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

[Carlos Ptriawan]

Quote from @Carlos Ptriawan:

Quote from @Clark Stevenson:

Quote from @Carlos Ptriawan:

These are the actual surveillance asset condition from one pool of CLO from one the bridge-lender mentioned above , look at AS-IS DSCR.

It's game over buddy, the status of their loan is 100% in trouble with 3 in watch list and most is at loan extension, to get loan extension the GP may ask for capital call for further reserve.

Those are nightmare numbers. On the 2 assets in Atlanta, my assumption is the DSCR is somewhere between 0.65 and 0.85 given the numbers provided by the GP. That's why I am assuming at this point I am wiped out!

These bridge-lender guys are suicidal, they offered a GP at 90% LTV with appraisal as-is DSCR of 0.90.
I assume the lender just offer the loan to 'not too smart GP' so the lender can acquire this property for cheap while LP is paying the bills becoz no matter what GP is still paid by the LP anyway.

these are suicidal project. These are similar to subprime 2008 except this is slightly more complicated.

 This is another data from the same bridge-lender pool for CLO issued after 2022:

The concentration of their CRE loan pool is mainly at DSCR 0.50.

Having said if someone is pointing me a gun to me to force to invest at multifamily or shopping mall. I wold just run away from any GP that's using bridge loand and floating debt.

But I will read their T12 if they use Fanni Mae loan fixed debt long term.

All these guys that borrows using bridge loan, they were rejected with gov. loan because their initial DSCR would not be accepted in traditional loan.

[Jay Hinrichs]

Quote from @Jason Piccolo:

I just contributed my 19.7%. They seem to have a good business plan moving forward on refinancing the current debt and are adjusting the splits 85/15. Ashcroft is also offering additional GP equity on a future deal. 

If your happy with the plan then supporting your GP is the thing to do.. need to keep them in play without them it gets very bad very quick.. 

[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.

[Jay Hinrichs]

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 will agree with Juul  but not the other examples the banks did not create the mortgage mess as you state is was the secondary market that dictated what paper they would buy.. banks and mortgage brokers just worked with the play book they were given. 

I dont agree with your assessment of syndicators either.. some maybe ALL no way

[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.

[Wesley Leung]

Quote from @Jay Hinrichs:

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 will agree with Juul  but not the other examples the banks did not create the mortgage mess as you state is was the secondary market that dictated what paper they would buy.. banks and mortgage brokers just worked with the play book they were given. 

I dont agree with your assessment of syndicators either.. some maybe ALL no way

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.

Yes, ofc I don't mean all the syndicators. I am using it as a blanket term to cover the bad actors who take advantage of retail investors.

[John Cho]

Im not in this fund but another Ashcroft deal originated in 2019 that has underperformed. They just put a slug of pref equity on my deal financed by Related and slashed distributions from 8% to 2% after pausing distributions. 

This was my initial test investment with Ashcroft but they my impression is that they they are always looking to acquire to generate fee income rather than maximize the value of what they have acquired.  I get bombarded with more communication about the next deal or fund they are looking to raise instead of the deal Im actually in.  As a LP, I hate that.   

They have one of the more unfriendly fee and waterfall arrangements for LPs and both Frank/Joe have made alot of money over the years during the ZIRP period.  Someone raised the question of why they are not fronting more of the money for this fund debacle and I would press them on that.  Citing loan covenants seems like a weak excuse.

People in the industry seem to have a dim view of much of class B equity can be recovered for this fund.  

https://www.wallstreetoasis.com/forum/real-estate/another-on...

[Bobby Larsen]

Quote from @John Cho:

Citing loan covenants seems like a weak excuse.

https://www.wallstreetoasis.com/forum/real-estate/another-on...

There's a years worth of posts in that forum but I read the most recent and I recommend LPs do the same. The anonymity of the forum leads to some pretty outlandish comments but overall, correct in their assessments. They are correct regarding the argument surrounding loan covenants, it's not a legitimate issue. Loan covenants restrict placing additional debt that is collateralized (backed) by the property. Uncollateralized debt from the sponsor can just as easily be structured as additional preferred equity. Very unlikely a lender would have an issue with a sponsor providing uncollateralized funds.

[Carlos Castellanos]

Thank you all for your contribution to this community.

