Reasons why syndication fails: stories

[John B.]

Hello,

I would be interested in starting a thread where more experienced investors can share their real life experience as to why a syndicated deal they participated in (or not) ended up failing, and by failing I mean not even returning the original capital to the limited partners. I am new to this and I am mostly reading about success stories, so I'm trying to look at the other side of the fence and learn from past failures. Some example of what I am just speculating (since I have no experience) could be failure stories:

- The property was over leveraged

- A larger than expected market downturn caused the economic vacancy to skyrocket, and the debt service couldn't be covered

- The sponsor failed to execute the plan of improving the NOI (why?)

- The mortgage on the property was an interest-only one in order to make the COC reasonable, although by the time the IO period was over, a sell strategy didn't materialize and the increased mortgage wasn't sustainable

- The sponsor was a scam (how?)

- The mortgage was too short and by the time the balloon payment was due, a sell strategy didn't materialize, maybe because the exit cap rate in underwriting was aggressively too low

- After stabilizing the property, it was refinanced in order to partially cash out investors, however the refinance was too aggressive and the NOI ended up not sustaining it?

Thanks!

[Rob Birch]

Quote from @Taylor L.:

Quote from @Rob Birch:

I'm just adding my two cents here in light of the recent downturns in the market with the increasing interest rates.  The three syndications I am in right now, two are doing okay and the the other is doing great. 

The two  multifamily deals I am in are having a cash crunch from their bridge debt due to rates, and will need to raise funds to remain solvent if and when they get fixed debt. They are in great markets (Houston & Austin) and the operators are doing a great job getting occupancy into the 95% range so there is potential to refinance out in 90 days. It's just a little nerve wrecking because I lived through 2008 and I'm somewhat shocked that neither syndication didn't buy extended rate caps. Glad they did buy the shorrt term rate caps. Each deal is expected to be held for 5 years.

The last syndication I am in is a homerun. It's a land development deal in Mustang Ridge near Austin. It is doing well, the city is giving us great work when it comes to utilities. The interest rate on the debt is mostly fixed it seems. The great thing is the exit is in three years. 

 Thanks for sharing Rob. What were the original debt terms on the deals that are struggling?

Taylor, I can't disclose too much specifically, other than that they are two interest only loans due within three to four years for $30M due to confidentiality. Both are doing capital calls and both seem to be very well run. 

[Amy Heitner]

Quote from @Rob Birch:

I'm just adding my two cents here in light of the recent downturns in the market with the increasing interest rates.  The three syndications I am in right now, two are doing okay and the the other is doing great. 

The two  multifamily deals I am in are having a cash crunch from their bridge debt due to rates, and will need to raise funds to remain solvent if and when they get fixed debt. They are in great markets (Houston & Austin) and the operators are doing a great job getting occupancy into the 95% range so there is potential to refinance out in 90 days. It's just a little nerve wrecking because I lived through 2008 and I'm somewhat shocked that neither syndication didn't buy extended rate caps. Glad they did buy the shorrt term rate caps. Each deal is expected to be held for 5 years.

The last syndication I am in is a homerun. It's a land development deal in Mustang Ridge near Austin. It is doing well, the city is giving us great work when it comes to utilities. The interest rate on the debt is mostly fixed it seems. The great thing is the exit is in three years. 

 Very encouraging Rob, thanks for sharing!