2 Capital calls in 2 weeks! Ouch

OP

Investor · Rockland County, NY · Member since 2018 · 46 posts · 55 votes

3y

Quote from @Brian Burke:

Why isn’t the property at or above 90% occupied? There could be a lot of reasons but I can think of three common ones: poor management, asking rents too high, units aren’t fixed up and the sponsor bled through their rehab dollars. More capital can only help with #3. But it does beg the question—where did the rehab dollars go?

You say the property is bleeding 6 figures monthly…was the acquisition financed with a bridge loan at high LTV? If so, the deck was stacked against you day one. The only way additional capital fixes that is to do a cash-in refinance to get a better loan at a low LTV. That would likely take a LOT of cash…is the sponsor calling enough for that, or just enough to kick the can down the road for a few months?

@Brian Burke Both of these properties have management issues, starting out 18 months ago occupancy was in mid 80's at takeover, but the economic vacancy was high a lot of delinquency, courts backed up and they couldn't evict fast enough, meanwhile they did most of the Capex but weren't able to fill all the upgraded units quickly, they changed management companies and things were getting better but not fast enough, and yes it has bridge debt with no rate cap, and the amount of the capital is to be able and hold on till they hit 90% occupancy and will be able to refinance.

Lessons I'm learning,

Due diligence is walking every unit, looking at every lease and checking if money from leases are actually going into the bank. (I think proper due diligence would catch all the non paying tenants) as an LP I don't know how to check if that was done.

Not having the right management can kill a deal (I'm looking at sponsors that self manage)

And understanding the debt structure. (Floating rate loans, with no rate cap)

8 Reply

Allan Smith

Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes

3y

Biggest thing to me is why wasn't the first round of capital enough, and why wasn't it brought up to 90% Occupancy ages ago? Only excuse is if the sponsor distributed profits heavily since the start and gave back too much capital.

2 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

3y

Quote from @Chris Seveney:

@Solomon Rosenberg

I was on a call a month ago with about 50 people and someone asked similar question, one of the people commented

“Has anyone ever had a capital call and the project turn around”

You could hear a pin drop. Before I would provide any capital I would want to see an updated proforma based on current situation and interest rates remaining where they are for the next 36 months. Also an analysis of if they have to sell now

Also is the sponsor waving their fees and reducing equity split for any calls?

Unfortunately in both scenarios you are probably getting wiped or losing almost everything

>“Has anyone ever had a capital call and the project turn around”

I would give you 10 upvotes for this question if I could. I question what percentage of capital calls result in a project turn around, but I speculate it is not a high percentage.

8 Reply

Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

3y

@Solomon Rosenberg

Now I am curious, is it the same sponsor and what is their track record?

How long have they owned the building and what’s the current occupancy?

What class is the building (my guess is class c)

What cap rate did they buy it at?

What’s the exit cap?

To get loans without a rate cap is a rookie 101 mistake.

I also ask because if they are new or inexperienced and

If they have no cap and it’s mismanaged sorry to be bearer of bad news but these projects are not going to end well.

Cut your losses now vs throwing money at a sinking ship.

7e investments53 Reviews

Website View Page

3 Reply

Justin Moy

Investor · Kansas City, MO · Member since 2020 · 400 posts · 278 votes

3y

Quote from @Solomon Rosenberg:

Within the past 2 weeks I got 2 capital calls from different sponsors, I'm assuming that there are many deals in similar situations.

The sponsors are saying, If they have enough capital to bring occupancy to 90% they will have better options to refinance or sell. That's true, however what if they can't deliver on the occupancy in a short period.

They say it's not a good market to sell now. True again, but what if interest rates stay volatile for longer than expected, and the market stays locked up longer.

Meanwhile the property is bleeding 6 figures monthly, and the added capital will only go so far, unless there is a major change in the interest rates soon, and that doesn't seem likely.

They also say if we don't infuse more capital we may lose our principle too, as they will be forced to sell at a loss. That is possible, but this may end up happening anyway.

So, what's the call? Do I put more money into these deals, or do I accept a dilution of my shares and put my money elsewhere?

Here is the thing - our brains are wired to be more sensitive to a loss compared to the possibility of even a much larger gain and we are biased to try and stop a loss.

I think I need to take a step back and think about this like it's a totally new deal, and I have no stake in it, would I invest in this deal now based on all the facts?

What do you think?

I'm sorry to hear you're going through this! I think you have a great mentality of stepping back and looking at it as a brand new deal. Sounds like the capital call is going to essentially buy time to hold off a delinquency on the mortgage and not so much rehab units that are not livable.

