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

[Mike Dymski]

Quote from @Todd Goedeke:

@Mike Dymskiif you think a person needs to be a RE financial analyst to evaluate a syndication you are either: A grossly complicating due diligence or B. Making the point that the average RE investor does not belong in a syndication and should invest directly in properties , C an attorney looking to promote his “ ambulance chasing”business .

A - We are experiencing the importance of proper diligence in real life with LPs losing money or having their capital at significant risk.

B - None of us want to be average...or would want to be in deals right now where average levels of diligence were performed.

C - I'm not in the business...just an investor (in syndications and my own personal portfolio).

[Shirley Poon]

I got the same email for the capital call several days ago as well. The email commented that the asset management fee is deferred in which I think should be not be paid out until the investors are made whole. Furthermore, there is a comment saying 24 mos return on the capital call, so that is something we'll need to get more details on. 

I've spoken to the rep in Ashcroft and looks like they've seem to exhausted a lot of options before approaching us. I think they are trying to pitch it as an opportunity for us to increase our share to when the sale happens foregoing the waterfall. I think there is more to dive into next week in the meeting and having seen the loans come up due and withholding our payouts to pay for the new floating rates. For me, I need to wait for the Vista to payout for it to then be placed for capital call for this fund. As far as they communicated, no other funds or syndications have asked for the capital call, only Fund I. 

I'm sure if this is on Bigger Pockets there is a lot of their reputation on the line to make investors whole otherwise, no additional investors will invest further due to their capital call and even loss of capital. The email is very well thought out and a lot of solutions placed on the table prior to approaching us. However, I've seen other syndicates use hard money loans to cover and also sponsors that have created a new side car to add capital until relief can be alleviated so that investors are whole. I question if this is really their final approach and wonder changing the deal structure in times of the most dire situation during high interest era is the right approach. 

The tight timeline of obtaining a % during 1 mos for those that invested more may not be feasible for those that may just invest $25k. Accounting for total amt doesn't seem to be taken into consideration. 

[Jay Hinrichs]

Quote from @Todd Goedeke:

@Mike Dymskiif you think a person needs to be a RE financial analyst to evaluate a syndication you are either: A grossly complicating due diligence or B. Making the point that the average RE investor does not belong in a syndication and should invest directly in properties , C an attorney looking to promote his “ ambulance chasing”business .

Todd with regard to Mike your barking up the wrong Tree. 

[Jay Hinrichs]

Quote from @Shirley Poon:

I got the same email for the capital call several days ago as well. The email commented that the asset management fee is deferred in which I think should be not be paid out until the investors are made whole. Furthermore, there is a comment saying 24 mos return on the capital call, so that is something we'll need to get more details on. 

I've spoken to the rep in Ashcroft and looks like they've seem to exhausted a lot of options before approaching us. I think they are trying to pitch it as an opportunity for us to increase our share to when the sale happens foregoing the waterfall. I think there is more to dive into next week in the meeting and having seen the loans come up due and withholding our payouts to pay for the new floating rates. For me, I need to wait for the Vista to payout for it to then be placed for capital call for this fund. As far as they communicated, no other funds or syndications have asked for the capital call, only Fund I. 

I'm sure if this is on Bigger Pockets there is a lot of their reputation on the line to make investors whole otherwise, no additional investors will invest further due to their capital call and even loss of capital. The email is very well thought out and a lot of solutions placed on the table prior to approaching us. However, I've seen other syndicates use hard money loans to cover and also sponsors that have created a new side car to add capital until relief can be alleviated so that investors are whole. I question if this is really their final approach and wonder changing the deal structure in times of the most dire situation during high interest era is the right approach. 

The tight timeline of obtaining a % during 1 mos for those that invested more may not be feasible for those that may just invest $25k. Accounting for total amt doesn't seem to be taken into consideration. 

