Ashcroft capital: Additional 20% capital call

[Jon Zhou]

After many of the Ashcroft capital syndications paused distributions, I get this surprise email this morning saying all LP investors need to pay additional 19.7% of invested capital call  

anyone have experience with capital calls and syndications? Is there ever a position outcome to these or are we putting more money into a failing syndication?

“Thank you for your patience as we continue to navigate our way through this current economic cycle and unprecedented time in the capital markets. We recognize that this email contains a substantial amount of information, which is why a member of our Investor Relations team will be contacting you shortly to address any questions.

We need to solve for three major factors as it pertains to Elliot Roswell:

1. Allow the multifamily market time to stabilize.
   
2. Meet liquidity needs for the rate cap, capital expenditures and unexpectedly high debt payments.
   
3. Resume renovations which have been temporarily paused.
   

How do we achieve this?

Based on feedback from our existing lender, other potential partners, and the significant capital requirements to potentially buy down the loan to refinance, we determined the best path forward is a successful LP capital call of 19.7%. This will allow us to maintain flexibility to potentially sell the property within 24 months.

This is Ashcroft’s first capital call, and while it’s regrettable to take this step, our primary focus remains safeguarding your investment. Therefore, all LPs must participate 

Elliot Roswell is a strong asset that is poised for a strong rebound in value as markets improve. This is due to the property’s institutional quality and the continued growth within the Atlanta market. Moreover, demand and absorption rates are currently at 25-year highs and are continuing to trend in that direction with a 70% reduction in new construction permits and drop off in deliveries in early 2025.

We will maintain flexibility to sell Elliot Roswell as markets improve and anticipate doing so within the next 24 months. In the meantime, we need to cover rate caps costs and resume renovations so that we are best positioned to maximize your potential return.

Why is a capital call necessary?

• Preserving Capital: If this capital call is not successful, we will have to sell Elliot Roswell in an inopportune market. This would result in selling the asset below our basis and incurring a significant loss of LP-invested equity. Specifically, if forced to sell now it would be a total loss of capital for both Class A and Class B.
  
• Replacing Rate Caps: Our rate cap is expiring this year, and the projected replacement cost is $736k.
  
• Resuming Renovations: Given rising inflation and labor costs, our capital expenditure exceeded initial underwriting. This prompted a temporary pause to renovations. However, resuming renovations is essential to increasing revenue, and a capital infusion allows us to resume both interior and exterior renovations. We will consistently evaluate the cost vs. benefit, adjusting the renovation scope as necessary.
  
• Maintaining Lender Requirements & Loan Covenants: We (Joe & Frank) will consistently support you and our other investors through both favorable and challenging times. We’ve already extended a $2.9M interest-free short-term loan to cover various unexpected expenses, including the replacement rate cap over the past 12 months. While this was meant as a temporary solution, it must be repaid promptly to maintain compliance with loan agreements and ens

[Lisa Jones]

I don’t understand why they need to bring in Preferred Equity AND do a capital call. Can’t the PE partner just cover all the costs? Or, perhaps, the capital call is specifically for the LP investors to repay their $11M interest free loan? Thought?

[Bobby Larsen]

Quote from @Lisa Jones:

I don’t understand why they need to bring in Preferred Equity AND do a capital call. Can’t the PE partner just cover all the costs? Or, perhaps, the capital call is specifically for the LP investors to repay their $11M interest free loan? Thought?

They mentioned that the total loan to value was somewhere around 90%+ with the current proposal of debt and preferred equity which means likely 100% LTV, or more, without the capital call. Very unlikely that you would find a preferred equity partner willing to take on that high of an LTV, ie. too much risk. At 100% LTV, there is no benefit to having a priority position in the capital stack because there is no common equity positioned behind it. The capital called equity, or common equity, is the cushion that makes preferred equity more secure so that if values decline further, they can still recoup their investment. But yes, also to repay the $11m in sponsor funds - unlikely a preferred equity partner would be comfortable with that as well when providing rescue capital.

[Lisa Jones]

Quote from @Bobby Larsen:

Quote from @Lisa Jones:

I don’t understand why they need to bring in Preferred Equity AND do a capital call. Can’t the PE partner just cover all the costs? Or, perhaps, the capital call is specifically for the LP investors to repay their $11M interest free loan? Thought?

They mentioned that the total loan to value was somewhere around 90%+ with the current proposal of debt and preferred equity which means likely 100% LTV, or more, without the capital call. Very unlikely that you would find a preferred equity partner willing to take on that high of an LTV, ie. too much risk. At 100% LTV, there is no benefit to having a priority position in the capital stack because there is no common equity positioned behind it. The capital called equity, or common equity, is the cushion that makes preferred equity more secure so that if values decline further, they can still recoup their investment. But yes, also to repay the $11m in sponsor funds - unlikely a preferred equity partner would be comfortable with that as well when providing rescue capital.

[Lisa Jones]

All good points.

In my opinion there was a huge miss on their part and big failure in communicating earlier they were facing this many issues. Yet, I continued to get bombarded messages, emails and invitations to webinars about participating in Fund 3, and QA sessions to learn more about how to invest more there. But until recently, it seems silence on the status of Fund1. If AVAF1 was indeed in trouble 1 year ago, as we are finding out now. It would have been nice to have a Q&A session 12 months ago to discuss options and strategies.