I'd really dig into how much time they can 'buy' with a capital call and why they think the next X months they'll be able to fill the vacancies when they haven't been able to the last 18 months.

Depending on the area, seasons will help with this. In the midwest or in other colder climates move ins are tough in the winter so now that it's warming up we're seeing leasing traffic increase, so that's something to consider as well.

OP

Investor · Rockland County, NY · Member since 2018 · 46 posts · 55 votes

3y

Quote from @Justin Moy:

Quote from @Solomon Rosenberg:

Within the past 2 weeks I got 2 capital calls from different sponsors, I'm assuming that there are many deals in similar situations.

The sponsors are saying, If they have enough capital to bring occupancy to 90% they will have better options to refinance or sell. That's true, however what if they can't deliver on the occupancy in a short period.

They say it's not a good market to sell now. True again, but what if interest rates stay volatile for longer than expected, and the market stays locked up longer.

Meanwhile the property is bleeding 6 figures monthly, and the added capital will only go so far, unless there is a major change in the interest rates soon, and that doesn't seem likely.

They also say if we don't infuse more capital we may lose our principle too, as they will be forced to sell at a loss. That is possible, but this may end up happening anyway.

So, what's the call? Do I put more money into these deals, or do I accept a dilution of my shares and put my money elsewhere?

Here is the thing - our brains are wired to be more sensitive to a loss compared to the possibility of even a much larger gain and we are biased to try and stop a loss.

I think I need to take a step back and think about this like it's a totally new deal, and I have no stake in it, would I invest in this deal now based on all the facts?

What do you think?

I'm sorry to hear you're going through this! I think you have a great mentality of stepping back and looking at it as a brand new deal. Sounds like the capital call is going to essentially buy time to hold off a delinquency on the mortgage and not so much rehab units that are not livable.

I'd really dig into how much time they can 'buy' with a capital call and why they think the next X months they'll be able to fill the vacancies when they haven't been able to the last 18 months.

Depending on the area, seasons will help with this. In the midwest or in other colder climates move ins are tough in the winter so now that it's warming up we're seeing leasing traffic increase, so that's something to consider as well.

Leasing started trending up the past 2 months, and there is a good chance the will reach the goal, but as an LP it's hard to know in detail, we have to rely on what the sponsors are projecting.
Either way I won't see a return on this capital it's just to save the deal from going down and I don't think my 20k will impact a 50 mil deal.

Steve Vaughan

Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes

3y

When I give myself a 'capital call' like if a stock or reit value has dropped significantly, I am rewarded with more shares for the dollar. Will this capital injection reward you relative to your initial investment?

I usually don't chase bad money with good and agree that your $20k against a 6 figure monthly bleed won't move the needle. What does $20k represent to your initial investment? 20%?

What interested you in this deal in the beginning? Tax advantages? Superior projected returns? With no liquidity and no say but lots of fees I've always wondered why.

I'd stay put and I hope this works out for you @Solomon Rosenberg

5 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Solomon Rosenberg:

Within the past 2 weeks I got 2 capital calls from different sponsors, I'm assuming that there are many deals in similar situations.

The sponsors are saying, If they have enough capital to bring occupancy to 90% they will have better options to refinance or sell. That's true, however what if they can't deliver on the occupancy in a short period.

They say it's not a good market to sell now. True again, but what if interest rates stay volatile for longer than expected, and the market stays locked up longer.

Meanwhile the property is bleeding 6 figures monthly, and the added capital will only go so far, unless there is a major change in the interest rates soon, and that doesn't seem likely.

They also say if we don't infuse more capital we may lose our principle too, as they will be forced to sell at a loss. That is possible, but this may end up happening anyway.

So, what's the call? Do I put more money into these deals, or do I accept a dilution of my shares and put my money elsewhere?

Here is the thing - our brains are wired to be more sensitive to a loss compared to the possibility of even a much larger gain and we are biased to try and stop a loss.

I think I need to take a step back and think about this like it's a totally new deal, and I have no stake in it, would I invest in this deal now based on all the facts?

What do you think?

THere're lot of hotel syndications that after pushing for any capital call, it is still going for bankruptcy.

I would expect lot more of story into 2024 would be similar like this.

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Steve Vaughan:

When I give myself a 'capital call' like if a stock or reit value has dropped significantly, I am rewarded with more shares for the dollar. Will this capital injection reward you relative to your initial investment?

