LP invested in a bad deal
Member since 2021 · 2 posts · 0 votes
LP invested in a bad deal
10 Replies
- Investor · Cleveland · Member since 2021 · 247 posts · 240 votes3y
I understand your frustration. Real estate deals going south is extremely tense for everyone. I don't think trying to affect their reputation is going to be as satisfying as you think.
The good news is, real estate moves slowly. It may be a bad deal, but it's not going to collapse tomorrow. Especially if they're making their mortgage payments. Also depending on what the business plan is, maybe some bumpiness is part of their business plan? It's very common with value add type strategies.
I think your best play is to give them (and yourself) some space. After that come back to them just trying to learn what's going on. See if you can figure out what the problems are and what their plans are. You might feel better about it after talking about it in those terms.
- 3yJim PfeiferBusiness MemberInvestor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
Perhaps trying a different strategy would help. They won't give you your investment back - especially if it's going poorly. They would need to buy it back from you or find another investor who will. You would likely take a loss because no one would pay you full price for a deal that is going south. Instead of asking for your money back, maybe just reach out and ask for more information - why is the deal not performing, what are they doing to try to get it back on track, how quickly do they think they can turn it around, etc.
This is the information you want - the frustrating part is the lack of communication. Were the communicating effectively before the deal went sour? If not, there is no reason to expect them to start communicating well now. You are in a tough spot - syndications are long-term investments that are completely out of your control. Unless there is fraud involved there is nothing you can do but try to ask questions and get information.
Going forward - with any new investments you make, be sure to vet the operator for effective communication. The only thing worse than losing money is losing money and not being informed about what is happening.
- 3yAnthony CharaPro MemberInvestor · Centennial, CO · Member since 2012 · 327 posts · 232 votes
Hey @Adam Harris, sorry to hear your deal isn't going well. At least not now. It could be temporary or it could get worse if the GP bought the deal using Proforma numbers. There's a lot of that going around since the market has been so hot the last 10 years. Unfortunately, with interest rates rising and people buying totally on Proforma, some GP's didn't take into account that rising interest rates would make their deals less profitable or possibly even cause them to lose the entire deal.
Not sure if that's what's happening in your deal or not. Maybe if you give us all a little more to go on as to why its not performing well, we might have different feedback for you.
Most Operating Agreements will tell you the process for you to get your money back. Have you read thru it again to follow that procedure? Since they've told you multiple times they won't give you your money back, maybe they've gotten to the point where they will just ignore you as your constant emails and bugging them might be taking them away from focusing on the problem to resolve it?
Lastly, the GP most likely can't give you your money back, because that would set a precedent for them to give everyone their money back. That could open up the flood gates. Besides, the OA probably explains when you'll get your distributions, if any, when the GP decides to do distributions. The PPM also probably says multiple times that you should NOT invest any money in this deal if you can't handle losing it as this is an investment and you could lose all or part of your investment.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
@Adam Harris
As others mentioned the OA outlines how to get money back which it probably won’t happen.
Jim had great advice reach out and ask for financials, what is their recovery plan? Review the OA and PPm to make sure they are providing you with what they promised - if not ask for it and reference the document
A simple way to not ruin their reputation but raise a flag is we see hear on BP peopke start a post with - “has anyone received any information from CYZ sponsor on the deal in ABC?
If invested in the deal let me know what you are hearing.
Nothing derogatory but code for “uh oh”
7e investments53 Reviews - Investor · Kansas City, MO · Member since 2020 · 400 posts · 278 votes3y
Quote from @Adam Harris:
I m an LP in a syndication that is going south. I started grasping for straws a month or two ago and asked for my investment back which I realize they aren’t obligated to do. They wanted to tell me how everything is going to be ok but numbers don’t lie. I ve asked a couple of times for fractions my investment back and now they won’t respond to basic yes or no emails - the lack of reply angers me a bit. I’m contemplating trying to affect their online reputation but wondering if this might come back to hurt me in some way. Any thoughts?
I'm sorry to hear this. It's definitely frustrating and I hope this input helps!
I'm not sure who the group is (and am not asking) but I'm going to give them the benefit of the doubt and say they are doing their best to get the deal back on track. I agree the lack of communication isn't acceptable, and I think the best thing to do is let them know that. Something like "I understand things aren't going as planned and I do believe you're doing your best to get things back on track, but I would like to connect on what that strategy is and how I can help". Just to get them comfortable communicating with you. (Then in the future you know to not invest with them again, but you have to play the game while they have your cash).
The biggest question is if the mortgage is being paid every month. To me that's 'going south'. If they stopped a pref or have paused distributions it may not be as bad as you think although their lack of communication is making it seem that way. Many LPs are seeing smaller or paused distributions but if the mortgage is being paid and there isn't a balloon coming due soon hopefully you'll be able to ride out these bumpier times.
- Specialist · Member since 2021 · 322 posts · 273 votes3y
Quote from @Adam Harris:
I m an LP in a syndication that is going south. I started grasping for straws a month or two ago and asked for my investment back which I realize they aren’t obligated to do. They wanted to tell me how everything is going to be ok but numbers don’t lie. I ve asked a couple of times for fractions my investment back and now they won’t respond to basic yes or no emails - the lack of reply angers me a bit. I’m contemplating trying to affect their online reputation but wondering if this might come back to hurt me in some way. Any thoughts?
First off I am sorry you are experiencing this. No one goes into a deal expecting it to not perform well of course.
Would definitely review the legal documents, Operating Agreement and Private Placement Memorandum as others have mentioned. As you know investing in real estate never has the "G" word, its why I always tell investors to vet out every deal fully and pick the best operator in the safest markets. Picking the jockey over the horse is usually a good approach in this space.
- Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes3y
@Adam Harris do what you can to provide value to the investment in your feedback. The biggest risk in an investment right now is not having enough cash to weather the storm; bashing them on social media will only make that worse. I understand you may want to warn others, but that could be detrimental to your investment.
We are facing very severe headwinds across the board in CRE right now. You signed on the dotted line. Try to help, not hurt.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes3y
Not replying to investors is highly unusual for experienced sponsors. They should at least reply that there is no recourse and explain the property plan.
It's concerning the property is already having challenges as the economy is okay at the moment...could get a lot worse.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes3y
I've been a passive LP investor a few times in this situation, it can sometimes feel like a scene out of "Lord of the Flies." You know, where the kids take over the island and stage a mutiny. In a similar fashion, within the LPs, there's usually a handful of individuals who step up and lead the charge. These leaders often engage a lawyer and start the process of subpoenaing the investor list to then rally everyone to pitch in for the legal expenses. However, I'd like to point out that being one of those ring leaders requires a tremendous amount of effort - which is why I was never that person. Consider if taking on that role is truly the best and highest use of your time and energy. If you're simply looking for representation for yourself, it might be wiser to hang back and wait for the LP mutiny to develop naturally. After all, what can a lawyer really do in this situation other than rack up billable hours? Now, let me be clear—I'm not offering any legal advice here. I'm just sharing my personal perspective. In my opinion, waiting for the LP mutiny to unfold might save you unnecessary expenses and hassle in what sounds like there is not much you can do. What is the reasonable cause other than LP hearsay?
In most cases, the Private Placement Memorandum (PPM) will protect the general partner against gross negligence, which includes cases of regular negligence - possibly applicable here. Ultimately, for your peace of mind, you have to trust that the GP has just as much at stake, considering their position as a key principal or loan guarantor, as well as the potential damage to their reputation. While emotions may be affected now, the GP should still have the best interests of everyone in mind.
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