[Bobby Larsen]

Quote from @Lisa Jones:

Absolutely, without question. It's a very uncomfortable position to be in as a sponsor and I suspect that is what drove those decisions but the only thing that investors dislike more than losing their money, is being blindsided by it. Especially if they're simultaneously being pitched on new investments.

[Chris Seveney]

Quote from @Bobby Larsen:

Quote from @Lisa Jones:

Absolutely, without question. It's a very uncomfortable position to be in as a sponsor and I suspect that is what drove those decisions but the only thing that investors dislike more than losing their money, is being blindsided by it. Especially if they're simultaneously being pitched on new investments.

I have not invested with Ashcroft, but someone I know who did was pretty fired up when they saw a FB ad touting their 38% IRR the day of the capital call and the amount of marketing for the new fund. While a company should not stop raising money, they should be careful on the marketing message.

I was in another group and this is not specific to Ashcroft, but they mentioned that some GP's have provided loans and the capital call includes paying off their loan that they provided. I saw in the post above that it appears sponsors put in almost $3M. I have no idea where the capital call money is going to, but the person discussing this had some serious pushback on the capital call paying back the sponsor (again not saying this is the case in this instance).

The reality is in these situations the Operating Agreement is probably poorly written for the LP and not much they can do, whereas when some of these sponsors deal with institutional money its a very different ballgame as they will make sure the OA has safeguards in place.

[Carlos Ptriawan]

Quote from @Bobby Larsen:

Quote from @Lisa Jones:

I don’t understand why they need to bring in Preferred Equity AND do a capital call. Can’t the PE partner just cover all the costs? Or, perhaps, the capital call is specifically for the LP investors to repay their $11M interest free loan? Thought?

They mentioned that the total loan to value was somewhere around 90%+ with the current proposal of debt and preferred equity which means likely 100% LTV, or more, without the capital call. Very unlikely that you would find a preferred equity partner willing to take on that high of an LTV, ie. too much risk. At 100% LTV, there is no benefit to having a priority position in the capital stack because there is no common equity positioned behind it. The capital called equity, or common equity, is the cushion that makes preferred equity more secure so that if values decline further, they can still recoup their investment. But yes, also to repay the $11m in sponsor funds - unlikely a preferred equity partner would be comfortable with that as well when providing rescue capital.

Another fund has similar multiple position with one is having dscr 2.1 ; but 8 more floating debt apt is having dscr 0.7-1.1x ; with average fund level dscr at 1.0x ;

dscr 1.0 means the business is generating losses and they may be unable to pay their operation.

like what you said here 100%LTV means simply collapse in reality, there would be no economic miracle.

[Bobby Larsen]

@Chris Seveney

“The reality is in these situations the Operating Agreement is probably poorly written for the LP and not much they can do.”

Is see this statement a lot and it’s not true. I’m not commenting specifically on Ashcroft or what LPs should do in this specific scenario but LP should know that they have significant control if it’s the voice of the majority of the LPs. Especially when it comes to Major Investment Decisions like dilution, additional debt, etc.

If there’s one thing that LPs on Bigger Pockets should know, it’s that they have rights and control over their investments even if it’s not specifically stated in operating agreements. The general sentiment that I see on forums is that they have to accept whatever path or outcome that a GP chooses, which is not correct if the majority of LPs are with you.

[Jay Hinrichs]

Quote from @Bobby Larsen:

@Chris Seveney

“The reality is in these situations the Operating Agreement is probably poorly written for the LP and not much they can do.”

Is see this statement a lot and it’s not true. I’m not commenting specifically on Ashcroft or what LPs should do in this specific scenario but LP should know that they have significant control if it’s the voice of the majority of the LPs. Especially when it comes to Major Investment Decisions like dilution, additional debt, etc.

If there’s one thing that LPs on Bigger Pockets should know, it’s that they have rights and control over their investments even if it’s not specifically stated in operating agreements. The general sentiment that I see on forums is that they have to accept whatever path or outcome that a GP chooses, which is not correct if the majority of LPs are with you.

when I worked for syndicator in the 80s thats what happened to them LPs revolted and kicked them out as Gps and took over.. of course this did not solve the issue just prolonged the agony and the attorney they hired milked it big time.. a few years later after capital calls etc all was lost anyway. LPs taking over did not solve anything made it worse from my vantage point they were not or are not experienced operators.

[Jay Hinrichs]

Quote from @Scott Trench:

Quote from @Wesley Leung:

Quote from @Dan H.:

Quote from @Wesley Leung:

Quote from @Carlos Ptriawan:

Quote from @Chris Seveney:

Quote from @Todd Goedeke:

@Carlos Ptriawan an additional question is why Bigger Pockets does not print more posts about how to analyze syndications and the red flags involved.

 honestly I do not think that is their responsibility on the forums. They are starting passive pockets which appears geared toward passive investments. Most of the posts are from members, which there are a lot of posts about there how to analyze them, the issue is most people IGNORE them. 