To play devils advocate. why should the GP/sponsor solely take the hit on something that seems to be out of most everyone's control or anticipated.. Kind of like the GFC when trillions of equity was wiped out and thousands of RE companies and investors went under. ??

If you strangle the GP ability to survive how does that help the project?

I get it if the companies kind of abandon you and move on to other deals like we are seeing with some of the other Gps on this site.. These guys always struck me as pretty conservative and never posting pics of their lambo or jet or bragging about 1000s of units etc etc.. They seemed pretty humble at least to me.

[Don Konipol]

Well, I do not know ANYTHING specific about the deal in question, the sponsors, or how the subject is organized, BUT as a syndicator/fund manager I will tell you the greatest risk faced by the limited partner/passive investor is NOT interest rate risk; NOT demographics risk; and not TECHNOLOGY risk; it is the risks that occur IF the sponsor’s interests are NOT aligned with the investors interests. (Heads the sponsor wins; tails the investor loses). 

[Brian Burke]

Quote from @Todd Goedeke:

@Brian Burke please post again the questions every investor should get answers for ( red flags) from the operating agreement and historical experience of general partners.

An investor should not have to read a book to see a checklist of “ dealbreakers” before investing.

You're right, Todd, they shouldn't.  Fortunately they don't have to--for people who purchase the book directly from BP here, they get free bonus content and one component of that is a list of 72 questions to ask a sponsor.

Someone will read this and think I'm just trying to sell books--not the case.  I wrote the book (and the list of questions) but BiggerPockets owns the publishing and distribution rights so I can't just post the list here.  I don't make a living off of book royalties, but I have built my reputation off of honoring contracts.  :)

[Brian Burke]

Quote from @Eric Bilderback:

@Brian Burke

In your opinion do you believe the sponsor should return fees etc?

Short answer:  No

Longer Answer:

In the vast majority of cases GPs are under no contractual obligation to return fees in any case.  And contractual issues aside--from a practical standpoint, GPs would have long-spent that money (if nothing else for the taxes on it) and might not have the cash available to return fees, especially if they are not currently transacting.

The dirty dark little secret in the syndication business is it's really a fee-based model.  If the deal is structured right, sponsors likely get little to nothing until the property has sold, aside from some up front fees and some ongoing fees.  Without opening up a whole other can of worms, it's true that some sponsors charge exorbitant fees and don't bring anything close to that value to the table, but that's another discussion.

None of this is to say that sponsors couldn't or shouldn't feel some pain when things go astray.  I know I have--I've waived off various fees and even written checks to cover losses several times over the years when things didn't go according to plan.  But when factors outside of the control of the sponsor derail a deal, that doesn't mean that the services the sponsor did perform and are performing are worthless (if they really are a good operator, etc).  

On the contrary, times of challenge are really when a good sponsor "earns their money."  LPs want and need their GP to stay interested in the deal and not go bankrupt.  If you think a bad market sets a deal off course, just imagine how much chaos stems from a failed GP.  That can be a complete disaster, with no one really in control.  If everyone's interests are aligned, the sponsors and investors are in it together and should work from the same side of the table to solve the issue.  Assuming the sponsor is honest and competent, becoming adversarial really benefits no one.

[Carlos Ptriawan]

Quote from @Shirley Poon:

I got the same email for the capital call several days ago as well. The email commented that the asset management fee is deferred in which I think should be not be paid out until the investors are made whole. Furthermore, there is a comment saying 24 mos return on the capital call, so that is something we'll need to get more details on. 

I've spoken to the rep in Ashcroft and looks like they've seem to exhausted a lot of options before approaching us. I think they are trying to pitch it as an opportunity for us to increase our share to when the sale happens foregoing the waterfall. I think there is more to dive into next week in the meeting and having seen the loans come up due and withholding our payouts to pay for the new floating rates. For me, I need to wait for the Vista to payout for it to then be placed for capital call for this fund. As far as they communicated, no other funds or syndications have asked for the capital call, only Fund I. 

