All Forum Posts by: Brian Burke

@Pedro NA you are starting from a better position from where I started...I had no money and no business experience when I made my first real estate investment.  Having said that, I wasn't raising money from others, either.  It took me almost a decade of real estate investing before I was ready for that step.  

I know or know of people in your same position (executive level tech experience + capital) who have done well in this business, and also ones that have imploded in a spectacular ball of flames.  Your experience, while definitely helpful, isn't a direct correlation to the real estate space--a space in which your greatest contributions will not only be your business skill, but your relationships in the industry (brokers, lenders, managers, vendors, the list goes on).  These things take time to develop.

Chances are you'll do well, but if I'm a passive investor your deal is a hard pass until you've built a real estate track record.  This is one of the reasons I constantly preach to start small--it requires less capital and you can find investors that already trust you for other reasons (friends & family, etc).  Build off that, and eventually outside investors will take notice.

Over the last several years commercial real estate, especially multifamily, has had a bull run.  Anybody could be successful and investors poured money onto these new operators to fuel their growth.  Now many of those deals are, or soon will be, running into trouble.  When investors lose money, or are at risk of losing money, they pay attention.  One thing they'll be paying closer attention to is the experience of the operator and how that operator has shown to perform.  That makes your battle somewhat more uphill--which circles right back to starting small with your own capital first, then friends and family, then, after developing a solid track record, building from there.  If you are going to do this for 20 years, spending 5 of it pouring a foundation before going vertical is time well spent.

Quote from @Dan H.:

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.  

Too bad BP doesn't let you vote for a post twice.  Very well said, Dan.

Of course just like any industry there are less competent operators and even downright fraud actors, but the vast majority of experienced operators (especially the ones that have been around the block a few times and survived adverse market cycles) are working with the investor's best interests in mind and strive to produce the best result possible under whatever circumstances they are dealt, even when the going gets tough.  If that wasn't the case, they wouldn't have survived in business as long as they have, and/or wouldn't have a long future.

Quote from @Clark Stevenson:

Acknowledging with empathy the fresh wounds you are experiencing here, I'll present a devil's advocate position on funds:  This is a feature, not a bug.  

In a different post I saw you say that the fund owns 8 assets in 4 markets.  That's a well-designed portfolio from a geographical diversification standpoint.  If the capital stack is well-designed (I'm not opining on that because I know nothing about how this stack is structured), the feature of the fund is that 2 under-performing properties or one underperforming market shouldn't take down the whole fund, just be a headwind to achieving the desired returns.

Investing in a single-asset syndication isn't a play on multifamily real estate as an asset class.  Instead, you are investing in that specific asset.  If the asset you picked turns out to be the one running into trouble and sells at a loss, you're completely or partially wiped out.  If you happened to pick the one that is doing well, you'll do well.  But you're leaving it up to luck, and luck isn't the best strategy.  And for those who say they'll only pick the winners because they can spot them, I'd argue that your luck will one day run out too--even deals that look great in the beginning can turn on a dime.

A well-designed fund that has a couple of losers and a lot of winners has the option to sell the underperforming assets, even if at a loss, and carry on with the winners.  Eventually markets correct and the winners can produce gains that make up for the losing asset's losses and investors can eventually come out the other side whole, and have a shot at a profit, even if the continuation plan requires a capital call.  It doesn't always work out that way, but it can.  With single-asset deals that are losers, this option is off the table, if the deal is sold at a loss investors take a loss with no chance of recovery.

Just food for thought as there are pros and cons to every structure.

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.  

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.

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.  :)

In order to do this you will need to raise money from investors. So flip the script:  Imagine that you are going to invest in a syndication as a passive investor.  Would you turn over your money to an inexperienced first-time real estate investor that you didn’t know?  And not just any real estate deal, but a large deal with many moving parts that they have no experience handling?  Remember the old schoolyard adage: “the bigger they are, the harder they fall.”

The truth is some investors will. But they are the inexperienced passive investors, which is a blind leading the blind scenario—and then when/if something goes wrong these people sue, alleging you mislead them, didn’t disclose the risks, were not prepared to manage the complexities, and so on.  Gurus leave that chapter out, but you’ll find with some Google (or BP) searching.

Another obstacle is debt. You’ll need to borrow money from a lender to acquire the property (it’s not all investor money).  The good lenders will require that you have experience not just in real estate, but in apartments and likely in the market you want to operate in.  If you don’t have that experience, the lender willing to take the risk will be charging you for it (much higher rates) and that increases risk to you and your investors even further.

Gurus will tell you that they can solve these problems for you. Among their membership they’ll have people that will “sign on the loan” to bring the experience to the table (at a cost), and they might even have other more experienced investors that you can partner with (and give them some of your profit).  I can’t say this never works—plenty of people have done one or more deals this way.  Some have built successful businesses. And many are the ones you are reading about in the news (or soon will) as they lose properties to foreclosure and wind their way through civil (and occasionally criminal) court.  But their loan-signers and experience straw people are nowhere to be found as you stand in court alone.