Now when you want to talk about BPCON or other events and books, podcasts etc. They are a business, and not knocking them, but what sells? Someone getting rich quick in real estate and sharing their story or the guy who builds a $25M portfolio over 10-20 years?  It is the former because people want it now.

 the problem started when people is buying without thinking of the risk.

most people only want to buy the income stream from rentonomics.

the problem with basic investors are they do not understand when we invest to equity or even debt is that we are buying the spread actually.

in cheap money financial regime, with interest rate of 1% and cap rate of 7% we have positive 6% spread which I feel the risk/reward is sufficient to proper for any rentonomics to run.

but we're in expensive money regime now with interest rate of 5% and cap rate of 3-4% (depending on class) so we have negative spread of 1% where it's guaranteed investor would lose money. 

there's also issue with supply especially in sunbelt.

i meant it's not the fault of GP but it is the fault of LP mosty because they do not understand all these risk.

when interest rate is high like these, obvious choice is to move from equity investment into debt investment (conservatively of course). 

when cash could generate s much as money as when we work, obviously we can also try to add more allocation to cash position rather than equity investment.

And all of these are actually predictable, when Fed prints gazzilion tons of money during covid, the problem in 2024 is expected to happen.

What? The GP’s are not at fault?? Are you serious? Do you even know how the syndicators operate? The GP’s take advantage of unsophisticated retail investors and lure them in with promises of high returns, then they take stupid amounts of risk with that capital - acquiring run down properties at ridiculous prices (2%, 3%, 4% cap rates)and leveraging them so much with FLOATING rate debt that they basically have 0 equity in the deal. Look at Tides Equities, who is the most prolific offender. Between 2020 and 2022 they acquired something like $6B worth of real estate, more than tripling their portfolio…it is impossible for all those investments to be purchased at reasonable prices because if they were, competitors would also acquire them. The ONLY way for these syndicators to win every deal is by paying way over the competition. And why do they do this? Fees, fees, and more fees. LP’s are charged a fee at acquisition, renovation, asset management, disposition, so when the investment goes south, only the LP’s lose money while th GP’s made it out like a bandit with all the fees and 0 equity in the deal. This is how syndicators operate and you have the balls to say that they are faultless? That’s the equivalent of your financial advisor charging you a management fee, investing all you capital into crypto or penny stocks, and when your portfolio goes to 0 they say to you “well you should have known the risks.” And you’re saying the financial advisor is free of fault? I’m not saying the LP’s are faultless, but they unsophisticated and naive. The GP’s know this and prey on them. So no, the blame does not primarily lie with the LPs. The GP’s are primarily to blame. 

> GP’s take advantage of unsophisticated retail investors and lure them in with promises of high returns

The reason syndications are restricted to accredited investors is an attempt to restrict the offers to sophisticated investors.   You could state high income or high net worth does not equate to financial literacy, but without an actual test it may be the best indicator. 

Investors have to do their due diligence.  They have to recognize risk versus reward.  They have to take responsibility. 

Between 2012 enter and 2021 exit or near exit, virtually every RE syndication performed well.  Many returned near 20% annualized returns.  Did you think these returns came without risk?

I am in a syndication that for the first time I am concerned about loosing some of my investment.  Did I think this investments had zero risk?   I posted multiple times over the last few years that the previous returns of RE syndications were unlikely to continue.  Even though I posted this, I chose to enter 3 new syndication (2 fully RE related and one an RE hybrid).   I recognized there was risk.  I thought the reward justified the risk, but it appears one may not preserve my investment (time will tell). Regardless if I lose my initial investment or not, I am responsible.  I analyzed the risk and reward and decided to invest.  I knew the fed had announced intent to raise rates.  I thought it unlikely that any time soon we would see mortgages at or near 3%. I still chose to invest believing in their plan and their ability to still produce an LP return that warranted the risk.  I was not investing in RE syndications that were solely going to rehab and improve management.  I was investing in more sophisticated value add offerings. 

The GPs find the best opportunities they can recognizing that the risk/return outlook needs to be able to get LP investors.  The present their syndication opportunity to potential accredited LP investors who do their due diligence and either invest  or don’t.  The due diligence   The GP then attempt to maximize the profits for their benefit and the benefit of the LPs.

I have little doubt that active RE investors can produce a better return than RE syndications.  However, RE syndications can produce good passive returns, but they come with risks.  LPs need to understand the risks versus rewards and make educated decisions.   They must recognize their responsibility.  

I wish those invested in Ashcroft capital a best case outcome.  

I'm not really sure why you are responding to my comment with this wall of text that at first glance appears to refute my position that GP's are to blame, but does not actually provide any argument. As I stated, LP's are not without fault, so your rambling about LP's needing to understand risk does not refute anything that I've said. I agree that LP's need to know the risks of their investments, but you can't provide a blanket argument that anytime LP's lose money that it is their fault for not knowing the risks. Every situation is different and in this specific case in regards to the syndicators, I am saying that the syndicators are primarily to blame. Let me provide you with a couple scenarios and see if you can draw some parallels to the syndicators.