I'm sure if this is on Bigger Pockets there is a lot of their reputation on the line to make investors whole otherwise, no additional investors will invest further due to their capital call and even loss of capital. The email is very well thought out and a lot of solutions placed on the table prior to approaching us. However, I've seen other syndicates use hard money loans to cover and also sponsors that have created a new side car to add capital until relief can be alleviated so that investors are whole. I question if this is really their final approach and wonder changing the deal structure in times of the most dire situation during high interest era is the right approach. 

The tight timeline of obtaining a % during 1 mos for those that invested more may not be feasible for those that may just invest $25k. Accounting for total amt doesn't seem to be taken into consideration. 

 Create an excel sheet like this :
Q4 2023


.........................Occupancy : DSCR TYpe of Debt LTV Maturity
-----------------------------------------------------------------------------------------
Apt A
Apt B
Apt C

Q1 2024
Occupancy : DSCR TYpe of Debt LTV Maturity
-----------------------------------------------------------------------------------------
Apt A
Apt B
Apt C 

I want to see the trend, if their pitch deck showing 50% gap (eg: they promise Y2 DSCR to be 1.4 but realistically it's 0.9), it's game over.

Be like detective, call the PM, pretend to try to rent a unit, check their google review, check how many eviction, cost of eviction, what is the occupancy, check how many concession given. What's costar says ? do you have intel from these website ?

These rentonomics nothing is magical

investor keep talking about investment and pitch without doing CT scan to each unit. 

I know few funds that we able to get the above data to give "proper analysis" though.

[Carlos Ptriawan]

most of the fund that could operate these days are those who have fixed debt and slightly longer term, but if 80% of the fund consist of MF with floating debt it's better to say goodbye to your money. You also want the fund that most of their maturity is after 2026.

( in another different subject, i found thru some research that loancore approves loan with 0.9 DSCR cap 3 class B in 2021, i seriously don't think it was that crazy, that's equivalent to suicidal lending and I've seen some is running with 0.6 )

[Ronald Rohde]

Please read your OA, there are different scenarios for different levels of investment, even timing of investment (early vs later).

You need to understand what happens if you don't fund or what your options are to organize with other LPs

[Brian Bernstein]

Aside from this LP position obviously, I have other Ashcroft LP positions available at a  discount. If anyone is interested, feel free to message me for more details.

[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. 

[Steve Vaughan]

Quote from @Brian Bernstein:

Aside from this LP position obviously, I have other Ashcroft LP positions available at a  discount. If anyone is interested, feel free to message me for more details.

Tell us more.  Are your interests assignable or how does a transfer work in general please? 

[Jay Hinrichs]

Quote from @Steve Vaughan:

Quote from @Brian Bernstein:

Aside from this LP position obviously, I have other Ashcroft LP positions available at a  discount. If anyone is interested, feel free to message me for more details.

Tell us more.  Are your interests assignable or how does a transfer work in general please? 

 Steve Generally all the ones I have seen these shares are either not assignable or highly illiquid. 

[Brian Bernstein]

@Steve Vaughan. The positions are notably illiquid, as is common with LP investments, but they can be assigned by coordinating a transfer with the company.

[Stef Irish]

Hi. About 5 months ago Ashcraft provided a warning about the trouble at that point the common equity was wiped out given that they were propping the properties up with their own cash. LPs need to ask if they see a path out by putting in new money or if they are throwing good money after bad. Here is a forum that has been tracking this firm with more analysis and called the capital call 5 months ago and says with the layered in preferred equity the original common equity is getting even more pushed down:

https://www.wallstreetoasis.com/forum/real-estate/another-one-bites-the-dustashcroft-capital

[Carlos Ptriawan]

Quote from @Stef Irish:

Hi. About 5 months ago Ashcraft provided a warning about the trouble at that point the common equity was wiped out given that they were propping the properties up with their own cash. LPs need to ask if they see a path out by putting in new money or if they are throwing good money after bad. Here is a forum that has been tracking this firm with more analysis and called the capital call 5 months ago and says with the layered in preferred equity the original common equity is getting even more pushed down:

https://www.wallstreetoasis.com/forum/real-estate/another-one-bites-the-dustashcroft-capital

 so these guys are talking so much in macro economics , fed and inflation rate chart etc but very very little showing the actual reality condition of their properties, the actual t12,dscr,noi,vacancy and so on... 