Here's the replay of yesterday's Ashcroft Capital's capital call update. Any thoughts and analysis would be appreciated as this can be a great learning opportunity.

  https://mailhub.ashcroftcapital.com/share/hubspotvideo/165541408857?utm_medium=email&_hsenc=p2ANqtz-9ZdXHKusNjT350LCP5W9ljDxUcnKNkmLJBSB1HZm9d1Cfc4vuRjIwURjYXmiiSb-jhQcNJ4TYKQINzomuJVxslHxDzaw&_hsmi=304380451&utm_content=304380451&utm_source=hs_email

[Henry Lazerow]

This is why I always doubted all these syndications. When times get tough (they barely even are tough now) you get capital calls and potential total loss of capital. You can get a much higher risk adjusted return buying class A/B multi units yourself or even just dumping the money in VNQ if want truly safe passive. 

[JD Martin]

Quote from @Carlos Castellanos:

Thank you all for your contribution to this community.

Here's the replay of yesterday's Ashcroft Capital's capital call update. Any thoughts and analysis would be appreciated as this can be a great learning opportunity.

  https://mailhub.ashcroftcapital.com/share/hubspotvideo/165541408857?utm_medium=email&_hsenc=p2ANqtz-9ZdXHKusNjT350LCP5W9ljDxUcnKNkmLJBSB1HZm9d1Cfc4vuRjIwURjYXmiiSb-jhQcNJ4TYKQINzomuJVxslHxDzaw&_hsmi=304380451&utm_content=304380451&utm_source=hs_email

 My thoughts so far after watching the call:

1. I think their NOI growth plan is going to be a lot tougher than they imagine. A lot of these buildings are already filled with renters that have hit their limits on ability to pay. They're just as likely to see higher vacancy rates wiping out any of that growth they are able to generate.

2. No way does all the new supply subside by the end of this year. Just where I am - and not in their market and a much smaller one - there's still a pretty good pipeline of 2-4 years of new mfh coming to market. I would bet it's worse than that in bigger markets 

3. Without the capital call they said all Class B investors would be fully wiped out and Class A would take a 30% loss. They estimate they would need to sell in 3 years at $625 million to return all principal and capital call funds. I believe the chart showed about $400 million in debt, which would put current valuation at about $450 million given 90% LTV. That's 50% growth in 3 years from current valuation! I didn't hear them mention what percentage of investors need to participate to prevent the fire sale but that doesn't sound terribly promising to me.

4. They are already leveraged at over 90% LTV and it wasn't clear to me if that includes the $11 million interest free loan they said they propped up the fund with last year. It sounds crazy to me that there's going to be anywhere near the kind of value add through renos or rent raise to get that number down, much less appreciation that even got them to that level. To me it sounds like "Buy high and pray for higher"; they said the initial plan had them exiting in 5-7 years from 2021, but they were already buying at a market top. I don't know how fast these buildings can appreciate in these markets but personally I would be considering if I should just eat the loss now. And the refi is going to put them at 93%, supposedly because it will fund the future capex issues (wouldn't that be the new owners issue in a couple more years?)

As best as I can tell the entire plan hinges on what sounds like crazy growth to me over the next 3 years, a pretty high cash infusion to keep Fund 1 alive, and hope and prayers that they can raise enough money from Fund 1 to buy longer cap rates on Fund 2 or buy down enough debt to be able to refinance those loans. After listening to the call it reminded me why I like my own plan and holding my own investments. Everyone who thinks REITs are totally passive should listen in on this call. Depending on how much I had invested I'd be up many nights trying to decide to keep throwing money at this or not.

Being totally honest, if I had any significant money invested in these funds right now I would be crapping my pants. I just took some cursory looks at some of their material and assets and I think it all sounds crazy as hell. I don't know most of the markets they've got there but I looked at their apartments in Orlando (I have an STR there) and their bottom end, 1br apartments start at $1900 per month. In my community I know for a fact that there are 4/3 2500sf homes with pools renting for $2000. I pulled up a small snapshot of their geography on Apartments and I see a ton of 1brs going from $900-$1500. You go online and read the resident Google reviews on it and it would scare the hell out of you. The crime rate maps show that block as being parts of the highest crime rates (violent & property) in all of Orlando.

The best thing I would say after listening to the call is that they appeared to have answers to questions but a lot of those answers didn't sound so hot to me. 

[Jay Hinrichs]

Quote from @JD Martin:

Quote from @Carlos Castellanos:

Thank you all for your contribution to this community.