1.) Leading up to 2008, mortgage brokers and banks participated in predatory lending. They would target low income borrowers with low credit scores (hence the "sub" in subprime mortgages) and foreigners who were not fluent in English and provide them mortgages, often times more than one. These borrowers who, in reality, could not actually afford these mortgages and were not financially literate were crushed under the weight of all the debt and forced to file for bankruptcy, while the mortgage brokers and banks collected their fees. This would eventually cause the 2008 Financial Crisis. These mortgage brokers and banks, who are suppose to have the borrower's best interest in mind, took advantage of naive, unsophisticated borrowers to make a profit.

2.) Juul, an e-cigarette company, was initially founded with the mission to help cigarette smokers break their addiction. However, they eventually became blinded by profits and began heavily marketing to high schools students. These marketing techniques included bright attractive ads, giveaways at concerts and festivals, flavors, and even going so far as giving presentations...in high schools. These were the same tactics that the big tobacco companies used in the mid to late 1900's. Juul took advantage of naive high schoolers to make a profit and was eventually banned by the FDA

3.) Scams on the elderly. This is pretty self-explanatory, but in case you are not familiar with what these are, scammers target the elderly with promises of winning free prizes or scare them into believing they have lost money and the only way to win the prize or recoup their money is by providing their financial information. These scammers take advantage of naive seniors to make a profit.

Now let's analyze what syndicators do. Syndicators primarily use social media (Linkedin, Instagram, TikTok, etc...) to boast their financial success and reach their target audience and potential investors (Do you think social media such as TikTok is a great place to find sophisticated investors? Or do you think it is a great place to find unsophisticated investors)? Once the syndicators have successfully raised funds from very sophisticated investors through TikTok (this is in italics to indicate sarcasm) they then use those funds to purchase as much real estate as possible. These syndicators have a financial obligation to their investors, but proceed to overpay for all their properties and encumber the properties with as much floating rate debt as possible. The syndicators then charge fees that are much higher than their institutional counterparts such as 5% acquisition fees, asset management fees, disposition fees, etc...).

Are you able to draw any parallels between the mortgage brokers/banks of 2008, Juul, and elderly scammers to the syndicators?

If you are able to draw parallels, but maintain your position that syndicators are not to blame, then do you also agree that the mortgage brokers/banks are not to blame and that the financially illiterate borrowers ShOuLd HaVe KnOwN tHe RiSks Of OwNiNg ReAl EsTatE AnD MoRtGaGeS? Do you also agree that Juul is not to blame and that the naive high schoolers ShOuLd HaVe KnOwN tHe RiSks Of VaPiNg? Do you also agree that the scammers are not to blame and that the elderly (who are all adults) ShOuLd HaVe KnOwN tHe RiSks Of FrEe PrIzEs?

If you are unable to draw parallels, then let me help you. Similar to the mortgage brokers/banks preying on low income/low credit borrowers, Juul preying on teenagers, and scammers preying on the elderly, the syndicators prey on unsophisticated, naive investors. The key words here are unsophisticated and naive. The mortgage brokers KNOW the low income borrowers are financially illiterate and target them as a result, Juul KNEW teenagers were naive and easy to manipulate, and the scammers KNOW that the elderly are easy to trick. In all three of these scenarios, the perpetrators are very aware that their victims are unsophisticated and target them due to their lack of sophistication, just as the syndicators do - someone with an MBA/finance degree, who works in real estate finance, who understands risk, and who understands there is no such thing as easy money does not reach out to the syndicators. It is the naive recent college grad, who worked for a year and saved up a couple thousands dollar and sees the lavish lives of these syndicators who does. The syndicators use social media to filter out the sophisticated from the unsophisticated.

Now that we have covered how the syndicators raise funds, let's discuss their actual investments. In order to win every deal, the syndicators must overpay. How do I know they overpay? Because they are paying 2%, 3%, 4% cap rates for the properties. New York City doesn't even have cap rates this low, let alone Fortworth, Texas or Tempe, Arizona. Any sophisticated and honest real estate investor would know these cap rates are ridiculous and you could easily verify their absurdity with cap rates of comparable properties that have sold. The syndicators then leverage the properties up to 80%-90% LTV, which once again any sophisticated and honest real estate investor knows is ridiculous.

So just as I told Carlos Ptriawan that he is wrong, so too will I tell you. You are wrong.

 I agree with most of what you said. Problem is, legally, syndicators laugh all the way to the bank. Many firms who will lose close to 100% of capital raised will get 8-figure acquisition fees. 

Carlos, and others, are, it seems to me, merely pointing out that the behavior only stops when LPs stop giving GPs their money without making it clear that they can’t win until LP capital is returned. Ultimately, this IS our fault as LPs. 

LPs, myself, now humbled and less wealthy, included, need to do better. There is nothing else to do, legally, other than to stop giving GPs with ridiculous fees and investments theses, our money.

All we can do is tell the GP - “no I ain’t giving you any more money until you eliminate this BS “acquisition fee” the bs “refinance fee”, the seller fee, take a modest salary, and split the carried interest 80/20 (LP gets 80). Don’t like it? No cash from me boo.”

Also, LPs can share their experiences and let the GPs who so badly want to become famous have their wish come true… in the context of disclosing their returns to LPs.