[Paul Azad]

Quote from @Stef Irish:

Hi. About 5 months ago Ashcraft provided a warning about the trouble at that point the common equity was wiped out given that they were propping the properties up with their own cash. LPs need to ask if they see a path out by putting in new money or if they are throwing good money after bad. Here is a forum that has been tracking this firm with more analysis and called the capital call 5 months ago and says with the layered in preferred equity the original common equity is getting even more pushed down:

https://www.wallstreetoasis.com/forum/real-estate/another-one-bites-the-dustashcroft-capital

Thankyou for posting this link Stef, interesting discussion there and very interesting Video link to Ashcroft's 15 min webinar about 6 months ago about their predicament, WOW, they had to spend 18.6 million for 12 months of Rate Cap insurance up from 513K they spent for same insurance they got 2 years earlier, on their 9 properties, which was for 24 months not 12 months, so a 36 fold increase. I had no idea it was that bad. Mr. Roessler spends the bulk of the call hoping and praying for the FED to cut interest rates due to hopefully an impending recession. This literally appears to be their plan at that point 6 months ago. No wonder they gave 12.75% to the 48 mil pref equity bailout group. They do mention the supply strain of 33,000 new doors in Atlanta alone in '23, they don't mention the 672K new doors in '24 across country, but heavily clustered in Hot markets like where they are located. Good luck to the investors, but man o man, low likelihood of any LP seeing their money again. These syndicators took huge risks in acquiring these MF properties with the variable bridge loans with rate cap insurance in order to buy at lower cap rates than any reasonable investor with fixed agency debt could afford and apparently at LTVs approaching 80% too, in order to drive higher IRR 'projected returns" for LP investors. The people in the WSO are pretty tough on the LPs and perhaps that is deserved but I think we need to help LPs by getting GVT to increase accredited investor standards, both $ net worth, and perhaps requiring people pass a basic financial knowledge proficiency exam, just WOW, i'm sure Ashcroft isn't the only one.....

[Brian Burke]

Quote from @Paul Azad:

WOW, they had to spend 18.6 million for 12 months of Rate Cap insurance up from 513K they spent for same insurance they got 2 years earlier, 

These syndicators took huge risks in acquiring these MF properties with the variable bridge loans with rate cap insurance in order to buy at lower cap rates than any reasonable investor with fixed agency debt could afford and apparently at LTVs approaching 80% too, in order to drive higher IRR 'projected returns" for LP investors.

Bridge loans are a disaster when the markets shift.  In 2020 and 2021 I was getting outbid by millions of dollars on nearly every property by syndicators using bridge debt. I graciously bowed out. I feel for their investors…

But fixed debt doesn’t solve every problem.  I had a broker bring me an off-market deal in 2020 that required a loan assumption because the fixed loan’s yield maintenance (prepayment penalty) was around $20 million.  The loan had like 10 years left on it. I didn’t want to be locked in like that so I passed. The deal sold to someone else. A couple years later that buyer was trying to sell but that prepay was an obstacle.  Another year later, it hadn’t sold and now they are riding the value down.  They lost tens of millions in value and counting.

My point here is there is no free lunch in CRE finance. LPs in fixed rate deals selling in 2018 to 2022 took major hits thanks to yield maintenance but no one made a big deal of it because that money came out of sales proceeds and even after that everyone made good money (but could have made more, so is not making the same as losing?). Contrast that to LPs dipping into their pockets further to buy a replacement cap, so it's understandable why that gets people's attention.

