Syndication deals gone sour and the GP is now radio silent! What can I do?

[Giles D.]

Good morning everyone,

I invested in a syndication deal back in late 2021 through Simple Passive Cashflow and Truepoint Capital, with Lane Kawaoka and Kyle Jones respectively as GP's. The deal has produced 1 single distribution in that time and now they have both stopped updating the LP's on the deal and have not had an updates this year. They have now stopped responding and corresponding to emails and the only phone numbers they provide go to a medical facility in Florida and a full VM box that never gets responded to.

Am I just f'd out of my money here with no recourse or do I have any leg to stand on to try and sue them for poor due diligence and not fulfilling the promises made? I've received 2 K1's so if this is fraud then i'd imagine they've committed a federal offence by issuing false documents to the federal authorities. Yes, I am getting desperate but I'm throwing myself to this crowd to see if any one else has gone through something similar or can give me some advice or even to laugh at me and say what an idiot I was, which I know already so save yourself the time!

Regards

Giles Dalrymple

[Carlos Ptriawan]

Quote from @Russell Brazil:

Funny enough his BP profile says this in his bio....

"My parents got screwed with the 401K and stock market and it's my mission to get everyone out of that "garbage!" I used to own three rentals in Seattle but after 2012 when the prices got too high I realized that sophisticated buy-and-hold investors invest where the numbers make sense with cash flow, not appreciation (gambling). I bought 100k homes for blue-collar working families that rented for 1000 dollars a month that more than paid for all repairs, vacancy, insurance, professional property management, and capital expenses."

What he wrote here indicates he actually doesnt have any background in financial analysis, and doesnt understand that the cash flow, or cap rates are a reflection of the risk. Seattle which he shied away from has lower cash flow/cap rates specifically because it is lower risk. Being lower risk means that it is more resilient to price drops, or deltas from expected appreciation rate. Instead he put said money (other peoples money at that) into higher risk assets/markets which would then be more prone to a price correction. And in doing so, completely wipe out their equity position and lead to foreclosure. 

There is a reason you need to be accredited to invest in these syndications. These companies do not have the type of oversight or reporting requirements that public companies have. They are by that very nature going to have higher risk based just on that fact alone.  There are good syndicators out there like Brian Burke above. But most of the people I personally know running these syndications...I wouldnt trust them to run a corner store. But even with the best operators, this is investing. There is risk. You can have the best operator who has the the highest degree of ethics, and you can still lose your money. There is always the risk of losing the entirety of the investment. 

There are just so many people that’s very valuable and I respected a lot here such as you and Lane.

But when it comes to investment , I would rather be quiet knowing what would happen in future.  So I expected thread like these since few years ago.

Some of you guys GP that keep buying and selling every 19 months are just simply crazy and create the foundation for market crash.

[Victor S.]

Quote from @Chris Seveney:

Quote from @Victor S.:

Quote from @Chris Seveney:

of course he doesn't lol

covering his investors on this "project" should be small potatoes for this high roller:

"Today I own over 10,000 rentals and handling assets worth $2.1 billion..."

if you believe they own 10,000 rentals outright then I have some swampland in florida.
the "i own" is "I am a GP/Co-GP" who manages a LLC that the GP owns 30% of that has X doors. the use of  "I" is always misleading. The question also is how much debt is on the assets? 

 my comment, if you couldn't tell, was firmly tongue-in-cheek. anyone see when this bozo posted last?

update: well, what do we have here: https://www.biggerpockets.com/forums/432/topics/1171472-pep-...

and BP still hasn't banned this scam artist? this is not a serious forum/site anymore. 