I am not anywhere on the level of these GPs but when I do a transaction with an investor what you describe is how I set it up.

1. I take no up front fee  I only get paid when the investor gets paid. For many syndicators I suspect they could not function economically without up front fee's so in their structure is expected most of the time.

2. Investor is on the checking account so always in control of their money and see money movement at all times. Of course cant do that when your putting smaller investors together.

3. Investor is on title so always in control of the asset something happens to me they can carry on themselves.

4. No lock in  I am doing good they stay if not they can simply exit  once assets are liquidated or notes pay off.

I think this is kind of what your getting at Scott.. its not for everyone but it seems to work for my little company.

[JD Martin]

Quote from @Jay Hinrichs:

Quote from @Bobby Larsen:

@Chris Seveney

“The reality is in these situations the Operating Agreement is probably poorly written for the LP and not much they can do.”

Is see this statement a lot and it’s not true. I’m not commenting specifically on Ashcroft or what LPs should do in this specific scenario but LP should know that they have significant control if it’s the voice of the majority of the LPs. Especially when it comes to Major Investment Decisions like dilution, additional debt, etc.

If there’s one thing that LPs on Bigger Pockets should know, it’s that they have rights and control over their investments even if it’s not specifically stated in operating agreements. The general sentiment that I see on forums is that they have to accept whatever path or outcome that a GP chooses, which is not correct if the majority of LPs are with you.

when I worked for syndicator in the 80s thats what happened to them LPs revolted and kicked them out as Gps and took over.. of course this did not solve the issue just prolonged the agony and the attorney they hired milked it big time.. a few years later after capital calls etc all was lost anyway. LPs taking over did not solve anything made it worse from my vantage point they were not or are not experienced operators.

Even if the LPs could revolt in this case there's virtually nothing there. They mentioned in the call that across the entire fund their DSCR is 1.0. Any hiccup and they are bleeding off whatever cash they have left. I literally laughed out loud when the last question from the LPs was "You say you have 93% occupancy across the board so why is NOI so low that you even need a capital call - where is everything going?" to which of course they replied that no one could have predicted interest rate rises and everything was going to debt servicing. Really? They thought that sub 3% was the new normal? I actually think they are in worse shape than they let on because they mentioned that several of their rate caps on the other properties will be expiring within the next 12 months. Their answer to how they're going to deal with this is refinance at higher rates or sell some of the assets to prop the fund. Who is going to buy the non-performing buildings unless they get them at a steal? They're going to have to sell the better assets which is going to obliterate whatever is left behind. That's also their plan to try to return the capital call, which will stack above the original investment. I think they're trying to prop this up enough to refinance long enough that the top of the stack is made whole.

I am going to make the "bold" prediction that every LP in Fund 1 takes a 50-100% haircut when this thing is liquidated. To me it sounds like they are up ***** creek if interest rates don't dramatically decline soon. 

[Bobby Larsen]

@Jay Hinrichs

@jd 

Does your answer change if you’re class A which presumably has 71% of their equity left and about to get diluted to 80% anyways and have their priority position taken away going forward?

@JD Martin

[Jay Hinrichs]

Quote from @Bobby Larsen:

@Jay Hinrichs

@jd 

Does your answer change if you’re class A which presumably has 71% of their equity left and about to get diluted to 80% anyways and have their priority position taken away going forward?

@JD Martin

way above my pay grade  :)  I am just commenting on what i experienced personally in the SF bay area Circa 1989 ..  what I saw happen personally was a revolt. instead of cash call to the original GP they used that cash to hire attorney and boot the GPs out with threats of bad things to happen to them.. a couple of the LPS stepped into the GP roll with the attorney guiding them and well folks then put more money in and the projects were ultimately lost a few years later.  I dont have the answer and I was so scarred working at that company and watching a 1 b company melt down I never did want to enter the syndication space. I left that to folks much smarter than me on those matters and set ups.. I like to keep it simple in my business set ups.

[Sam Silverman]

The driver of this capital call is due to the floating rate debt that is on the properties that, over the last couple of years, gone up dramatically. 

In turn, this drastically decreases cash flow as the debt service becomes far more expensive.

The intention of the capital call here is to allow for the market conditions to improve to exit properties to be able to recover significant investor capital and in the best case, provide some level of a return.

In most cases, if the investors do not participate in a capital call, they would become diluted in their investment. In the case that not enough capital is raised, the project can entirely fail and all capital would be lost as the deals would be sold at a total loss of all LP equity. 

[JD Martin]

Quote from @Bobby Larsen:

@Jay Hinrichs

@jd 

Does your answer change if you’re class A which presumably has 71% of their equity left and about to get diluted to 80% anyways and have their priority position taken away going forward?

@JD Martin

 No, because I think they're probably going to be forced to liquidate anyway after watching and listening to that call, and if they do they say Class A will lose about 30% themselves but that's of the original investment. If they believe in the fund long term why is a good chunk of the capital call going to repay the loans fronted by the GPs? It seems to me they've probably already made peace with the fact that unless there's a dramatic shift in the market they're going to burn some of their principal, which is fine since they've collected all the other fees as they went along. Once they repay their own loans, then repay the capital call funds first before distributing the leftovers, they may even show an overall profit (when adding in all the management and fund fees etc). 

