All Forum Posts by: Bobby Larsen

 MF got slammed in 08 to 2011, worse than today.

That's not a very good way to look at it. If the CC is successful, the final outcome for Class A is entirely unknown with the worse case scenario being 0% of your original investment returned. The issue for Class A in the event that the CC is successful is that there will be preferred equity from a third party and preferred equity from the capital raise that will all sit above Class A interest and will receive their investment back and 12.75% interest before Class A receives a distribution or initial capital back. Rough math, the properties will need to appreciate 7-9% per year for Class A to do better than the 70% if sold today. There is a very strong probability that does not happen.

@Kelsey Bowman Your question is actually very complicated. Normally, when the term dilution is used in a capital call scenario, it is your equity ownership that is being diluted. For example, you will go from 10% ownership to 8.35% ownership of the property because your $100,000 investment was initially 10% of the $1,000,000 equity required but with the capital call, there is now $1,197,604 of equity in the investment. In that basic example, all investors are the same share class and the capital call is pari passu, meaning no senior positioning of the additional capital.

From my understanding of the Ashcroft capital call, additional capital will be in a senior position to both of the original share classes and the capital call equity will receive a fixed 10% and 7% coupon that will be paid before the original equity is returned. Because of the structuring of fixed coupons and senior positioning, the original Class B equity returns will not necessary be reduced by just the 16.5% dilution. Time also plays a larger factor.

@Scott Trench

I think that would be valuable to LPs. A member also contacted me and asked about current offerings as well. Similar to a private investment group, a crowdsourced peer review forum isn’t a bad idea either.

I didn’t mean for this to be a Yardi promotion. Costar is another product that is useful as well. I was only trying to explain that a lot of us GPs have resources, along with obviously market expertise, to be able to provide quick feedback on specific investments.

Quote from @Jay Hinrichs:

Quote from @Bobby Larsen:

@Jay Hinrichs

Ok so how does the average LP use or get that information I don't think they are going to spend 10 to 20k for it?  . I get it how if your the GP that would be a reasonable business expense.   Again just curious.  I suspect the bigger commercial brokers probably subscribe so they can share with their buyers/sellers ??

I doubt any LPs would subscribe to the service. I initial brought it up as an example of the type of current information I use to assess current market values which I would gladly provide feedback on properties. Very limited information is being communicated by sponsors, particularly those that used high leverage variable rate loans to acquire in 2021-2022, so LPs are commonly feeling left in the dark. Since there are a handful of good sponsors on here, I thought there could be a thread used as a resource for an LP to say “Hey, I invested in XYZ in 2021 and the sponsor is telling me everything is fine but I’m worried. What do you think the property/my investment is valued at today?”.

@Jay Hinrichs

Yes and pretty expensive, $10,000 to $20,000 depending on market coverage. Similar to Costar but more institutional. Yardi has better expense information while costar has better coverage of sub-50 unit properties and in my opinion, better qualitative reports.

@Jay Hinrichs

Yes. Yardi tracks vacancy and asking rents at each property over 50 units on a monthly, quarterly and annual basis. They also receive information on operational expenses through one of their loan servicer partners but I don’t find that to be entirely accurate. However, with tracking of rents and occupancy, I can at least ballpark pricing of a property in markets that I know.

It's a difficult time to be an LP, particularly those that invested between 2021 and 2022. You're likely reading the headlines about commercial real estate distress and wondering how your investments are doing. Kudos to the sponsors that are being transparent but many sponsors are not, and continue to provide the "we are not distressed" messaging up until the day that they send a capital call request to investors. Unless it's a catastrophic capex related issue, the need for a capital call does not come up overnight for sponsors and neither should it for LPs. 

To help LPs wondering what the market values of their investments are today, I thought it would be beneficial to have a thread where LPs can ask for valuations on specific properties and the sponsors in this forum can opine. By no means would these be exact estimates and they should not be solely relied on but with high level information, I think most sponsors would agree that they could provide feedback fairly accurate assessments within +/- 5%. We subscribe to a market research platform called Yardi which only provides information on multifamily properties 50 units and larger so if you are invested in a property that is 50 units or more, I would happy to provide quick "back of the napkin" valuation and methodology. You can DM me as well but there are many experienced sponsors on this forum that I think collectively can provide valuable feedback across the whole country.