[Chris Seveney]

Quote from @Victor S.:

Quote from @Chris Seveney:

Quote from @Victor S.:

Quote from @Chris Seveney:

of course he doesn't lol

covering his investors on this "project" should be small potatoes for this high roller:

"Today I own over 10,000 rentals and handling assets worth $2.1 billion..."

if you believe they own 10,000 rentals outright then I have some swampland in florida.
the "i own" is "I am a GP/Co-GP" who manages a LLC that the GP owns 30% of that has X doors. the use of  "I" is always misleading. The question also is how much debt is on the assets? 

 my comment, if you couldn't tell, was firmly tongue-in-cheek. anyone see when this bozo posted last?

update: well, what do we have here: https://www.biggerpockets.com/forums/432/topics/1171472-pep-...

and BP still hasn't banned this scam artist? this is not a serious forum/site anymore. 

 haha sorry about that.  Since this sponsor is on BP and was posting on other forum posts last night - I think he should have the ability to provide his side of things prior to anyone being banned or called a scam artist. While it does not look good at all, I think we should atleast wait to here to see if they comment as I tagged them above to give their side. 

PS not defending this person - I like to hear all sides.

[Brian Burke]

Quote from @Russell Brazil:

Instead he put said money (other peoples money at that) into higher risk assets/markets which would then be more prone to a price correction. And in doing so, completely wipe out their equity position and lead to foreclosure. 

I don't think it's that, Russell. The asset that is the subject of this thread is in Houston, and not the worst area of Houston, either. It's a 70s vintage deal, 400+ units, with a lot of nearby competition, so certainly there is some risk elevation from the asset/market, but that's the least of the problem here, in my opinion.

If the numbers on CoStar are correct, the property was purchased at the very top of the market for $47M, with a $39.4M bridge loan (that would likely mature this year).  And according to an article published by the Texas Real Estate Research Center, there was a $5.25M preferred equity tranche as well.  Add the pref to the debt and you have 95% combined senior capital in front of the investor's common equity. 

This allows the sponsor to buy a nearly $50M property with just a few million of investor equity--but it provides zero resiliency to an adverse market.  A 5% movement down wipes out 100% of the equity, and multifamily values are down 5% or more almost everywhere since late 2021.

I'm less inclined to say that they invested in a higher risk asset/market, and more inclined to say that they invested at an inopportune time with a high-risk capital structure.  This structure, if the data I'm finding is true, is unsurvivable if the market moves against them.

[Chris Seveney]

@Brian Burke

I bet none of the investors asked the question of “what does the capital stack look like on this deal”

Probably was variable rate debt as well…

[Giles D.]

You don’t know what you don’t know 

[Jay Hinrichs]

Quote from @Chris Seveney:

Quote from @Victor S.:

Quote from @Chris Seveney:

of course he doesn't lol

covering his investors on this "project" should be small potatoes for this high roller:

"Today I own over 10,000 rentals and handling assets worth $2.1 billion..."

if you believe they own 10,000 rentals outright then I have some swampland in florida.
the "i own" is "I am a GP/Co-GP" who manages a LLC that the GP owns 30% of that has X doors. the use of  "I" is always misleading. The question also is how much debt is on the assets? 

10k units and billions under management seems to be a common theme today with some of the other syndicators we see advertising today yet their past projects are failing.. kick the can down the road big time.

[Becca F.]

@Giles D.

Thanks for sharing. I'm sorry you're going through this.

I talked to two syndications, not the ones you mentioned. Their investments were apartment complexes, self storage, car washes real estate debt funds where you could choose which fund you wanted to invest in. I considered it because it seemed easier than dealing with properties, tenants, repairs, etc but putting in $100,000 in something I didn't have control over made me very apprehensive.  I also don't have enough knowledge to vet what are good syndications and bad ones. 

I hope you're able to find a resolution to this and appreciate your cautionary story to the rest of us. 

[Anil Dham]

@Giles D.

Any investor putting money in syndication deals should only put in money that they can afford to lose in its entirety. Meaning that you aren't bothered one bit if it goes to 0.

As others mentioned , you are probably going to have to owe the irs money on top of the loss. You should only invest in deals with excellent operators not excellent sales people

[Chris Seveney]

@Becca F.

Honestly this is why the govt needs to change the criteria for an accredited investor

It has not changed the amounts in like 40 years and many people making $250k a year cannot afford to lose $50 or $100k which is happening now as many use the “accredited investor” as a status but the only status is you can lose $ and govt doesn’t care.