To me it honestly sounds like it's going to just be blame the feds and the market and the timing of the thing, blow it out in a year or two, hopefully get the next funds rolling before people lose their appetite for the whole thing, and go on like nothing happened. As all the materials say, there's no guarantee of return of principal. 

[JD Martin]

Quote from @Sam Silverman:

The driver of this capital call is due to the floating rate debt that is on the properties that, over the last couple of years, gone up dramatically. 

In turn, this drastically decreases cash flow as the debt service becomes far more expensive.

The intention of the capital call here is to allow for the market conditions to improve to exit properties to be able to recover significant investor capital and in the best case, provide some level of a return.

In most cases, if the investors do not participate in a capital call, they would become diluted in their investment. In the case that not enough capital is raised, the project can entirely fail and all capital would be lost as the deals would be sold at a total loss of all LP equity. 

Where is this fantastical market shift going to take place in the next 12 months? They're probably going to have to fire sale the worst buildings or sell the best performers at market which may not even be as good as today. After their refi they are at 93% LTV. Their other building rate caps are getting ready to expire. Their DCSR is even right now. I think any major change that will supposedly save the LP group is wishful thinking.

[Justin R.]

Quote from @Bobby Larsen:

I’m particularly bias on the topic but the word syndicator is once again a dirty word and the truth is, there are many many very good syndication groups out there. So when you’re painting a broad brush stroke of “syndicators”, you’re referring specifically to a few select bad actors but mostly the inexperienced syndicators that flooded social media the past 5 years with dreams of getting rich quick. Unfortunately, that message resonates most with unsophisticated investors and they poured money into groups that had no business buying and/or operating real estate. Or, maybe they were even good operators but with a lack of experience they didn’t understand cycles or financing. The largest syndication buyer out there today is still one of these groups and the money continues to pour in.

The forums have become angry and it’s very unfortunate but the same complexities of this industry that get investors in trouble are the same complexities that allow experienced investors to do well. Syndications, leverage, and even debt funds are not at fault, it’s the inexperience of both GPs and LPs and a select few bad actors.

 I just cannot agree with you and a few others on here. Yes, like any thing there are good and bad players. When an LP does research, and invest with a credible operator, there is a level of trust because they are investing in the operator, not the deal. I firmly believe it is the operators job to be a good steward with their LPs money.

I fully believe in personal accountability. I just think saying that someone knows the risks, so its kinda OK to lose their capital, doesn't shine the light at the operational errors. This is like saying "they understood the risk of driving a vehicle" when someone gets taken out by a drunk driver. Yes you can understand the risk, but the misfortune shouldn't have happened. 

I have a few companies which I am 100% manager and partial equity. I have done, and will continue to treat my investors capital like gold, because they trusted me with their resources.

This isn't the markets fault, this isn't the LPs fault, this is the operators lack of planning and foresight. I dont personally know Ashcroft, and they may be good group of people. I just hope they hold themselves accountable, communicate clearly to their investors, and do the best they can do in order to minimize losses.  

Wishing everyone the best

Cheers!

[Justin R.]

 I agree with most of what you said. Problem is, legally, syndicators laugh all the way to the bank. Many firms who will lose close to 100% of capital raised will get 8-figure acquisition fees. 

Carlos, and others, are, it seems to me, merely pointing out that the behavior only stops when LPs stop giving GPs their money without making it clear that they can’t win until LP capital is returned. Ultimately, this IS our fault as LPs. 

LPs, myself, now humbled and less wealthy, included, need to do better. There is nothing else to do, legally, other than to stop giving GPs with ridiculous fees and investments theses, our money.

All we can do is tell the GP - “no I ain’t giving you any more money until you eliminate this BS “acquisition fee” the bs “refinance fee”, the seller fee, take a modest salary, and split the carried interest 80/20 (LP gets 80). Don’t like it? No cash from me boo.”

Also, LPs can share their experiences and let the GPs who so badly want to become famous have their wish come true… in the context of disclosing their returns to LPs.

Exactly @Scott Trench! Im fine with the waterfall, if an operator hits that, they deserve it. The fees are under the table and ridiculous. Kinda reminds me of the property managers that charge a PM fee even during vacancy. 

[Carlos Ptriawan]

Quote from @Justin R.:

And this is the root cause of the problem.

@Joel Owens and Mr. Burke (the ex syndicator) is saying "you as GP do not force to make a deal if the deal does not pencil out at the very beginning. You (as GP) don't do all those funny loan if you can't make it."


The problem started when market is entering default cap 3 environment, in this situation , even with no interest rate, making profit is very very difficult, so most GP switched from using fixed debt to floating. Why they wanna do this because it's the way for them to offer you IRR 15% just like before (although chance is way slimmer). Basically more leverage to generate interest. Therealdeal article talked about this a lot, I identified these problem long time ago.

However the problem with using bridge-floating is the maturity is very short and one need to have perfect execution and perfect market condition.

Which did not happen. And some folks are surrendering (GVA ? Tides ?) and some are making asset as hostage by issuing pref/capital call. (This is the same tactic when non-real estate company failed to sell their product and keep continue the operation by selling more riskier and riskier bonds to the public). 