Here's the replay of yesterday's Ashcroft Capital's capital call update. Any thoughts and analysis would be appreciated as this can be a great learning opportunity.

  https://mailhub.ashcroftcapital.com/share/hubspotvideo/165541408857?utm_medium=email&_hsenc=p2ANqtz-9ZdXHKusNjT350LCP5W9ljDxUcnKNkmLJBSB1HZm9d1Cfc4vuRjIwURjYXmiiSb-jhQcNJ4TYKQINzomuJVxslHxDzaw&_hsmi=304380451&utm_content=304380451&utm_source=hs_email

 My thoughts so far after watching the call:

1. I think their NOI growth plan is going to be a lot tougher than they imagine. A lot of these buildings are already filled with renters that have hit their limits on ability to pay. They're just as likely to see higher vacancy rates wiping out any of that growth they are able to generate.

2. No way does all the new supply subside by the end of this year. Just where I am - and not in their market and a much smaller one - there's still a pretty good pipeline of 2-4 years of new mfh coming to market. I would bet it's worse than that in bigger markets 

3. Without the capital call they said all Class B investors would be fully wiped out and Class A would take a 30% loss. They estimate they would need to sell in 3 years at $625 million to return all principal and capital call funds. I believe the chart showed about $400 million in debt, which would put current valuation at about $450 million given 90% LTV. That's 50% growth in 3 years from current valuation! I didn't hear them mention what percentage of investors need to participate to prevent the fire sale but that doesn't sound terribly promising to me.

4. They are already leveraged at over 90% LTV and it wasn't clear to me if that includes the $11 million interest free loan they said they propped up the fund with last year. It sounds crazy to me that there's going to be anywhere near the kind of value add through renos or rent raise to get that number down, much less appreciation that even got them to that level. To me it sounds like "Buy high and pray for higher"; they said the initial plan had them exiting in 5-7 years from 2021, but they were already buying at a market top. I don't know how fast these buildings can appreciate in these markets but personally I would be considering if I should just eat the loss now. And the refi is going to put them at 93%, supposedly because it will find the future capex issues (wouldn't that be the new owners issue in a couple more years?)

As best as I can tell the entire plan hinges on what sounds like crazy growth to me over the next 3 years, a pretty high cash infusion to keep Fund 1 alive, and hope and prayers that they can raise enough money from Fund 1 to buy longer cap rates on Fund 2 or buy down enough debt to be able to refinance those loans. After listening to the call it reminded me why I like my own plan and holding my own investments. Everyone who thinks REITs are totally passive should listen in on this call. Depending on how much I had invested I'd be up many nights trying to decide to keep throwing money at this or not.

Being totally honest, if I had any significant money invested in these funds right now I would be crapping my pants. I just took some cursory looks at some of their material and assets and I think it all sounds crazy as hell. I don't know most of the markets they've got there but I looked at their apartments in Orlando (I have an STR there) and their bottom end, 1br apartments start at $1900 per month. In my community I know for a fact that there are 4/3 2500sf homes with pools renting for $2000. I pulled up a small snapshot of their geography on Apartments and I see a ton of 1brs going from $900-$1500. You go online and read the resident Google reviews on it and it would scare the hell out of you. The crime rate maps show that block as being parts of the highest crime rates (violent & property) in all of Orlando.

The best thing I would say after listening to the call is that they appeared to have answers to questions but a lot of those answers didn't sound so hot to me. 

I built half a dozen new builds around Orlando suburbs I know its apples to oranges with apartments but my brand new 3 and 2s rent for 1700 to 1800.  just sayin..

[JD Martin]

Quote from @Jay Hinrichs:

Quote from @JD Martin:

Quote from @Carlos Castellanos:

Thank you all for your contribution to this community.

Here's the replay of yesterday's Ashcroft Capital's capital call update. Any thoughts and analysis would be appreciated as this can be a great learning opportunity.

  https://mailhub.ashcroftcapital.com/share/hubspotvideo/165541408857?utm_medium=email&_hsenc=p2ANqtz-9ZdXHKusNjT350LCP5W9ljDxUcnKNkmLJBSB1HZm9d1Cfc4vuRjIwURjYXmiiSb-jhQcNJ4TYKQINzomuJVxslHxDzaw&_hsmi=304380451&utm_content=304380451&utm_source=hs_email

 My thoughts so far after watching the call:

1. I think their NOI growth plan is going to be a lot tougher than they imagine. A lot of these buildings are already filled with renters that have hit their limits on ability to pay. They're just as likely to see higher vacancy rates wiping out any of that growth they are able to generate.