Besides that the jobs act introduced crowdfunding and regulation a+ that allows people to invest hundreds or thousands of dollars at a time not $50k and accepts non accredited.

[Lucia Rushton]

@Brian Burke as you know. sadly this is not a one-off story. And how many “syndicators “ were students with expensive coaches and goals/deadlines they had to meet. So the novice syndicator, yes he had a sponsor but they were a dime a dozen back in what I call the gold rush 20-22, tweaked his UW to close a deal. We are going to see multiple stories like this in the coming months up until 2027.

I recall a “seasoned” BP contributor saying being an LP is the safest place to be ……

As always just my opinion and not written by Ai.

[Giles D.]

@Anil Dham harsh but fair point.

[Jay Hinrichs]

Quote from @Chris Seveney:

@Becca F.

Honestly this is why the govt needs to change the criteria for an accredited investor

It has not changed the amounts in like 40 years and many people making $250k a year cannot afford to lose $50 or $100k which is happening now as many use the “accredited investor” as a status but the only status is you can lose $ and govt doesn’t care.

Besides that the jobs act introduced crowdfunding and regulation a+ that allows people to invest hundreds or thousands of dollars at a time not $50k and accepts non accredited.

the other thing is I flat guarantee that many of these syndication just take the investor word for being accredited. And many lPs fibbed about it and are not accredited.. I know in the two syndication's I have invested in they required a letter from my CPA that confirmed that Ms. Lori and I are indeed accredited investors.. Its kind of like in Golf where you have some golfers fudge their scores to have lower handicaps than they really do.

[Carlos Ptriawan]

Quote from @Jay Hinrichs:

Quote from @Chris Seveney:

@Becca F.

Honestly this is why the govt needs to change the criteria for an accredited investor

It has not changed the amounts in like 40 years and many people making $250k a year cannot afford to lose $50 or $100k which is happening now as many use the “accredited investor” as a status but the only status is you can lose $ and govt doesn’t care.

Besides that the jobs act introduced crowdfunding and regulation a+ that allows people to invest hundreds or thousands of dollars at a time not $50k and accepts non accredited.

the other thing is I flat guarantee that many of these syndication just take the investor word for being accredited. And many lPs fibbed about it and are not accredited.. I know in the two syndication's I have invested in they required a letter from my CPA that confirmed that Ms. Lori and I are indeed accredited investors.. Its kind of like in Golf where you have some golfers fudge their scores to have lower handicaps than they really do.

 This is why I curious how is the LP investment prior to 2012 ?

[Carlos Ptriawan]

Quote from @Brian Burke:

Quote from @Russell Brazil:

Instead he put said money (other peoples money at that) into higher risk assets/markets which would then be more prone to a price correction. And in doing so, completely wipe out their equity position and lead to foreclosure. 

I don't think it's that, Russell. The asset that is the subject of this thread is in Houston, and not the worst area of Houston, either. It's a 70s vintage deal, 400+ units, with a lot of nearby competition, so certainly there is some risk elevation from the asset/market, but that's the least of the problem here, in my opinion.

If the numbers on CoStar are correct, the property was purchased at the very top of the market for $47M, with a $39.4M bridge loan (that would likely mature this year).  And according to an article published by the Texas Real Estate Research Center, there was a $5.25M preferred equity tranche as well.  Add the pref to the debt and you have 95% combined senior capital in front of the investor's common equity. 

This allows the sponsor to buy a nearly $50M property with just a few million of investor equity--but it provides zero resiliency to an adverse market.  A 5% movement down wipes out 100% of the equity, and multifamily values are down 5% or more almost everywhere since late 2021.

I'm less inclined to say that they invested in a higher risk asset/market, and more inclined to say that they invested at an inopportune time with a high-risk capital structure.  This structure, if the data I'm finding is true, is unsurvivable if the market moves against them.

 None of these lo guys able to comprehend that back then

I am about to say even if the Fed raised the rate in 2015 , Lp equity would be wiped out as well.

It is just Lp investors are too dumb to understand basic math and relationship between equity LTV and volatility changes in rate.

[Eric James]

Quote from @Jay Hinrichs:

Quote from @Chris Seveney:

@Becca F.