The root cause of all of these is those cap rate spread. And some of us has been marketed continuously that CRE is passive investment, that's not true, there's time where market risk is high enough that keep continuing do investment no longer make sense).

At the end of the day ............... it's not GP responsibility.

it's LP responsibility because it is our own money and none force you to do that.

The GP would just continuously doing that because that's the way they make money (by keep buying/selling and do the operation and get their fee and so on).

[Bobby Larsen]

@Justin R.

I think you misunderstood my comments, I actually completely agree with you. I was commenting on the entire industry being labeled negatively due to a wave of inexperienced sponsors that have entered the industry and unsophisticated equity’s tendency to follow “get rich quick” promises. Sponsors are absolutely responsible for being taking care of their LPs. With that said, LPs also have a responsibility to be more knowledgeable about their investments.

Sponsors should be more transparent about the extreme risk of debt fund executions with 1-2 years of interest rate protection. At the end of the day, high leverage variable rate debt on real estate is similar to investing in a triple leveraged ETF. When the markets good, it’s great but those investments get crushed in downturns. I don’t think many of these retail LPs would be investing in triple leverage ETFs so they shouldn’t be investing in highly leveraged real estate either. With that said, sponsors and the industry needs to do more to disclose risks and LPs should find strategies that align better with their risk tolerance. There are plenty of sponsors that focus on long term, lower leverage, and interest rate protected investments but LPs often object to their lack of liquidity and lower return projections.

[Carlos Ptriawan]

Quote from @Bobby Larsen:

@Justin R.

I think you misunderstood my comments, I actually completely agree with you. I was commenting on the entire industry being labeled negatively due to a wave of inexperienced sponsors that have entered the industry and unsophisticated equity’s tendency to follow “get rich quick” promises. Sponsors are absolutely responsible for being taking care of their LPs. With that said, LPs also have a responsibility to be more knowledgeable about their investments.

Sponsors should be more transparent about the extreme risk of debt fund executions with 1-2 years of interest rate protection. At the end of the day, high leverage variable rate debt on real estate is similar to investing in a triple leveraged ETF. When the markets good, it’s great but those investments get crushed in downturns. I don’t think many of these retail LPs would be investing in triple leverage ETFs so they shouldn’t be investing in highly leveraged real estate either. With that said, sponsors and the industry needs to do more to disclose risks and LPs should find strategies that align better with their risk tolerance. There are plenty of sponsors that focus on long term, lower leverage, and interest rate protected investments but LPs often object to their lack of liquidity and lower return projections.

 hahaha sorry bit disagree, I think triple leverage ETF is stil safer in my opinion becoz underlying biz is there generating profit.

For me CRE with cap rate 3 with floating is equal to purchase junk bond with CCC--- rating or buying OTCBB Pink stock companies

Investor is guaranteed 25% to lose money.

I agree in your point this is very high risk but investor doesn't realize it because what's wrong with real estate,right ? lol they are not all equal.

[Paul Azad]

Quote from @Chris John:

Quote from @Wesley Leung:

What is your assessment of what happened in 2008? I am not saying that mortgage brokers and banks alonecaused the 2008 financial crisis, but they were certainly a contributing factor. There are many factors that resulted in the financial crisis.

I realize you didn't ask me, but here's my answer.  I think it started with the government wanting more minority home ownership and applying pressure to make it happen.  Hilarity ensued.  Lots of people disagree though.  In the end, it's however your personal bias will allow you to view and characterize the events of the past.

 I'm from TEXAS, and trust me George "Dubya" Bush (President from 2000-2009) was not motivated by helping minorities to get their first homes. GFC was due to naive/lazy nurses/teachers/cops/fire-fighters and anyone else with a pension, not deploying any Due Diligence and just letting their greedy pension managers get billions in fees to invest in crap MBS and synthetic CDOs, all else by banking and ratings agencies and real estate investors just followed like trigger/hammer/powder/bullet down the pipe. The person who pulled the trigger is solely responsible and that was the American people with pension funds that placed the investments and MADE the Market and not anyone else. 

Today idiots like at Ashcrack pay ridiculously high prices with cap rates of 3to4 then cry, "what happened" when their ENron or Pets.com share price starts to pull back 20-30%. "Inconceivable!" 

I listened to the call above, from 2 days ago and the GP when asked what he would have done differently, said "would have bought longer term Rate Caps".  Really, that's all your frontal cortex with all the reflection over the past 2 years could come up with? Really? Never occurred to you to maybe not buy at all-time highs, near lowest 10yr in recorded US history {0.31% in March of 2020}, Maybe don't use variable rate debt with short term maturity? Maybe just sit on your hands and do nothing? If I go to a car lot and the 20year old Subaru with 200,000 miles and frame damage is selling for 300K, maybe I take the frickin' BUS! 