Don’t get me wrong, short-term maturity risk 10+ years into a bull run is ill-advised to say the least.  But in every deal there are decisions that need to be made on which risk to choose when selecting financing.  Experienced groups that have survived cycles are more likely to make the right call at the right time, but even they don’t always get it right. Neither do the LPs that invest in these deals, even the ones that really know what they’re doing.  

[Carlos Ptriawan]

Quote from @Brian Burke:

Quote from @Paul Azad:

WOW, they had to spend 18.6 million for 12 months of Rate Cap insurance up from 513K they spent for same insurance they got 2 years earlier, 

These syndicators took huge risks in acquiring these MF properties with the variable bridge loans with rate cap insurance in order to buy at lower cap rates than any reasonable investor with fixed agency debt could afford and apparently at LTVs approaching 80% too, in order to drive higher IRR 'projected returns" for LP investors.

Bridge loans are a disaster when the markets shift.  In 2020 and 2021 I was getting outbid by millions of dollars on nearly every property by syndicators using bridge debt. I graciously bowed out. I feel for their investors…

this guy is my friend.

Let’s start with the ****.

Multifamily syndicators have been the subject of my ire lately. I’d be worried about going after them again but most of those idiots can’t read, so this lesson will miss them as well.

A common tool the syndicator crowd used to finance their acquisitions of apartments is bridge debt. Think of this loan as a "bridge" that gets the property from where it is at acquisition to where it will be once you've changed the name, painted the cabinets gray, installed some subway tile, and renamed it The Judson at WaterChase or what the **** ever. The bridge debt is designed to carry you while you're improving the property. The syndicator crowd would famously overpay for these types of deals (3 caps and ****), which in turn meant these deals typically didn't have enough net income to get attractive permanent debt (Fannie/Freddie/HUD, etc.) at acquisition. So, you get a bridge and plan to replace it with permanent debt in the near future. In theory, anyway. It works until it doesn't.



These deals were super popular over the past few years. Stuff built in the 1970s and 1980s was bought by the syndicator crowd with a business plan of renovating and increasing rents. For the loan, they would turn to bridge debt from various non-bank originators. Debt funds like Arbor, Benefit Street Partners, MF1, Loan Core, Ready Capital, and the list goes on. These shops are all over the place. If you love “doing deals and saying “bro” and you’re not crazy about actual math, then might I suggest a career in the debt fund world. These debt funds would create a higher leverage and shorter-term loan for the syndicators to finance the acquisition. Debt fund shows up with the loan, syndicator with a pocket full of “dentist money” and the deal would close.

End of story, right? Well, to tie back to the well-written open, this is about the point the syndicator would hit “flush” and walk out of the room with dreams of bilking the next group of retail LPs.





But what the **** actually happens to that mortgage? Where does it go?



Flush.

Debt funds raise money from investors to make loans. They’re like multifamily GPs in many ways, except these idiots have mastered “equity-like risk with debt-like returns.” Truly incredible stuff. Like if the prize for learning to juggle chainsaws was a potato. Whatever, not my business.

Imagine a debt fund raises 100M in equity to make loans. They find four loans for 25M each and go home happy, right? Except they don’t. What if you could sell those loans in the public market and keep about 10% on your books? If you’re reading this aloud to an illiterate syndicator friend, please take a moment to explain that 10% is less than 100% in a way they’ll understand. Its important for the rest of the lesson.

So, if you can dump 90% of your loans on the public market, a debt fund with 100M in initial equity can theoretically do 1B in loans. This makes sense. It’s leverage for a debt funds balance sheet. Or “debt for debt” if you’re into being very meta about ****.

This is where the CLO joins our story.

Think of a Collateralized Loan Obligation as a basket, or pool, of different loans from a variety of originators. These pools typically contain 100 to 300 individual loans of varying risk levels.