Honestly this is why the govt needs to change the criteria for an accredited investor

It has not changed the amounts in like 40 years and many people making $250k a year cannot afford to lose $50 or $100k which is happening now as many use the “accredited investor” as a status but the only status is you can lose $ and govt doesn’t care.

Besides that the jobs act introduced crowdfunding and regulation a+ that allows people to invest hundreds or thousands of dollars at a time not $50k and accepts non accredited.

the other thing is I flat guarantee that many of these syndication just take the investor word for being accredited. And many lPs fibbed about it and are not accredited.. I know in the two syndication's I have invested in they required a letter from my CPA that confirmed that Ms. Lori and I are indeed accredited investors.. Its kind of like in Golf where you have some golfers fudge their scores to have lower handicaps than they really do.

 The good golfers are trying to fudge their handicaps upward. I guess real estate investors don't do that.

[Eric James]

I guess on the up side, BankCorp has a troubled asset that can be bought cheaply.

[Chris Seveney]

Quote from @Jay Hinrichs:

Quote from @Chris Seveney:

@Becca F.

Honestly this is why the govt needs to change the criteria for an accredited investor

It has not changed the amounts in like 40 years and many people making $250k a year cannot afford to lose $50 or $100k which is happening now as many use the “accredited investor” as a status but the only status is you can lose $ and govt doesn’t care.

Besides that the jobs act introduced crowdfunding and regulation a+ that allows people to invest hundreds or thousands of dollars at a time not $50k and accepts non accredited.

the other thing is I flat guarantee that many of these syndication just take the investor word for being accredited. And many lPs fibbed about it and are not accredited.. I know in the two syndication's I have invested in they required a letter from my CPA that confirmed that Ms. Lori and I are indeed accredited investors.. Its kind of like in Golf where you have some golfers fudge their scores to have lower handicaps than they really do.

 correct - and many think that its up to the LP and their problem, but its like selling alcohol, just because someone says they are 21 does not mean they are. I have had many people include personal residence to say they are a Accredited Investor... Whats worse is I know some GP's do not even know what the definition is.

[Carlos Ptriawan]

Quote from @Chris Seveney:

Quote from @Jay Hinrichs:

Quote from @Chris Seveney:

@Becca F.

Honestly this is why the govt needs to change the criteria for an accredited investor

It has not changed the amounts in like 40 years and many people making $250k a year cannot afford to lose $50 or $100k which is happening now as many use the “accredited investor” as a status but the only status is you can lose $ and govt doesn’t care.

Besides that the jobs act introduced crowdfunding and regulation a+ that allows people to invest hundreds or thousands of dollars at a time not $50k and accepts non accredited.

the other thing is I flat guarantee that many of these syndication just take the investor word for being accredited. And many lPs fibbed about it and are not accredited.. I know in the two syndication's I have invested in they required a letter from my CPA that confirmed that Ms. Lori and I are indeed accredited investors.. Its kind of like in Golf where you have some golfers fudge their scores to have lower handicaps than they really do.

 correct - and many think that its up to the LP and their problem, but its like selling alcohol, just because someone says they are 21 does not mean they are. I have had many people include personal residence to say they are a Accredited Investor... Whats worse is I know some GP's do not even know what the definition is.

 precisely, there should be like 10-20 self-certification question, for example givethem question like this:

a) if gp is buying with 5% cap rate and interest rate is 3% with rate of change of appreciation per year is 0.25% cap rate compression, what would be the IRR for investment ? as simple as that..

folk in BP is even asking how much their IRR when cap rate is 2% and they give 20%.

they don't know that buying simple rental even in cupertino market is still way less riskier than buying syndicatioon at 4% cap.

[Giles D.]

Appreciate the brutal honest! Understand that people trust other people to do what they say they were going to do. 

The fact that IR's accelerated outside of the worst case scenario models, even outside of a 2 SD, didn't have anything to do with it nor the fact that the local jurisdiction decided to extend the covid moratorium for an extra year resulting in no rent collection for a large portion of the MF property, was certainly factors not considered when applying basic math to the forecasting. 