2. No way does all the new supply subside by the end of this year. Just where I am - and not in their market and a much smaller one - there's still a pretty good pipeline of 2-4 years of new mfh coming to market. I would bet it's worse than that in bigger markets 

3. Without the capital call they said all Class B investors would be fully wiped out and Class A would take a 30% loss. They estimate they would need to sell in 3 years at $625 million to return all principal and capital call funds. I believe the chart showed about $400 million in debt, which would put current valuation at about $450 million given 90% LTV. That's 50% growth in 3 years from current valuation! I didn't hear them mention what percentage of investors need to participate to prevent the fire sale but that doesn't sound terribly promising to me.

4. They are already leveraged at over 90% LTV and it wasn't clear to me if that includes the $11 million interest free loan they said they propped up the fund with last year. It sounds crazy to me that there's going to be anywhere near the kind of value add through renos or rent raise to get that number down, much less appreciation that even got them to that level. To me it sounds like "Buy high and pray for higher"; they said the initial plan had them exiting in 5-7 years from 2021, but they were already buying at a market top. I don't know how fast these buildings can appreciate in these markets but personally I would be considering if I should just eat the loss now. And the refi is going to put them at 93%, supposedly because it will find the future capex issues (wouldn't that be the new owners issue in a couple more years?)

As best as I can tell the entire plan hinges on what sounds like crazy growth to me over the next 3 years, a pretty high cash infusion to keep Fund 1 alive, and hope and prayers that they can raise enough money from Fund 1 to buy longer cap rates on Fund 2 or buy down enough debt to be able to refinance those loans. After listening to the call it reminded me why I like my own plan and holding my own investments. Everyone who thinks REITs are totally passive should listen in on this call. Depending on how much I had invested I'd be up many nights trying to decide to keep throwing money at this or not.

Being totally honest, if I had any significant money invested in these funds right now I would be crapping my pants. I just took some cursory looks at some of their material and assets and I think it all sounds crazy as hell. I don't know most of the markets they've got there but I looked at their apartments in Orlando (I have an STR there) and their bottom end, 1br apartments start at $1900 per month. In my community I know for a fact that there are 4/3 2500sf homes with pools renting for $2000. I pulled up a small snapshot of their geography on Apartments and I see a ton of 1brs going from $900-$1500. You go online and read the resident Google reviews on it and it would scare the hell out of you. The crime rate maps show that block as being parts of the highest crime rates (violent & property) in all of Orlando.

The best thing I would say after listening to the call is that they appeared to have answers to questions but a lot of those answers didn't sound so hot to me. 

I built half a dozen new builds around Orlando suburbs I know its apples to oranges with apartments but my brand new 3 and 2s rent for 1700 to 1800.  just sayin..

 Exactly, that's why when I did my admittedly quick & dirty check up on some of what they're talking about in the call it sounds like crazy talk. High crime, rent numbers that look like they're already maxed out, virtually no equity in the deals. 

[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.

[Billy Jalali]

Joe Fairless was the guest on The Real Wealth Show podcast which came out today (4/26). He referred rate caps being an issue in today’s market a number of time. Towards the end he talked about having loans come due at inopportune times. “Fortunately we aren’t in any of those positions, but I know of people that have gone through that and they will get pref equity or do a capital call, or both” … kinda sounded like the “asking for a friend” 

[Carlos Ptriawan]

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.

 it is more than that , it is the whole ecosystems especially when it comes to NON-BANK LENDER.

The process was three stages :

1. The non-bank lender is offering a "subprime-like loan product" to GP syndicator knowing it is almost impossible for the loan to be paid as DSCR at approval is ridicilously low, so the lender can get high interest rate loan and asset for cheap in case there's foreclosure.

2. The GP sees this as opportunity, because they see ah we will get paid anyway even if the asset is not performing. if our asset was liquidated so freaking what, we got money from acquisition fee. Scott is referring into this phase only.

3. The GP is directly or indirectly advertising these "investment" thru social media , biggerpocket or calling every phone number that they had. Telling to the masses hey this is passive investment, there is chance your money would be doubled in few years. 

..... and that's the problem, the problem is not just in #2 ; the problem happened because of #1 (read the twitter post that I signed)

.... in my view these loan product (non-bank lender/non gov lender bridge loan that's used by GP with 90% LTV 2-3 years bridge loan with 0.90 DSCR ..... offered to GPs) is just similar to daylight robbery.

[Carlos Ptriawan]

Quote from @Henry Lazerow:

This is why I always doubted all these syndications. When times get tough (they barely even are tough now) you get capital calls and potential total loss of capital. You can get a much higher risk adjusted return buying class A/B multi units yourself or even just dumping the money in VNQ if want truly safe passive. 