But I must agree with Carlos' sentiments, most GPs knew exactly what they were doing and the risks they were taking with other people's money. The Ashcrock crew may not have known what they were doing, may have been as moronic as they sound on the webinar, and perhaps that is even more dangerous though less nefarious.  They also throw up a table with a "range" of exit Cap Rates from only 4-5%, R U Kiddin me. 10 yr is at 5% now and heading, by most bond experts, much higher. We have 42 years of leverage to de-risk as an economy.  So they are being wildly optimistic, and also two faced as they say many times that the multi-family market has improved in last 6 months, but that they can't sell any assets to raise capital in this horrible market so they must do the Capital call and ADD pref equity (to pay them back the 12 mil they stupidly sunk in over last 1 year, good money after bad). 

They are Un-Good at investing, swipe Left :) 

[Paul Azad]

Quote from @Bobby Larsen:

@Justin R.

I think you misunderstood my comments, I actually completely agree with you. I was commenting on the entire industry being labeled negatively due to a wave of inexperienced sponsors that have entered the industry and unsophisticated equity’s tendency to follow “get rich quick” promises. Sponsors are absolutely responsible for being taking care of their LPs. With that said, LPs also have a responsibility to be more knowledgeable about their investments.

Sponsors should be more transparent about the extreme risk of debt fund executions with 1-2 years of interest rate protection. At the end of the day, high leverage variable rate debt on real estate is similar to investing in a triple leveraged ETF. When the markets good, it’s great but those investments get crushed in downturns. I don’t think many of these retail LPs would be investing in triple leverage ETFs so they shouldn’t be investing in highly leveraged real estate either. With that said, sponsors and the industry needs to do more to disclose risks and LPs should find strategies that align better with their risk tolerance. There are plenty of sponsors that focus on long term, lower leverage, and interest rate protected investments but LPs often object to their lack of liquidity and lower return projections.

 Bobby, the accredited investor standard was set in 1933 then revised in 1982 to the current 1 million net worth or 300k married amounts, but to adjust for inflation they should be re-set to 3.2 million and around 700k, which would help to weed out a lot of the inexperienced investors, who as Ruth from "Ozark" would say "don't know **** about f$%k!" (i don't know why i can't bring myself to drop the f-bomb here, seems like a safe place). 

So, there is a bill working its way now through the Congress to re-adjust those accredited investor standards, but ultimately, it's as old as Caveat Emptor, the buyer must be ware. 

[Wesley Leung]

Quote from @Carlos Ptriawan:

Quote from @Justin R.:

And this is the root cause of the problem.

@Joel Owens and Mr. Burke (the ex syndicator) is saying "you as GP do not force to make a deal if the deal does not pencil out at the very beginning. You (as GP) don't do all those funny loan if you can't make it."


The problem started when market is entering default cap 3 environment, in this situation , even with no interest rate, making profit is very very difficult, so most GP switched from using fixed debt to floating. Why they wanna do this because it's the way for them to offer you IRR 15% just like before (although chance is way slimmer). Basically more leverage to generate interest. Therealdeal article talked about this a lot, I identified these problem long time ago.

However the problem with using bridge-floating is the maturity is very short and one need to have perfect execution and perfect market condition.

Which did not happen. And some folks are surrendering (GVA ? Tides ?) and some are making asset as hostage by issuing pref/capital call. (This is the same tactic when non-real estate company failed to sell their product and keep continue the operation by selling more riskier and riskier bonds to the public). 

The root cause of all of these is those cap rate spread. And some of us has been marketed continuously that CRE is passive investment, that's not true, there's time where market risk is high enough that keep continuing do investment no longer make sense).

At the end of the day ............... it's not GP responsibility.

it's LP responsibility because it is our own money and none force you to do that.

The GP would just continuously doing that because that's the way they make money (by keep buying/selling and do the operation and get their fee and so on).

I'm curious to hear your thoughts on 2008 and who's fault you think the 2008 Financial Crisis is. Do you mind sharing your thoughts?

[Joel Owens]

There is an old saying ( Pigs get fat. Hogs get slaughtered ).

For every aggressive GP on pro-forma there is naive LP to take the bait. I think nobody really could have predicted rates doubling at that fast of a clip. What I take issue with is an GP manipulating ( talking general not this specific thread) debt and then setting best cap super low cap exit range that might be reasonable for a limited period of time if everything goes close to perfect.

You have debt and investor sentiment change with economic times and boom that plan is out the window.

What likely happened is when rates were low everyone was chasing capital from LP's to leverage and raise less equity per deal. Do more deals and scale, scale, scale and hopefully have some winners in there. So to win capital some GP's had to put out rosier and rosier stuff to get the money over the next GP and their deal and hope that markets and cap rates with debt would make it come true over time.

If sponsors would have just used long term fixed rate debt that was assumable many would be absolutely golden right now and if they needed to sell there are tons of buyers for assumable debt deals.

The other properties it's a kick the can down the road and see if they find food to live or croak and the property goes back to the bank and the vultures on the side wait for the right time to take their spoils. Investing is survival of the fittest. 

A GP could say some deals do not work out and oh well but the negative press your company gets and the LP losses incurred those investors will be lost forever on future deal and they will tell everyone their story. There are about 14 million millionaires in the United States so only about 4% of United States population.

Personally I like accredited investors that have already made alot of money and not looking for high risk deal and just want that steady coupon and if they get upside great but not required to invest in the deal as equity upside is a secondary focus versus the safety and stability of the investment.