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

[Randall Joseph]

The latest from Ashcroft -- in the of the AVAF1 August Recap email -- does not seem terribly encouraging.

"With the original capital call amount of $27.9M, we have a $11.7M gap in funding and have a plan to bridge most of the gap by selling Elliot Baymeadows."

And, later in the update, Ashcroft acknowledges that the prior listing for Elliot Abernathy needs to be pulled because offers were too low (or...non-existent). "Upon receipt of initial offers, for Elliot Abernathy it is likely that we will pull the listing and work to season net operating income so the asset is valued based on the recent NOI growth."

It's hard to avoid connecting the dots, and to expect that the planned listing of Elliot Baymeadows will also be met with anemic offers. Such is life when you're forced to sell into a less-than-favorable market.

Are other folks still following along with this slow-motion trainwreck? Foolish to still hope that Class B investors won't be wiped out entirely?

[Brian Bernstein]

I've been following along, and it seems they blended a new GP participation incentive offering—which appears to be way outside their usual strategy—with efforts to raise capital / avoid a complete loss for AVAF1 investors.  Still, the full AVAF1 picture is difficult to comprehend. Fingers crossed. 

[Chris Seveney]

Quote from @Randall Joseph:

The latest from Ashcroft -- in the of the AVAF1 August Recap email -- does not seem terribly encouraging.

"With the original capital call amount of $27.9M, we have a $11.7M gap in funding and have a plan to bridge most of the gap by selling Elliot Baymeadows."

And, later in the update, Ashcroft acknowledges that the prior listing for Elliot Abernathy needs to be pulled because offers were too low (or...non-existent). "Upon receipt of initial offers, for Elliot Abernathy it is likely that we will pull the listing and work to season net operating income so the asset is valued based on the recent NOI growth."

It's hard to avoid connecting the dots, and to expect that the planned listing of Elliot Baymeadows will also be met with anemic offers. Such is life when you're forced to sell into a less-than-favorable market.

Are other folks still following along with this slow-motion trainwreck? Foolish to still hope that Class B investors won't be wiped out entirely?

 I think many investors are going to realize that the capital calls they participated in was only to put a bandaid over open heart surgery to allow some of these sponsors time to raise money for their new deals and end up wiping not only their initial investment out but suffer losses on the capital call as well.

[John Teachout]

Many syndicators and fund sponsors are still touting how well all their previous exits have done, so kicking the can down the road as long as possible will maintain that status even though there are many deals at risk. We're not in fund 1 but are in fund 2 and it's very likely we'll see a capital call for that fund as well. Our minds are already made up to not participate as I've no confidence that it would actually keep "us" from suffering a complete loss of capital. Meanwhile we continue to receive offers from Ashcroft about new offerings. I'm deleting those as they come in.

[Joel Owens]

I pay all cash double digit cap rates with NNN syndications. Buying in this way can weather cycles for optimal timing to exit and 1031 or refi with low debt. I have not been a believer in massaging debt to make the capital raise pref look appealing to accredited LP investors.

A bunch of years ago I sold some apartment buildings. One client had about 230 units across 7 buildings. The portfolio was being dragged down by the bad buildings taking all the good buildings cash. So they were doing a bunch of work for nothing. That taught me don't buy just to buy. Purchase based on feeling very confident and conservative about the deal. The portfolio might not scale as fast but the quality should be there with less headaches and more equity upside yields. Everyone is different that is just my approach. I remember me saying on here somewhere in a post many years ago that cycles can be a game of musical chairs when no more spots the investors crash. There was one investor who took short term 3 year debt so he could shave 30 basis points off the rate versus the 10 year fixed. Now the rate has over double and paying many millions more a year in interest because he got greedy.  

[JD Martin]

Quote from @Joel Owens:

I pay all cash double digit cap rates with NNN syndications. Buying in this way can weather cycles for optimal timing to exit and 1031 or refi with low debt. I have not been a believer in massaging debt to make the capital raise pref look appealing to accredited LP investors.

