All Forum Posts by: Harish V.

Important note - All the negative comments about Grocapitus in this string are not related to Grocapitus performance. They are for a past company called Financial Attunement, where Neal was a minority partner from late 2015 to Feb 2018. Grocapitus has an absolutely stunning profit track record over 7 exits (see below) and 800+ happy investors in 31 projects.

William Woodring brings up very good points, so here is detailed context. Firstly, we have to grudgingly agree with William that 30% down payment was onerous. Our Fourplex 100% ownership strategy has evolved over time, and based on feedback from William and others, we now charge a 20% down payment, instead of 30%.

Secondly, we now pay the investor interest on the down payment, as a discount on the final price. These changes have been made in January 2022. Since the changes were made, demand for the product has roughly doubled.

With regards to actual demand vs ‘implied demand’, the demand for our fourplexes is actually very high. We have launched five fourplex projects, and of all the fourplexes in all of those projects that were offered, only two are available for sale in Feb 2022. So, over $40 Million of fourplexes were sold in the last 14 months. The typical project sells out in 30-45 days, though one of them took longer.

All of our projects have a detailed Purchase and Sale Agreement (PSA) that buyers sign with details on terms and construction timelines. Perhaps William did not review the entire document.

With regards to William’s comments about rosy financials, we have to disagree. I purchased a fourplex myself (Grocapitus did not give me a discount), and have seen projected rents spike by over $200 per month beyond what was projected). Later this year, as a bunch of Fourplexes from different projects deliver, I will post budgeted financials vs actuals, and also post multiple unedited reviews from the buyers. We can say with confidence that those buyers will not consider the financials rosy, but conservative.

@Harish V., I can only comment on reporting of sales price versus actual.  I am making an educated guess based on working on more than a few purchases and sales as an employee of operators.  Most sales are done through an entity transfer, in order to avoid having to record an actual sale price and being reassessed to full purchase price.  

Many taxing authorities are wise to this, and so require some form of disclosure on the sale price of the holding entity.  I have seen more than a few syndicators underwrite real estate taxes to 80% of purchase price, which this equates to, presumably based on a tax consultants recommendation.

Put simply: when the parties disclose the value of the real estate being transferred, they put own 80% of actual purchase price, with the remaining 20% likely going to goodwill or other intangible assets.

Harish, what Chattanooga project are you talking about?  The only one I'm aware of is an existing property that they bought.

Since I work for Grocapitus, I just want to add that this useful string has convinced us to working on adding exit dates to our track record, and also add in the late 2023 and early 2024 exits that we have been a bit lazy about adding. So, you should be able to see the exits from late 2023 and early 2024 on our home page by next week. As you can imagine the recent exits have lower average IRRs than the ones before, but did outperform proforma.

We do have to agree with the comments on this string that our earlier exits did benefit from the 'all ships rising' effect. No doubt about that.

In ideal conditions:

Pref equity receives higher ongoing distributions but no profits at sale

Common equity receives lower distribution and profit at sale (assuming their is cash flow left over after pref equity is paid and assuming their is profit at sale.

In non-ideal conditions

Pref equity may receive ongoing distributions less than pref, or no ongoing distributions at all, but the pref accrues. Depending on how bad the conditions are, accrued pref may never be paid out and original contribution may not be returned in full.

If pref equity's original capital contribution is not returned in full, common equity is in even worse shape. If pref equity's original capital contribution is returned in full, common equity may or may not have their original capital contribution returned in full. If it is returned in full, the pref equity will receive their accrued pref before common equity receives their accrued pref + share of profits.

So, common equity has "unlimited" upside but really no downside protection. All the "bad" affects them first.

Pref equity has a known capped upside and more downside protection, but as @Lane Kawaoka said, getting paid and/or getting your money back is not a guarantee. Once the common equity has absorbed all the "bad", the pref equity gets affected.

Another thing to think about with pref equity offered during a capital call. I've seen a lot of this lately where GPs are offering outside investors pref equity to effectively "save" the project from foreclosure. The new pref equity is given priority to the original pref and/or common equity. So that's another layer between you and getting your money back and/or paid.