My advice is to get experience first, investors second. I invested in RE for over a decade before raising my first syndication dollar, and I’m glad I did.  I didn’t “get rich quick”, but I’ve had a 34-year career and I’m still around to talk about it. So many people that I’ve encountered over those years were one and done, or here for a while and gone.  Not meeting that fate requires a real commitment and a solid foundation of skill, knowledge, and experience.

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.

To be fair, BiggerPockets published an entire book on this very topic.  Not intending to self-promote, just pointing out something many people might not be aware of.  One of the things that led me to write it was I saw too many instances of what I believed were cattle being led to slaughter and I hoped that a little education would save some people from that experience.  Hopefully it did, but I think we’ll see over the next few years that I couldn’t save everyone.

@Jon Zhou I don’t know anything about this deal so my comments here are intended to be general because I have a feeling that a significant percentage of passive investors will be faced with a capital call in the near future from a large array of operators, and maybe this will be helpful to them, too. I’m not an attorney, just a syndication sponsor who has survived 34 years in the investment arena, so this is not intended to be legal advice, either.

The first question you face is whether you “have to” meet this capital call. I doubt you have to, despite the language in the letter you shared stating that “all LPs must participate.” Letters to investors are not governing documents—whether you are required to fulfill this capital call depends on the language in the operating agreement, so I’d start there. It should say whether capital calls in excess of your capital commitment are voluntary or mandatory, and if they are mandatory, it should state what the penalties are for failing to fulfill it. By that, I mean the contractual penalties, not the practical penalty such as loss of principal due to foreclosure of the property, dilution, and so on.

Then, you must decide whether you “want to” meet this capital call. There is a lot to consider here.

The letter you posted states that the sponsor has extended a $2.9 million loan to the entity to cover expenses, which “must be repaid promptly.” On one hand, it’s a good sign that the operator stood behind the deal to keep expenses funded with their own cash as long as they could. On the other hand, it could be a sign that they waited too long to issue the call, or that getting their cash back from the proceeds of the call plays a role in their decision to now issue it. Maybe it’s not a factor for this sponsor, but it could be with others…just something to consider.

To address your concern of whether you “are putting more money into a failing syndication,” your mission is to analyze whether there could potentially be a positive outcome, and if you can earn a return on the additional money.

The decision is actually a bit easier in a scenario such as this where a total loss of principal is on the table. In the case of a partial loss of principal, you also have to factor in the return you could make on the principal you got back from an immediate sale. That calculation doesn’t apply here.

If a sale today would result in a 100% loss, but a sale in the future resulted in only getting all your money back (original plus the additional call), but zero profit, you are getting a 5X return on the called capital (putting in $20K to get $120K back, for example). If it took 5 years, that’s a 20% return on the 20K (in the simplest terms). Probably a decent investment. If you got half of your original investment back plus the additional, that’s a 2.5X return on the called capital, or 10% over 5 years. Still not terrible.

But the question is, can such an outcome be achieved? Only hindsight will reveal the true answer, but I have personal experience that it is possible. I was there in the great recession of 2009 and had a deal where we were totally underwater and bleeding cash but 6 years later sold and returned all capital plus a profit.

But you have to weigh all the factors to gauge your odds. You need two things for this to work: 1. you can’t run out of time, and 2. you can’t run out of money. So is a 20% capital call going to get the job done, and provide enough money to go the distance? And if it will, is there enough term left on the loan (and if not, what’s the plan to fix that)?

Here are some things to consider in your decision (i.e. questions you might want to ask):

1. When does the loan mature? (perhaps the most important question of all)
2. What was the loan-to-purchase-price ratio when the property was bought?
3. How much is the property worth today?
4. What is the loan amount?
5. When does the rate cap expire?
6. What is the monthly cash burn, including reserves to purchase replacement rate caps?
7. Is income/occupancy holding up?
8. What are the market rent growth and occupancy forecasts for the next few years?
9. Are renovation bumps supported by the market?
10. What happens if some investors fulfill the call but others don’t? i.e. if the sponsor doesn’t get enough money to solve the problem, what will they do with the capital that was just contributed?
11. What place am I in the capital stack? Is there preferred equity or Mezz Debt at a higher priority than me?
12. What are the uses of the new funds?
13. And a question for you: If you are invested in multiple syndications, do you have enough reserves to fulfill capital calls from all or many of them? And if not, you need to prioritize the ones that have the most likely positive outcome.

You also want to think about the market and subsequent recovery. If you zoom out, real estate goes up in value. Maybe not year to year, but certainly decade to decade. I remember people saying in 2010 that prices would never get back to the 2006 peak. But by 2014 prices had not only reached the 2006 peak but exceeded it. How long will it take for the next recovery cycle to bring you back to right-side up? I’d guess five to seven years, but I could be way off base. I’m a bit of a market pessimist lately which is why I’m not invited to a lot of parties.

BP is doing a podcast on the topic of capital calls and I’m one of the two panelists. Maybe listen to that when it comes out in a couple weeks and see if any other nuggets of info come up in the discussion.

Answers to all that can be found here:  http://www.biggerpockets.com/syndicationbook.  My best advice is to hold off on placing capital into any syndication until reading it at least once.