A bunch of years ago I sold some apartment buildings. One client had about 230 units across 7 buildings. The portfolio was being dragged down by the bad buildings taking all the good buildings cash. So they were doing a bunch of work for nothing. That taught me don't buy just to buy. Purchase based on feeling very confident and conservative about the deal. The portfolio might not scale as fast but the quality should be there with less headaches and more equity upside yields. Everyone is different that is just my approach. I remember me saying on here somewhere in a post many years ago that cycles can be a game of musical chairs when no more spots the investors crash. There was one investor who took short term 3 year debt so he could shave 30 basis points off the rate versus the 10 year fixed. Now the rate has over double and paying many millions more a year in interest because he got greedy.  

 And that's the salient point. I believe a lot of these deals were put together by one of two groups:

1. Those so (relatively) new to either syndication or REI or both that they had no institutional memory of market downturns, interest rate acceleration, frozen capital access, and other risks, sometimes all at the same time. In their minds nothing could ever go wrong because if rents didn't increase dramatically or costs increased dramatically they could just refi till you die (exit, in their case);

2. A smaller group that understood these systemic risks and plowed forward anyway, knowing somewhere inside that they were likely duping a lot of supposedly sophisticated investors, capitalizing on the latest "pet rock" frenzy. 

I like to think there were more naive or dumb GPs than charlatans but who can know for certain? And the LPs bear at least a significant part of the blame, because they were seduced by unrealistic return promises that (most) investors know inside are impossible or unlikely or both and even if achievable requires a very high level of risk to principal. Risk and reward are not inversely proportional - no one gets more reward for less risk, and just about everyone understands this internally because everyone would do it if not the case - but the LPs wanted to believe they were smarter than the next guy, or knew someone smarter than the next guy. In any case, if there hadn't been any market for these deals, we wouldn't be having this conversation for sure. 

Humans are both greedy and lazy by natural design, and these types of deals appeal to both facets; you don't have to do anything and you get disproportionate riches. There's a whole lot less people that want to do it the way you did it. Even on the other forums, when I tell people that I did it by working a 50 hr W2 and using my downtime (nights, weekends, holidays, vacations) to build the business, 95% or more just tune out. Everyone wants to go to heaven, but nobody wants to die. That kind of thing :)

[Henry Clark]

Throughout these types of posts I have asked what the LPs due diligence was.  

Market- rental rates, occupancy, inventory

Loan- rates, term- amort/balloon, down, 

Capex- budget and management.

LP terms.

An LP plays the role of a banker.  They should stress test all of the above.  What if?

Rates are $1,009 versus $1,200

Occupancy is 85% versus 95%

Capex is $2mm vs $1.5mm

Inflation is 20%.

What is the impact to the LPs position?

Etc. Etc

We do the above on each Self storage location we develop.  Even at 65% occupancy versus 90% we still win.  Even with 20% inflation or cost overruns we win.  Might cover all costs plus the bank P/I but we are banking the principal payment.  

My point is the numbers without seeing them don’t add up.  No syndication or Class should go under.  That means the money went to the GP up front which means they aren’t working for the LPs interest.  They want the current deal to look good so they can do the next deal.  

BP podcast ??? Next should be don’t do a LP investment into a syndication if you don’t know how to do a Stress test.  

When I do  a project I always hold back xx% from the contractor till I sign off.  Part of the syndication should include a holdback on the GP upfront fees.  

Should you respond to a capital call?  Only after they answer the positions above.  Otherwise it blind money investing.  

[Henry Clark]

I’m a logic person and always look for a numeric or process answer.   Per my last post.   As one of you mentioned people will be lazy.  So I could give good advice but it wouldn’t matter.

Luckily in self storage we can be lazy since we can get rid of a customer within 6 weeks with little financial impact to us.  

