All Forum Posts by: Brian Burke

Quote from @Steven Gesis:

Important takeaway is due diligence review, not only deal level but sponsor track record - yes, past performance is not indicative of future results, but at least it's a metric to review. 

Agreed--but wait, there's more! One of the ways these operators got to the high IRR was to leverage the equity with a lot of debt and senior equity. So in addition to what Steven said about track record and due diligence, investors should pay close attention to how the capital is structured.

High LTVs, short maturities, mezzanine debt, outside preferred equity, and multiple share classes (the recently popular A/B equity structure) all increase risk.  This wasn't taken seriously by many sponsors (who used these methods to attract capital as well as reduce the amount of capital they needed to raise) as well as investors (many of whom didn't understand the risks nor were they educated on these risks by the sponsor outside of a paragraph buried in a 100 page PPM).

Quote from @Russell Brazil:

Instead he put said money (other peoples money at that) into higher risk assets/markets which would then be more prone to a price correction. And in doing so, completely wipe out their equity position and lead to foreclosure. 

I don't think it's that, Russell. The asset that is the subject of this thread is in Houston, and not the worst area of Houston, either. It's a 70s vintage deal, 400+ units, with a lot of nearby competition, so certainly there is some risk elevation from the asset/market, but that's the least of the problem here, in my opinion.

If the numbers on CoStar are correct, the property was purchased at the very top of the market for $47M, with a $39.4M bridge loan (that would likely mature this year).  And according to an article published by the Texas Real Estate Research Center, there was a $5.25M preferred equity tranche as well.  Add the pref to the debt and you have 95% combined senior capital in front of the investor's common equity. 

This allows the sponsor to buy a nearly $50M property with just a few million of investor equity--but it provides zero resiliency to an adverse market.  A 5% movement down wipes out 100% of the equity, and multifamily values are down 5% or more almost everywhere since late 2021.

I'm less inclined to say that they invested in a higher risk asset/market, and more inclined to say that they invested at an inopportune time with a high-risk capital structure.  This structure, if the data I'm finding is true, is unsurvivable if the market moves against them.

@Giles D. I hate to be the one to tell you this, but your money is gone.  

I don't know anything about the deal but after reading your post I googled the company and found a press release from Nov 2021 announcing that they had purchased The Aubrey.  

I then went to CoStar and looked it up.  They bought the property in Oct 2021 for $47 million and borrowed $39.4 million from Bancorp Bank, who is a bridge lender.  Knowing what I know about Bankcorp, the loan would have had a floating rate, likely somewhere in the range of SOFR + 3-5% and would mature in October of this year.  CoStar reports the property to be 52.7% vacant, but keep in mind that this data is often inaccurate (but not enough to make a difference with vacancy that high).

Figuring this set of facts spelled trouble, I went to the Harris County Recorder's grantor/grantee index and found a foreclosure deed.  Your property was sold back to Bancorp Bank in a foreclosure sale on April 2, 2024 at 10:19AM.  There were no bidders at the foreclosure sale so the property reverted to the beneficiary (meaning the lender now owns it).  I also found a dozen mechanic's liens dating back to 2022 (meaning they didn't pay contractors that did work on the property).

I'd like to say I'm shocked that you had no idea this was coming, but I'm really not shocked.  My Google search revealed the principal of TruePoint started investing in 2020, and if that's true, this sponsor lacked all of the things that I consistently preach to look for--experience, track record, full-cycle experience, market cycle experience, and so on.  

This probably wasn't a scam (but I do not know one way or the other).  More likely, it is an inexperienced sponsor raising money from inexperienced passive investors (and experienced ones that opted to take the risk on an inexperienced sponsor) who got in way over his head and had no idea how to right this ship.  Not knowing what to do, they probably didn't even know what to say, so they buried their head in the sand.

I'm not justifying this behavior, I find it repulsive, but I've seen it so many times in the decades I've been in this industry that I'm just reporting what history has taught me has likely happened here.

