My Background Continued... 4

So, It turns out that the partnership that was formed to own and manage a 98 unit investment in Kansas City no longer owned the property.  

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At this point in time, I had to put on my detective cap and do some work.  Amazingly, the general partner seemed confused himself about what had happened.   I had to book a meeting with the accountant filing the returns for the partnership and tell him that what had happened.   The accountant would not do any more work for the partnership as the GP had past due accounts with the accountant. I had to take over and get the accountant to go back and re-file for 2018 and send the corrected returns to all of the investors.  We all individually had to file amendments to our 2018 personal taxes as well.

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Because I do not know what exactly happened, I will only comment on what I believe happened from the agreement I read about the document signed by the GP and the Kansas developer.  

The GP had agreed to turn over the property in exchange for the developer making the mortgage payments , improving the rents and repairing/improving the property to put it into a state ready to be sold.  The agreement said that the property was in position X and needed improvements to be in a position to be sold.  After the improvements in the physical property and rents, the developer and the GP(representing the partnership) would sell the property for Y and split the profits. 

From running my own calculations, and knowing how all properties are presented in sales, the actual position of the property was say X-3 and the sale price Y was unachievable.   If you are good with NOI and Cap rates, you can run quick calculations for some high level overviews.  From the numbers presented, the property would have to be more than 100% occupied at the current rent rates or the current tenants would have to rents significantly increased to actually justify a sale at Y. 

So several months after this deal is in place (unknown to the Vancouver Investors) the KC developer realizes that the position of the property is untenable and sells/moves the property to a non-arms length company.  (Another real estate company that his family owns).  It essentially pays the outstanding mortgage amount to make the transfer and wipes out all of the equity of the Vancouver investors. 

From what I understand, the GP and the KC developer had many other properties in different states of "fix and flip" Several of which where completed and listed for sale.   I do not know anything of these other dealings except for what I was shown and that a closing on one of these other properties was always pending. 

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The next step was to actually think about what to do going forward.  In all of our meetings with the GP, he would only use the phrase that he would make good on our investment, but never gave any specifics and never had any plan of how to make it happen.   All of the Vancouver investors had know the GP as a successful RE investor and I knew that he had many properties in Kansas as well as Detroit.   (I did not know until later that he also owned Commercial property in Vancouver.)

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I know most investors would shudder at the thought, but I contemplated asking him to turn over a couple single family homes in Detroit to square my dealings with him personally.   I had purchased a number of SFH from the GP many years prior and after many many struggles(lots of stories there), had finally gotten to where the properties were now low maintenance and producing a very strong cash flow.   I was certain that If he gave me more Detroit properties in exchange for settling the KC project, I could make them perform as well. 

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In a meeting with the other Vancouver investors (not including the GP) we discussed how to resolve our issue.   One of the other investors did some research on the GP and found that he owned several warehouses in Vancouver.  We also discussed how much we would accept in settlement for his "Trading off the KC property." Over the next few months, I developed an Idea for a possible resolution. 

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I knew that the GP was strapped for cash and that we had no chance for actually being paid back in cash.   So I formulated a very long plan and started chunking it down. Chapter 8, The Success Principles by Jack Canfield. 

To make this win-win I had to put myself in the GP's shoes and think of what he wanted most.  I knew that he had many properties for sale but for some reason was not able to close on one or more and that he had very high carrying costs on many of his deals.   We did a search on his Vancouver warehouse and found that he had a normal first mortgage and a second high rate, interest only mortgage on the property that made the warehouse negative cash flow. The warehouse was recently on sale.  I was told by the GP that there was interest in the property but the buyers all wanted to be owner/occupiers and the GP had recently signed a new lease with a tenant.   The GP had also assigned the rents to one of the mortgage companies.

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The plan in short was to have the Vancouver investors purchase this warehouse at the full appraised value, and utilize a credit for settling the outstanding KC deal.

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From there to here is about another 10 steps and throw in Covid-19 and we get down to today, approximately 15 months after we found out we no longer owned the KC property TODAY December 3, 2020 is closing day on the Vancouver Warehouse.   I will let you know how that goes.