.....


So, what happens if an underlying loan defaults? Is the CLO ****ed?

Maybe a little. If the cash flow going into the CLO drops from $100 a month to $90 a month, it’s really the junior/equity tranches who get harmed first. The debt funds, originators, and more risk tolerant investors. If I’ve said it once, I’ve said it a thousand times, but no one gives a **** about the debt funds. Good luck out there boys.

As part of the CLO structure, the originator of the loan (debt fund) has the right, but not the obligation, to buy the non-performing loan out of the CLO at their loan balance, often called “par.” The “not the obligation” part is potentially fraught with peril, but we’ll deal with that in a bit. They buy the non-performing loan out of the CLO and replace it with a performing loan to protect the integrity of the CLO and their reputation. They buy the loan out of the CLO because they have more flexibility on their balance sheet vs in the pool.

So, let’s revisit The Judson at WaterChase. A wonderful 1970s built apartment complex outside Chattanooga, bought at a 3 cap by a syndicator. You’re gonna **** when I tell you this, but that loan is having problems and heading for default. Not wanting to damage the CLO and their reputation, MF1 (in this made up scenario) decides to buy the loan out of the pool at par and replace it with a different performing loan. But they don’t actually want this dogshit on their balance sheet either, so they put together a predatory loan package and go fishing for an idiot. The dumbest pitch I’ve heard in a while came from BSP and it went something like this.

“Look Marlo, we’ve got a non-performing asset on our books that we’re going to foreclose on. And, because we’re good partners, we will sell it to you at par. We’ll give you 90% leverage at SOFR + 150 for 18 months, provided you put some money into improvements. And you’re a smart guy, you can turn this thing around in 18 months!”

Few problems with this stupid ****ing pitch.
1. They are offering me 90% leverage on par, which means I need to effectively pay down their loan with my 10% equity. Helps them de-risk a bit.
2. They are insisting I invest capital into the property, to improve their asset.
3. High-leverage debt at some temporarily reduced rate is a trap. There’s no way the property can service the debt and they ****ing know it. They just want to jam another GP into the hot seat, call the loan “performing” and put it back into the pool.
4. When they inevitably foreclose on me and I’ve lost all my equity, they will try to pull the same **** with another GP.
5. Very few people have the ability to fully turn around a distressed asset in 18 months. It might be you, but it’s probably not you, so why take that risk?
6. Don’t even take on 90% leverage. If you’re too dumb to understand this, why the **** are you reading a write up on CLOs?
7. No ****ing **** you want me to buy it at par. You mean, you don’t want to lose money on this loan that is secured by a rough apartment complex? Jesus, what a deal for me. I’d love to bail you out. Idiots.

https://twitter.com/mu2myoc/status/1781735993839644964

[Carlos Ptriawan]

the very basic of lender bridge-loan product is basically these products are originated by more-smarter lender to bankrupt the dumbest LP first and then the dumber GP too.

these producs are almost similar to subprime.

so my friend, the calamity of 2024 CRE mishap is not accidental , but it's almost designed to bankrupt you. And we thought accredited investor understand more of this since 2008 GFC but I guess not.

in my own word I called those practice as suicidal lending.

[Clark Stevenson]

Unfortunately, I'm an investor in this fund. To answer a few of the questions I have read here, DSCR is horrible on the Atlanta assets and naked DSCR is abysmal. As their letter states clearly, if sold today, Class B is completely wiped out and Class A would take roughly a 30% hit! One of the selling features of the fund ended up being one of the worst features. They have several performing assets in the fund but a few stinkers are pulling the entire fund down. Under current conditions now is the wrong time to have to sell a MF asset so they are just trying to buy time.

I think they are very optimistic with their recovery plan and as a colleague of mine likes to say, they are passing around the "hopium pipe" with the wish that the market recovers in the next 2 years so everyone can escape with their hide somewhat intact. Each investor is going to have to decide whether they want to meet the 19.7% call. 