 Very very very general simple rule in investment :
- you want asset that's continuously has asset appreciation , this is to avoid underwater investment 
- you want better asset protection rather than chasing asset return 

how it can be achieved ?
- by having asset that's secured using long term debt 
- by having preferably fixed-rate debt.
- by having asset that demand is outpacing supply 

can CRE achieve all that ? maybe, and only if :
a- if market risk spread (between cap rate vs SOFR/10 year notes) are wide enough to generate profit.
b- if their asset is secured using long term debt (preferably gov. loan)
c- if  they're using fixed rate debt
d- if they're in the market where the new supply of CRE doesn't exceed the demand of CRE

otherwise yes just invest at VNQ is enough.

[Henry Lazerow]

@Carlos Ptriawan interesting thoughts. For large cre deals is it sometimes fixed rate debt? I thought always had balloons etc. I agree even on 2-4s which is what I normally focus on you need a solid margin between cap rate and debt rates. One thing thats hard to calculate is rent growth. I passed on some deals that broke even a year or two ago that now would have been great buys due to their rents increasing 20%+ here in chicago, its somewhat of a gamble to rely on faster then inflation rent growth though to make a deal work.  

[Joel Owens]

I have said it so many times over the years. I do not massage debt to make deals work. If you see a pro-forma and they have to use short term, debt, floating debt, etc. to make something look good then might think of running fast.

Just like house flipping there are times in cycles when anyone could make money and other times when it takes someone long time in the business to avoid pitfalls. Not talking about anyone specific but in generalities. So at best it's a game of musical chairs for most where they hope to have big gains in money and none to small losses before the sink ships on the cycle. The ones that keep going at it hoping things will turn around when cycle dropping are the ones that tend to lose it all just like a business waiting too long to make the hard decisions. I have lived in GA all my life 49 years so far. Roswell for the most part is a good area even though it has what is called ( armpit) areas. These areas might be in an overall good city for example or county but have high crime and issues.

Really look at the tenant pay history and their current income levels versus the in place rent to see how at the top of income they are or overextending themselves. Compare that with age of building with amenities versus similarly priced buildings in the area. If 2 bed rent is 1,500 a month for example and range for area is 1400 to 1800 then bottom range which tends to make tenants more sticky and hard to leave. If rent is closer to 1700 or higher then might leave for cheaper rent when economy gets tougher. You need to know vacancy in the Roswell market for apartment units on average and the business department with planning and zoning how many permits approved for new multifamily builds. GA is one of the best states in the country. I am not saying that because I live here. We have pro-business governments in most areas. Have great weather most of the year ( few months get super hot and super cold ). Clean air in suburbs. Lower taxes. Low crime and good schools except for problematic counties and cities which every state has. I would look at your portfolio now for LP investments and rate the location quality and area of each investment and amount invested into each versus current liquid and net worth and how much you make annually and monthly from your job or business. Be pro-active and assess risk now and not re-active when a GP drops a request on you. Also have to look at opportunity cost. There are alot worse areas in GA than Roswell. In my business for NNN most all my clients have 7 to 10 year fixed debt at super low interest rates. They can pay off property before loan comes due and have ultimate flexibility when to sell or refi.

[JD Martin]

Quote from @Henry Lazerow:

@Carlos Ptriawan interesting thoughts. For large cre deals is it sometimes fixed rate debt? I thought always had balloons etc. I agree even on 2-4s which is what I normally focus on you need a solid margin between cap rate and debt rates. One thing thats hard to calculate is rent growth. I passed on some deals that broke even a year or two ago that now would have been great buys due to their rents increasing 20%+ here in chicago, its somewhat of a gamble to rely on faster then inflation rent growth though to make a deal work.  

They all use variable debt because (theoretically) it is a lower rate than fixed and it gives them 3-7 years to "stabilize" the property, "value add" by renovating and jacking up rents, and then selling the asset at a huge profit to either another REIT who thinks they can do even better or (less commonly) to a Blackstone or similar, someone who might theoretically hold it for 10 or 20 years as a stable, income producing asset.

Most of these REITs are just slow motion flips. They are completely anathema to the idea of building wealth in RE slow and steady. That's why they're in trouble - they have to take bigger risks and hope all of the economic factors remain in place. If you look at any of their prospectus materials they all plan to exit the asset in less than 7 years, because that's maxing out what they can get cheap rate, interest only loans for.