I may have been too dumb to understand that I couldn't control 2 unprecedented future events, please educate us on how you do it as I for one would be fascinated to learn how you do it.  @Carlos Ptriawan

[Carlos Ptriawan]

Quote from @Giles D.:

Appreciate the brutal honest! Understand that people trust other people to do what they say they were going to do. 

The fact that IR's accelerated outside of the worst case scenario models, even outside of a 2 SD, didn't have anything to do with it nor the fact that the local jurisdiction decided to extend the covid moratorium for an extra year resulting in no rent collection for a large portion of the MF property, was certainly factors not considered when applying basic math to the forecasting. 

I may have been too dumb to understand that I couldn't control 2 unprecedented future events, please educate us on how you do it as I for one would be fascinated to learn how you do it.  @Carlos Ptriawan

 Usually I'm attacked when I say thing like this, but well yes I'll try to explain from the big picture and mini picture here and kind of mixed bag PoV okay ;-) lol.

in big picture, back to basic
first of all , the relationship between the borrower and the lender ; are never equal.
The risk modelling is vastly different from how a loan is structured, no matter what it is.

second, All assets have intrinsic value and extrinsic value. A 50x more beautiful single family in Montgomery AL would be priced 1/10 compared to a similar house in CA. There's ceiling in CRE, but no ceiling in single family.

third,the valuation of CRE is solely follows the actual rent it received

so lets go back to the first one , this has nothing to do with interest rate at beginning, but lets give comparison. 

A fixed-rate 30 years with a 2% rate, even without an interest rate hike, the borrower would have a better return profile than the lender. The lender is throwing us money for free.  We know SF owners would have a better risk/reward profile because appreciations are typically 150-200% higher than inflation rate. Even with increasing rate, home price may not go down because it's a fixed rate for 30 years. This is the safest loan type for borrowers in the planet. 

On the other hand, CRE appreciation is limited by the rent factor. The lender is always winning or has way way better risk/return profile compared to the borrower (GP/LP). Because a CRE valuation is based on income, then we make a valuation indicator called cap rate. Cap rate is essentially just a ratio between income and price to buy. Essentially, on this model, the model only works if the cap rate has a slight positive margin compare to the interest rate. In 2009 we have a cap rate of 8-9% for certain asset class and the interest rate is 3%, this gap is actually one that makes you money.

However, and this is the big however if cap rate is falling high enough (aka) valuation going up too high too fast because of overbidding (such as in 2020 era), then even without an interest rate hike, your project risk profile is way higher because your upside is way limited. Why the upside is limited? because next buyer can't justify buying your asset in cap rate 1 or 2 because if you do then essentially there's no return given to investor.

Now, what is the most riskiest type of lending ? For the borrower, the riskiest are short-term loan, the lender approves the lend with DSCR 0.20-1.5x, but I checked it's very typical to have DSCR 0.80x. In these circumstances and may bridge lender and CRE debt rating agencies, already know from the beginning that the property has bigger chance of going to fail. I But because the lender can allocate those riskier loan into bunch of other mortgage loan that's more "safer", the lender can somehow reduce their risk, also by requiring the borrower to purchase interest rate caps as hedges and so on. So lenders are way smarter than the GP when it comes to riskier loan.

In 2022, Fed increased the rate by 500 bps, automatically asset pricing should fall by 30-40%. This is very straightforward because those loans are short-term. A 100bps interest rate hike is equal to 5-10% reduction in asset valuation give or take. We're in a territory where the cap rate is 3-4% and the interest rate is 7-9% , of course the equity would be wiped out.

If one fellow has good understanding about how the lending work this problem is very easy to be avoid. Again, it's not 100% of the fault of the GP.

[Jay Hinrichs]

Quote from @Eric James:

Quote from @Jay Hinrichs:

Quote from @Chris Seveney:

@Becca F.

Honestly this is why the govt needs to change the criteria for an accredited investor

It has not changed the amounts in like 40 years and many people making $250k a year cannot afford to lose $50 or $100k which is happening now as many use the “accredited investor” as a status but the only status is you can lose $ and govt doesn’t care.