I'm going to listen to tomorrow's (4/24) Q&A call and make my decision after that.

What I like about the stated plan: 1) they have clearly thought out next steps 2) they are making some concessions (although some are giveaways of things already lost- there will be no waterfall) 3) if everything works perfectly, they have shown they are pretty good at execution

What I don't like about the stated plan: 1) Atlanta has a ton of new units coming online in the next 2 years- MM says that Buckhead has a 10 year absorption supply in the pipeline 2) the sponsors have already made 8 figures in fees on this deal so minor concessions feel a bit empty 3) it requires everything to work perfectly in the hopes of getting principal back.

[Jeff O.]

Quote from @Clark Stevenson:

Unfortunately, I'm an investor in this fund. To answer a few of the questions I have read here, DSCR is horrible on the Atlanta assets and naked DSCR is abysmal. As their letter states clearly, if sold today, Class B is completely wiped out and Class A would take roughly a 30% hit! One of the selling features of the fund ended up being one of the worst features. They have several performing assets in the fund but a few stinkers are pulling the entire fund down. Under current conditions now is the wrong time to have to sell a MF asset so they are just trying to buy time.

I think they are very optimistic with their recovery plan and as a colleague of mine likes to say, they are passing around the "hopium pipe" with the wish that the market recovers in the next 2 years so everyone can escape with their hide somewhat intact. Each investor is going to have to decide whether they want to meet the 19.7% call. 

I'm going to listen to tomorrow's (4/24) Q&A call and make my decision after that.

What I like about the stated plan: 1) they have clearly thought out next steps 2) they are making some concessions (although some are giveaways of things already lost- there will be no waterfall) 3) if everything works perfectly, they have shown they are pretty good at execution

What I don't like about the stated plan: 1) Atlanta has a ton of new units coming online in the next 2 years- MM says that Buckhead has a 10 year absorption supply in the pipeline 2) the sponsors have already made 8 figures in fees on this deal so minor concessions feel a bit empty 3) it requires everything to work perfectly in the hopes of getting principal back.

@Clark Stevenson  Same here.  Will be listening as well.  I have investments in both AVAF1 and AVAF2.  Sent the list of questions from @Brian Burke to Ashcroft today.  Hoping to get some clarity tomorrow.

[Clark Stevenson]

Quote from @Paul Azad:

Quote from @Stef Irish:

Hi. About 5 months ago Ashcraft provided a warning about the trouble at that point the common equity was wiped out given that they were propping the properties up with their own cash. LPs need to ask if they see a path out by putting in new money or if they are throwing good money after bad. Here is a forum that has been tracking this firm with more analysis and called the capital call 5 months ago and says with the layered in preferred equity the original common equity is getting even more pushed down:

https://www.wallstreetoasis.com/forum/real-estate/another-one-bites-the-dustashcroft-capital

Thankyou for posting this link Stef, interesting discussion there and very interesting Video link to Ashcroft's 15 min webinar about 6 months ago about their predicament, WOW, they had to spend 18.6 million for 12 months of Rate Cap insurance up from 513K they spent for same insurance they got 2 years earlier, on their 9 properties, which was for 24 months not 12 months, so a 36 fold increase. I had no idea it was that bad. Mr. Roessler spends the bulk of the call hoping and praying for the FED to cut interest rates due to hopefully an impending recession. This literally appears to be their plan at that point 6 months ago. No wonder they gave 12.75% to the 48 mil pref equity bailout group. They do mention the supply strain of 33,000 new doors in Atlanta alone in '23, they don't mention the 672K new doors in '24 across country, but heavily clustered in Hot markets like where they are located. Good luck to the investors, but man o man, low likelihood of any LP seeing their money again. These syndicators took huge risks in acquiring these MF properties with the variable bridge loans with rate cap insurance in order to buy at lower cap rates than any reasonable investor with fixed agency debt could afford and apparently at LTVs approaching 80% too, in order to drive higher IRR 'projected returns" for LP investors. The people in the WSO are pretty tough on the LPs and perhaps that is deserved but I think we need to help LPs by getting GVT to increase accredited investor standards, both $ net worth, and perhaps requiring people pass a basic financial knowledge proficiency exam, just WOW, i'm sure Ashcroft isn't the only one.....

