When a syndication is managed really badly...

[Matyas Sustik]

I am invested in a syndication as a limited partner. The property is an apartment complex in the South. It has been struggling for several years now. Distributions were halted before COVID hit and then COVID brought more problems. Taxes and insurance increased. Recently became evident that the manager is to blame to a large extent. As I mentioned trouble started before COVID. They made a distribution early on, seemingly by eliminating most of the reserves (since the operating income did not sustain the distribution). The maintenance suffered, which was followed by occupancy diving. The manager asked for extra cash in 2021. Most LP-s contributed (including me) as we accepted the explanation at that time that the stress is due to COVID and inability to evict etc.

Later, we found out that the manager who is also invested as LP did not contribute to the cash call and elected to be diluted instead. When this was questioned, we were told that the manager a few months prior to the cash call infused cash voluntarily to help operations. According to the manager this was done hoping that this would eliminate the need for the cash call. First we though, what a hero! However, closer inspection of the financials showed a new loan with the same exact amount as this prior cash infusion by the manager. When this was further questioned, it was revealed that this infusion was an operating loan from the manager. However, it was also said that the manager did not receive a penny in interest. Ok, to less extent, but still a hero! However, there was an interest line item associated with this loan in the financial documents. Upon inquiry we were told that there was no interest *collected*, but it was accruing instead (and presumably due at a later date, maybe at sale). All this left some LP-s really riled up. They felt that the communication was deceptive and that not contributing to the cash call was showing the real colors. In fact, the manager clearly claimed prior to the cash call that he already paid (referring to the loan amount).

Now, there was a second cash call earlier this year. This time much fewer LP-s contributed (~40%), because the above information about the first cash call finally was brought to light. We also learned that the lender inspection found items that need immediate attention (some due to safety etc.) or the lender will declare default. This prompted the second cash call by the manager.

Manager also claimed that no asset management fee was collected in the last 18 months, as a way of him kicking in some extra beyond the contractual obligations. However, upon inquiry he revised it to 10 months. Then the financial documents showed a single month with $0 asset management fee, so the rest may not have been paid out, but still accruing (and paid upon sale of the asset). This fee is 2% of the gross operating income (rents) paid monthly. The manager collected a 150k payment when the LLC was formed. Together with that, he received near 300k over the course of the investment. He invested as LP only 50k for 1.2% interest. But in addition to that, the manager also received a 10% ownership interest in the asset fro free (basically the rest of us got diluted on day one).

So from the manager's point of view this is working out pretty well. A recent appraisal showed that the property value decreased since purchase (5+ years ago), and a sale today would net about 60-70% of what we paid as investors (30% principal loss). Despite of this, as a result of the fees and the 10% ownership grant the manager would bank a positive IRR. For the rest of us, this will be a massively negative IRR investment.

The manager has a bad track record. I failed to uncover this during my due diligence. I guess some operators only presents their successful  investments and stay mum about the failed ones.

At one property that went full cycle for a 50k LP investor there was another 17k in cash calls. At sale only 15k was paid out, meaning on top of the total principal loss the some of the additional cash call amounts were not returned either. This makes you wonder why anyone would pay one more dollar to this operator. Having information is crucial. In another investment he tried to force all LP-s into a 1031 exchange. A lawyer had to be hired by one of the LP-s to make the manager comply and pay out the sale proceeds. And these are just the tip of the iceberg it seems. There are other ongoing investments that are reported to be in trouble. Some members he buys out, but makes them sign gag orders, so information is not widely available.

I hope others learn from my mistake.

If you have any suggestion regarding this situation, please message me. I am not sure whether there is enough for fraud here, but I am no expert. If you have experience in bringing some sponsor to justice, advice on how to contact (what to say to) the attorney General or SEC or other organization, I would especially be interested. How to spread the word about this operator's misdeeds? Could I use publicity to choke his investor supply at least to prevent future damage?

This operator has hurt and keep hurting investors. He gives a bad reputation to real estate investing. It is in all the honest participants' interest who work in this space to stop this man.

I kept the names and identifying information out of this post for now. Email me 1-1.