Quote from @V.G Jason:

Quote from @Bobby Larsen:

All good points but I don't think it's realistic to assume one can properly time exiting and entering a market. If you're invested with long term fixed rates, you'd be paying HUGE pre-payment penalties. I thought 2019 was the peak but it was delayed and the market saw a huge rally because of COVID stimulus. What can be done is switching to more risk averse investments (property quality, location and financial structure) during the later stages of a cycle.  Variable rate loans and even high leverage aren't bad, they're just bad when applied to the wrong investments and/or at the wrong time of a cycle. The issue with most syndicators in 2021/2022 is that they used high leverage, floating rate loans on EVERY deal thinking the market was going to continue to take off.

As for exiting in 2021, I would just counter that there are plenty of investments done in 2021 with 10-year fixed rate loans at 3% (and less) that are still distributing strong cashflow and will be completely fine or HUD loans that now have sub-3% for the next 35 years. Investors should understand their own risk tolerance and should align with a sponsor's strategy. Stop chasing the highest stated returns because in order to achieve a 15-20% return, absent cap rate compression, it requires what's referred to as financial engineering (leverage mostly) and significant risk comes along with it.

@Carlos Ptriawan I think you're 100% right regarding 7 to 10 year debt. You avoid market volatility and while short term gains often don't look as impressive, long term gains over a 10 to 20 year period often surpass short term investment strategies because they don't lose capital. I often speak to two types of investor: Investor #1 say "Here's my money, when do I get it back?" and Investor #2 says "Here's my money, please don't sent it back quickly. Keep it compounding." Investor #1 is typically those with a moderate net worth while investor #2 is typically very very wealthy.

 Investor #1 is the typical investor that just got into money. #2 investor I've never heard of.

The very wealthy roll their money, but absolutely will come in and capitalize at times strategically. They never tell you to keep it compounding, they just don't outright say that or instruct that. They do it without saying, because when you least expect it they will be out there realizing their gains. We could be talking about different classes of wealth though.

Very, very wealthy to me is north of half bil. Investor one is someone with something small like 10 or 15 M that just got into inheritance or luck. Or even more small fry like BP real estate investor that focus on $100/mo cash flow in Akron like that one lady.

I frequently have these conversation, more often than Option 1 investors which I agree, tends to be new money or small investors. Probably why 90%+ of our investors roll over investments via our 1031 exchanges each time. I’d categorize ultra wealthy as those with $50-$100 million+ though so that’s probably the difference. At $500m+, you're probably not an LP with 50 other investors. You’re a family office and/or employ advisers trying to earn their salary and/or investing as 100% owner of a TIC (or JV) and can maintain continuous pre-tax compounding even after exiting a position. Most of our investors aren’t trying to time a market and I personally think that’s a fools game. Even if you timed it perfectly, which no one can, market timing does not exceed the benefits of pre-tax compounding. Rather than entering and exiting based on market timing, I prefer to change an investment focus/strategy depending where I think the investment cycle is.

I agree with your approach. Cashflow provides more certain return AS WELL AS downside protection. Appreciation will happen over the medium to long term and will boost returns but cashflow is the lynchpin of a good investment.

All good points but I don't think it's realistic to assume one can properly time exiting and entering a market. If you're invested with long term fixed rates, you'd be paying HUGE pre-payment penalties. I thought 2019 was the peak but it was delayed and the market saw a huge rally because of COVID stimulus. What can be done is switching to more risk averse investments (property quality, location and financial structure) during the later stages of a cycle.  Variable rate loans and even high leverage aren't bad, they're just bad when applied to the wrong investments and/or at the wrong time of a cycle. The issue with most syndicators in 2021/2022 is that they used high leverage, floating rate loans on EVERY deal thinking the market was going to continue to take off.

As for exiting in 2021, I would just counter that there are plenty of investments done in 2021 with 10-year fixed rate loans at 3% (and less) that are still distributing strong cashflow and will be completely fine or HUD loans that now have sub-3% for the next 35 years. Investors should understand their own risk tolerance and should align with a sponsor's strategy. Stop chasing the highest stated returns because in order to achieve a 15-20% return, absent cap rate compression, it requires what's referred to as financial engineering (leverage mostly) and significant risk comes along with it.

@Carlos Ptriawan I think you're 100% right regarding 7 to 10 year debt. You avoid market volatility and while short term gains often don't look as impressive, long term gains over a 10 to 20 year period often surpass short term investment strategies because they don't lose capital. I often speak to two types of investor: Investor #1 say "Here's my money, when do I get it back?" and Investor #2 says "Here's my money, please don't sent it back quickly. Keep it compounding." Investor #1 is typically those with a moderate net worth while investor #2 is typically very very wealthy.