to say an experienced sponsor has bad deals, they will, but an investor typically will not only get 100% wiped out but if the company also took bonus depreciation the LP's will also have to pay that money back to the IRS, so its a double whammy (not an accountant but one may be able to chime in more on this).

If you are a LP and invested in a syndication that has bridge debt, I strongly recommend you watch it very closely. This is not the first time I have heard of issues of this nature as many of the investment clubs I am in are seeing GP's stopping the issuance of dividends and performing cash calls.

Lastly, if you are a single family investor and thinking - who cares this is commercial, recognize commercial real estate has a significant impact on residential real estate since it will lead to banks being more strict on lending and a drop in rental rates on MF will make its way to residential. 

Love to hear others opinions.