It sickens me to be the one to deliver this news--the sponsor should have kept you informed every step of the way and failed in their most basic duty--to communicate with investors.  

@Giles D., is the deal you invested in called "The Aubrey" in Houston?

Quote from @Scott Trench:

This is one of the rare times I disagree with @Brian Burke. 

Brian is a career GP. GPs do not like to put material portions of their net worth into deals. And do not like pressure from LPs like me who simply pass if they don't. 

LPs do like it when GPs put material portions of their net worth into deals. 

I've never met a GP who feels that they should have to put a meaningful co-invest and serious percentage of their own net worth into a deal. 

I've never met an LP who feels that they shouldn't.

Data in this industry is the wild west. But, we will figure it out. And I bet that when all is said and done, LPs who invest with GPs who put real wealth into their own deals will do better on a risk-adjusted basis than those who invest with GPs who don't. Having real skin in the game is a major incentive to do the best thing for investors in a downside situation. 

And, I just don't buy that GPs will liquidate the deal to finance their personal problems - if that's the case, then I invested with a GP who was irresponsible to risk their family's financial future on a single deal. I feel that the coinvest should be meaningful enough to cause real pain for the GP in the event of a bad outcome, but not so much pain that a bad outcome or 100% loss ruins them or threatens to disrupt their lifestyle either. 

A career GP (who invests in my own deals), yes, but also an LP in private placements across a broad spectrum of industries, real estate included, so I see this issue from both perspectives.

I think we do agree that many GPs won't, don't, or can't invest in their own offerings, and I also think we agree that GP investment makes LPs feel better.

I think where we differ is that the existence or absence of this investment makes a tangible difference.  There isn't hard data, but there is plenty of anecdotal evidence, as this issue has been researched for decades.  I researched this heavily when writing a whole subchapter on this issue in The Hands-Off Investor because I didn't want to fill that book with just my own opinions.  Just a small sampling of what I found:

In 2011, Pensions & Investments wrote, "...investment strategies of some large real estate managers that had made sizable investments alongside their investors suffered some of the worst returns."

Pension Real Estate Association wrote in a 2013 whitepaper, "...co-investment capital does little to deter imprudent risk-taking.  Many of the real estate investment advisors who lost substantial amounts of their client's capital during the financial crisis were also the advisors ho posted substantial co-investment capital at the fund's inception."

The California State Teachers' Retirement System studied this and was quoted to say, "CalSTRS executives have not seen a relationship between co-investment and investment manager performance to 'any significant degree.'"

Institutional Real Estate Inc published an article stating, "...not seen any evidence that manager co-investment produces superior results.  I've asked a number of the major consultants and research people whether such evidence exists, and they all say, 'no!'"

But this is one of those polarizing issues where I'm unlikely to change any minds, so I'll leave it at this:  a co-investment, significant or otherwise, isn't going to make an incompetent sponsor competent, an inexperienced sponsor experienced, or a dishonest sponsor honest.  The mere presence of a large co-invest shouldn't be taken as a license to bypass all other due diligence on the sponsor, the asset, the business plan, the assumptions, and the deal structure.  Declining an investment only because of the absence of a sizable co-investment, even when all other aspects of the offering are exemplary, is an individual choice--right, wrong, or indifferent--it's the LP's money and it's the LP who should sleep well at night.

Quote from @Paul Azad:

it seems this latter structure incentivizes GP to take more risks particularly with debt options. It seems rather difficult to find GP - LP alignment today. :(

GP - LP alignment is like Big Foot and the Loch Ness Monstor.  Some say they have seen it. Some say they have photos but they are always blurry and grainy.

Same goes here.  I have yet to see that the concept of GP - LP alignment exists at all, nor has anyone ever produced evidence (that I’ve seen) that co-invest, or anything else for that matter, has aligned interests, produced better results, or led to better decisions.