Besides that the jobs act introduced crowdfunding and regulation a+ that allows people to invest hundreds or thousands of dollars at a time not $50k and accepts non accredited.

the other thing is I flat guarantee that many of these syndication just take the investor word for being accredited. And many lPs fibbed about it and are not accredited.. I know in the two syndication's I have invested in they required a letter from my CPA that confirmed that Ms. Lori and I are indeed accredited investors.. Its kind of like in Golf where you have some golfers fudge their scores to have lower handicaps than they really do.

 The good golfers are trying to fudge their handicaps upward. I guess real estate investors don't do that.

sandbaggers go up  guys with ego's go down . thats handicaps.. I know both kinds

[Ian Ippolito]

Quote from @Giles D.:

Good morning everyone,

I invested in a syndication deal back in late 2021 through Simple Passive Cashflow and Truepoint Capital, with Lane Kawaoka and Kyle Jones respectively as GP's. The deal has produced 1 single distribution in that time and now they have both stopped updating the LP's on the deal and have not had an updates this year. They have now stopped responding and corresponding to emails and the only phone numbers they provide go to a medical facility in Florida and a full VM box that never gets responded to.

Am I just f'd out of my money here with no recourse or do I have any leg to stand on to try and sue them for poor due diligence and not fulfilling the promises made? I've received 2 K1's so if this is fraud then i'd imagine they've committed a federal offence by issuing false documents to the federal authorities. Yes, I am getting desperate but I'm throwing myself to this crowd to see if any one else has gone through something similar or can give me some advice or even to laugh at me and say what an idiot I was, which I know already so save yourself the time!

Regards

Giles Dalrymple

In my personal opinion there were lots of red flags with Lane Kawaoka deals. And so there were many reasons that I never felt personally comfortable with pulling the trigger on them.

At the same time, you want to know how the investment is actually doing. And many times equity investors have a right to books and records. So check your operating agreement and consult with an attorney knowledgeable with Delaware law (or whatever state it's incorporated in). You could even team up with other investors to split the costs.

[Carlos Ptriawan]

I found a lot of Lane's teaching dangerous (but so does other BP teaching), but I would not say it openly before as he's very friendly, like when he said commercial real estate is way safer than the stock market index. While he trades CRE is almost like a day trader, he keeps buying and selling property very fast for an asset that's not in his expertise/level. He's multi-leveraging everything. I wish he stayed in a rental only. I just know he is going to collapse someday. The Fed is helping him eventually.

[Jay Hinrichs]

Quote from @Ian Ippolito:

Quote from @Giles D.:

Good morning everyone,

I invested in a syndication deal back in late 2021 through Simple Passive Cashflow and Truepoint Capital, with Lane Kawaoka and Kyle Jones respectively as GP's. The deal has produced 1 single distribution in that time and now they have both stopped updating the LP's on the deal and have not had an updates this year. They have now stopped responding and corresponding to emails and the only phone numbers they provide go to a medical facility in Florida and a full VM box that never gets responded to.

Am I just f'd out of my money here with no recourse or do I have any leg to stand on to try and sue them for poor due diligence and not fulfilling the promises made? I've received 2 K1's so if this is fraud then i'd imagine they've committed a federal offence by issuing false documents to the federal authorities. Yes, I am getting desperate but I'm throwing myself to this crowd to see if any one else has gone through something similar or can give me some advice or even to laugh at me and say what an idiot I was, which I know already so save yourself the time!

Regards

Giles Dalrymple

In my personal opinion there were lots of red flags with Lane Kawaoka deals. And so there were many reasons that I never felt personally comfortable with pulling the trigger on them.

At the same time, you want to know how the investment is actually doing. And many times equity investors have a right to books and records. So check your operating agreement and consult with an attorney knowledgeable with Delaware law (or whatever state it's incorporated in). You could even team up with other investors to split the costs.

Ian I know your super heavy in the space.. do you have any of the deals your invested in or your club is invested in that are doing cash calls or worse going under ?  just curious I know your super diligent.