 I was at the Marcus & Millichap's Southeast forum a few weeks ago and Buckhead and Downtown have a 10 year absorption supply in the pipeline to be delivered in the next 2 years. Atlanta may have a bright spot or two in micro markets but on the whole, nothing is going to improve from a valuation perspective. They revealed that 50% of the supply addition nationwide is going into only 10 markets and Atlanta is one of them. Paul, you are correct, it is going to get ugly for a number of sponsors, not just Ashcroft.

[Clark Stevenson]

Quote from @Jay Hinrichs:

Quote from @Shirley Poon:

I got the same email for the capital call several days ago as well. The email commented that the asset management fee is deferred in which I think should be not be paid out until the investors are made whole. Furthermore, there is a comment saying 24 mos return on the capital call, so that is something we'll need to get more details on. 

I've spoken to the rep in Ashcroft and looks like they've seem to exhausted a lot of options before approaching us. I think they are trying to pitch it as an opportunity for us to increase our share to when the sale happens foregoing the waterfall. I think there is more to dive into next week in the meeting and having seen the loans come up due and withholding our payouts to pay for the new floating rates. For me, I need to wait for the Vista to payout for it to then be placed for capital call for this fund. As far as they communicated, no other funds or syndications have asked for the capital call, only Fund I. 

I'm sure if this is on Bigger Pockets there is a lot of their reputation on the line to make investors whole otherwise, no additional investors will invest further due to their capital call and even loss of capital. The email is very well thought out and a lot of solutions placed on the table prior to approaching us. However, I've seen other syndicates use hard money loans to cover and also sponsors that have created a new side car to add capital until relief can be alleviated so that investors are whole. I question if this is really their final approach and wonder changing the deal structure in times of the most dire situation during high interest era is the right approach. 

The tight timeline of obtaining a % during 1 mos for those that invested more may not be feasible for those that may just invest $25k. Accounting for total amt doesn't seem to be taken into consideration. 

To play devils advocate. why should the GP/sponsor solely take the hit on something that seems to be out of most everyone's control or anticipated.. Kind of like the GFC when trillions of equity was wiped out and thousands of RE companies and investors went under. ??

If you strangle the GP ability to survive how does that help the project?

I get it if the companies kind of abandon you and move on to other deals like we are seeing with some of the other Gps on this site.. These guys always struck me as pretty conservative and never posting pics of their lambo or jet or bragging about 1000s of units etc etc.. They seemed pretty humble at least to me.

 @Jay Hinrichs you are absolutely right! GP shouldn't take the whole hit but we also need to realize that they already made 8 figures on the purchase of the assets and they also have a disposal fee in the subscription agreement so the GP's are not going to be losers in this deal regardless of their personal LP investments. 

Ashcroft is waiving the asset management fee so that's a good concession. I've been in 4 syndications and 2 performed amazingly well but I'm thinking my investment in this fund is a total loss. Fortunately, I have not rolled returns into new deals so I'm at a break even right now (assuming a total loss) and my 4th was very selective so unless something goes haywire, I should be in a good position on the exit.

People have to realize that all investments of this kind are highly speculative investments and if you don't believe where it tells you that your "entire investment is at risk," you shouldn't be investing. I read that when I signed the subscription agreement and I believed them. You win some and lose some and you just hope your winners compensate for the losers. I can tell you that I will never do another fund. They have several solid communities in this fund but the losers are dragging the whole fund down.