I think if investors can come to terms with that, and make their investment decision based on facts that actually matter, they might avoid more trouble.  Bottom line—you either trust the sponsor (based on due diligence, facts, track record and evidence) or you do not.  As for the debt risk, that’s easy—find out what the debt structure is before you invest, and pass if you aren’t comfortable.

Didn’t mean to drift the thread—so on to the OP…I reviewed the website but didn’t watch the webinar.  Fee structure can incentivize the right things or the wrong things.  Fee structure for this deal incentivizes the right things, that looks good to me. 

Track record…I like that they’ve been in business for a while, but I’m not as comfortable with their history in industrial (maybe I didn’t dig deep enough). I like the market, Fort Wayne area has been a rent growth leader on the multifamily side for a while, not sure about industrial but a strong resi market means positive things must be happening there. 

The reason this deal is a pass for me is I just can’t get comfortable with the vacancy risk.  There are only a few tenants and most of them have been there a short time. Some are newer businesses and some are described as “growing” (meaning to me, will they need more space at renewal and move?).  A vacancy might take a while to fill if it happens during an adverse phase of the cycle.  Maybe I’m just chicken little…

The 15% sponsor investment does little to nothing to align your interests—especially in this case where they are a TIC to the syndicate. Even if they were a LP alongside you the alignment is slim.

It could even misalign your interests.  Let’s say, for example, they needed that capital back for something else. That need could outweigh their desire to protect your best interests.

Not saying there investment here is a bad thing, per se, just raising this point so that this one element of the deal doesn’t tip the scale to you investing if you otherwise might not.

@Mark Forest the comments above that you’ve lost, or will lose, all or a significant portion of your investment may or may not be true.  The only way for you to understand the situation and evaluate your options is to ask a lot of questions.  Or if the sponsor of your investment is doing a good job they should have answered all questions you could think of before you even have to ask.

Check out my reply on page 1 of this forum thread:

https://www.biggerpockets.com/forums/960/topics/1185204-ashc...

I have a few questions listed there that you should ask. The rest of the thread is a good read and will give you a lot to think about.

Quote from @Carlos Ptriawan:

- we expected the valuation of MF to be down around 21-24% from 2022 peak
- the aggregate MF LTV looks like is around 90-100%  LTV from 62% during original issuance 
- It seems Gov. is actively participating in helping bridge lender to do loan modification to offset the losses.

 my opinion: It looks to me from a reward/risk perspective, between now to 2027 could be one of the best year to invest in distressed multifamily debts.

 One thing I am seeing a lot of is sugar-coating and hopeful optimism on the part of GPs and lenders—and that’s my takeaway from your notes on this CEO call.  They probably don’t want to admit the real story to themselves or their investors.

My observation is MF values are down 25% to 37% from peak—I have a case study with a reliable value at the moment of peak and a semi-reliable current value estimate—the drop is 37% and this is not a distressed property. 

LTVs are all over the place, depending on vintage. Originations pre-pandemic are likely fine if the LTV at origination was reasonable. But all that 90% LTC stuff in 2021-2022 is likely deeply underwater.

Your inference that the government is participating to mitigate bridge lender losses is incorrect. The government isn't giving these lenders a dime. What this CEO was referring to is the government's support of housing through the GSEs, which provide very good loan terms for multifamily owners, and his statement was that this is a good source of takeout financing for their borrowers. Ok, great, but the troubled loans in his portfolio won't be able to refinance into GSE debt without massive cash injections by the borrower because agencies are topping out at 60-ish LTV (current value).

I agree with you that there is an opportunity here—but I wouldn’t want to touch any of this bridge debt unless bought at a very steep discount, and so far those trades don’t seem to be happening.

Quote from @Lane Kawaoka:

It's a sobering situation that no one has faced since 2009 faced with it firsthand (the dinosaurs who did are out of the game or in the institutional world not working with BP type retail investors like you and I).

 

Um, (insert whatever sound a dinosaur makes here).

Some of us are still around…. :)