[Joel Owens]

Here is another nugget for people. When looking at a property the listing brokers for almost any asset class like to put you with their capital markets broker. They do this because they want to know you can really qualify but also tend to sell you a bill of goods knowing their mortgage guy will try to use a debt instrument to make the deal look better than it is at the cap rate the seller is trying to sell at. The listing broker wants a quick win for their seller by imposing more debt risk on the buyer with non-optimal financing.  

[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.

[Carlos Ptriawan]

Quote from @Henry Lazerow:

@Carlos Ptriawan interesting thoughts. For large cre deals is it sometimes fixed rate debt? I thought always had balloons etc. I agree even on 2-4s which is what I normally focus on you need a solid margin between cap rate and debt rates. One thing thats hard to calculate is rent growth. I passed on some deals that broke even a year or two ago that now would have been great buys due to their rents increasing 20%+ here in chicago, its somewhat of a gamble to rely on faster then inflation rent growth though to make a deal work.  

 increasing rent is factor of supply and demand.

if today someone offering me the following :

Austin,TX 15% IRR, class B, bridge loan 90% LTV as-is DSCR 0.9
Piscatwaway,NJ 8%IRR,class B, fixed 7 years 50% LTV as is DSCR 1.50 

I will invest at Piscataway, although IRR is lower but risk way way lower than Austin, not just because of the financing deal is better but I know vacancy rate in NJ is 1-2% today compare to 8-10% in Austin today. So rent growth is more possible in NJ rather than in TX.

[Carlos Ptriawan]

Quote from @JD Martin:

Quote from @Henry Lazerow:

@Carlos Ptriawan interesting thoughts. For large cre deals is it sometimes fixed rate debt? I thought always had balloons etc. I agree even on 2-4s which is what I normally focus on you need a solid margin between cap rate and debt rates. One thing thats hard to calculate is rent growth. I passed on some deals that broke even a year or two ago that now would have been great buys due to their rents increasing 20%+ here in chicago, its somewhat of a gamble to rely on faster then inflation rent growth though to make a deal work.  

They all use variable debt because (theoretically) it is a lower rate than fixed and it gives them 3-7 years to "stabilize" the property, "value add" by renovating and jacking up rents, and then selling the asset at a huge profit to either another REIT who thinks they can do even better or (less commonly) to a Blackstone or similar, someone who might theoretically hold it for 10 or 20 years as a stable, income producing asset.

Most of these REITs are just slow motion flips. They are completely anathema to the idea of building wealth in RE slow and steady. That's why they're in trouble - they have to take bigger risks and hope all of the economic factors remain in place. If you look at any of their prospectus materials they all plan to exit the asset in less than 7 years, because that's maxing out what they can get cheap rate, interest only loans for.

 Right......and for our fellow investors :

it takes longer for cap rate 4 to move to cap rate 3 ; compare between the time when cap rate 8 move to cap rate 7.

which means.... if you are investing at market where the default cap rate is at cap rate 3 ; it is a totally different environment when market cap rate is at cap rate 9.  Even when there is no interest rate changes.

The risk is way way way higher than at cap rate 3 compare if we're at cap rate 9 (in 2011 for example). 

These cap rate compression could happen because interest rate was low enough for almost 13 years. We are riding from cap 9 market to cap 3 market, everyone in BP that invested in 2009 is rich enough lol.

Now................ the difference is the effect of asset when financed with short term debt vs very long term debt.

With very long term debt like residential we have reduced appreciation rate in different market (from -2 to 6% market)

to a collapsed of valuation (in CRE using short-term floating) with (DE-)appreciation from -10 to -30%
( one 100 bps changes in spread causing a decline of valuation to 10-15% and/or 10-15 DSCR from my napkin calculator ). Some office valuation is even devalued to -90% these days.

..... another problem with MF CRE is comps ; even if the rate is not rising anymore, and even if one GP is using fixed but the valuation of next property that uses floating (if there're lot) , that comp is still impacting the fixed-GP because it would impact the valuation and the market.
In residential we don't have these problem ..........

so problem in CRE is kind like resetting the market to everyone. 

[Lisa Jones]

Quote from @Billy Jalali:

Joe Fairless was the guest on The Real Wealth Show podcast which came out today (4/26). He referred rate caps being an issue in today’s market a number of time. Towards the end he talked about having loans come due at inopportune times. “Fortunately we aren’t in any of those positions, but I know of people that have gone through that and they will get pref equity or do a capital call, or both” … kinda sounded like the “asking for a friend”