Watching a commentary on AI. Triggered the following thinking whether Syndications, LTR, STR on how the owners can be lazy using AI applications.

Example:  My banker just installed AI software.  Sometimes they will have up to 15 docs to fill out and go thru or even know to do.  Now they all are filled out with minimal data input.  They just have to review.  

BP can you do a post or take a lead on AI for Syndication investing, LTR and STR? This should help weed out bad investments and bad rental customers.

Bad google reviews, bad STR reviews, bad credit, etc etc. We have had google reviews by people who have never used or contacted us. Luckily our business model doesn't use google reviews. I've looked at one star Airbnb reviews by Bnb pros whose complaints are minuscule.

Develop or have triggered an AI review of customers and syndications.  

[Eric Bilderback]

Quote from @JD Martin:

Quote from @Joel Owens:

I pay all cash double digit cap rates with NNN syndications. Buying in this way can weather cycles for optimal timing to exit and 1031 or refi with low debt. I have not been a believer in massaging debt to make the capital raise pref look appealing to accredited LP investors.

A bunch of years ago I sold some apartment buildings. One client had about 230 units across 7 buildings. The portfolio was being dragged down by the bad buildings taking all the good buildings cash. So they were doing a bunch of work for nothing. That taught me don't buy just to buy. Purchase based on feeling very confident and conservative about the deal. The portfolio might not scale as fast but the quality should be there with less headaches and more equity upside yields. Everyone is different that is just my approach. I remember me saying on here somewhere in a post many years ago that cycles can be a game of musical chairs when no more spots the investors crash. There was one investor who took short term 3 year debt so he could shave 30 basis points off the rate versus the 10 year fixed. Now the rate has over double and paying many millions more a year in interest because he got greedy.  

 And that's the salient point. I believe a lot of these deals were put together by one of two groups:

1. Those so (relatively) new to either syndication or REI or both that they had no institutional memory of market downturns, interest rate acceleration, frozen capital access, and other risks, sometimes all at the same time. In their minds nothing could ever go wrong because if rents didn't increase dramatically or costs increased dramatically they could just refi till you die (exit, in their case);

2. A smaller group that understood these systemic risks and plowed forward anyway, knowing somewhere inside that they were likely duping a lot of supposedly sophisticated investors, capitalizing on the latest "pet rock" frenzy. 

I like to think there were more naive or dumb GPs than charlatans but who can know for certain? And the LPs bear at least a significant part of the blame, because they were seduced by unrealistic return promises that (most) investors know inside are impossible or unlikely or both and even if achievable requires a very high level of risk to principal. Risk and reward are not inversely proportional - no one gets more reward for less risk, and just about everyone understands this internally because everyone would do it if not the case - but the LPs wanted to believe they were smarter than the next guy, or knew someone smarter than the next guy. In any case, if there hadn't been any market for these deals, we wouldn't be having this conversation for sure. 

Humans are both greedy and lazy by natural design, and these types of deals appeal to both facets; you don't have to do anything and you get disproportionate riches. There's a whole lot less people that want to do it the way you did it. Even on the other forums, when I tell people that I did it by working a 50 hr W2 and using my downtime (nights, weekends, holidays, vacations) to build the business, 95% or more just tune out. Everyone wants to go to heaven, but nobody wants to die. That kind of thing :)

In defense of the dumb, I have been saying we are in a bubble since 2009 but I have been blown by by many investors I think were less qualified bigger egos etc.  After watching what the financial engineers did during COVID how are young guys hoping to have freedom, comfort, stability, a family supposed to make that happen?, work like a sap all day with a couple cats while other dumb asses are getting rich?  This predicament is the mostly the fault of a system that has become way to reliant on asset prices.  The planners have worked to hard in skewing the gravy of the economy to asset owners at the expense of guys and gals being able to get ahead by managing their finances responsibly and putting in a hard days work.  

You probably agree with this, but I certainly feel strong about it.