I usually don't chase bad money with good and agree that your $20k against a 6 figure monthly bleed won't move the needle. What does $20k represent to your initial investment? 20%?

What interested you in this deal in the beginning? Tax advantages? Superior projected returns? With no liquidity and no say but lots of fees I've always wondered why.

I'd stay put and I hope this works out for you @Solomon Rosenberg

public REIT investment is still way better than private syndication, because of public transparency and the financial progress is getting audited. Dealing with private syndication is like dealing with individual actor that many times has different personality, nuances and lack of public/transparency skillset. If any syndication issuing capital call right now it's just a troubled sign.

5 Reply

Dylan Speer

Investor · Denver, CO · Member since 2023 · 161 posts · 52 votes

3y

Who is the sponsor?

4 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

one thing to add though, whatever decision that you do make sure you execute it after the debt ceiling is over. There's big risk in everything if the US gov. itself is going for default. Save your cash...

Nick B.

Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes

3y

Quote from @Carlos Ptriawan:

one thing to add though, whatever decision that you do make sure you execute it after the debt ceiling is over. There's big risk in everything if the US gov. itself is going for default. Save your cash...

Debt ceiling is a non-event. The Congress will increase it after the usual finger-pointing and mutual accusations.
There may be a period of a "government shutdown" for a week or two when non-essential personnel would be furloughed and financing of some programs put on hold.
That's it until the next debt ceiling dog-and-pony show.

9 Reply

OP

Investor · Rockland County, NY · Member since 2018 · 46 posts · 55 votes

3y

Quote from @Steve Vaughan:

When I give myself a 'capital call' like if a stock or reit value has dropped significantly, I am rewarded with more shares for the dollar. Will this capital injection reward you relative to your initial investment?

I usually don't chase bad money with good and agree that your $20k against a 6 figure monthly bleed won't move the needle. What does $20k represent to your initial investment? 20%?

What interested you in this deal in the beginning? Tax advantages? Superior projected returns? With no liquidity and no say but lots of fees I've always wondered why.

I'd stay put and I hope this works out for you @Solomon Rosenberg

I actually like to invest in syndications better then reit or stocks and have done well, you need to understand it and as with any investments there will be losses here and there. The main thing is to learn from it and not repeat the mistakes.

OP

Investor · Rockland County, NY · Member since 2018 · 46 posts · 55 votes

3y

Quote from @Chris Seveney:

@Solomon Rosenberg

Now I am curious, is it the same sponsor and what is their track record?

How long have they owned the building and what’s the current occupancy?

What class is the building (my guess is class c)

What cap rate did they buy it at?

What’s the exit cap?

To get loans without a rate cap is a rookie 101 mistake.

I also ask because if they are new or inexperienced and

If they have no cap and it’s mismanaged sorry to be bearer of bad news but these projects are not going to end well.

Cut your losses now vs throwing money at a sinking ship.

2 different sponsors, both with a good track record and years of experience and i have done successful deals with them in thd past, but as you point out some serious mistakes were made.

Luka Milicevic

Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes

3y

I am curious on how this deal turns out. Please keep us updated and really hoping it all works out and you can at least recover initial capital.

Christie Gahan

Investor · Hillsboro, OR · Member since 2016 · 310 posts · 153 votes

3y

Quote from @Chris Seveney:

@Solomon Rosenberg

I was on a call a month ago with about 50 people and someone asked similar question, one of the people commented

“Has anyone ever had a capital call and the project turn around”

You could hear a pin drop. Before I would provide any capital I would want to see an updated proforma based on current situation and interest rates remaining where they are for the next 36 months. Also an analysis of if they have to sell now

Also is the sponsor waving their fees and reducing equity split for any calls?

Unfortunately in both scenarios you are probably getting wiped or losing almost everything

Christie Gahan

Investor · Hillsboro, OR · Member since 2016 · 310 posts · 153 votes

3y

Are they waiving their fees ? Now THAT is a great question!

James Hamling

Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes

3y

That's your answer right there Solomon, the answer to exactly those questions will tell you to walk or dig in deeper.
If the property is bleeding out on operating, I don't understand how it's expected to sell at a profitable mark.

There should have been a plan-B from the start, that seems like failure #1 to me in this and a STRONG question of the experience and capability for this sponsor. I NEVER enter any deal with just 1 exit strategy, NEVER! I have contingencies for my contingencies. I require no less than 3 profitable exit strategies, if I can't hit that mark it's a no-go.

I think you need to ask some hard questions and press for some real answers, and be ready to get brutal with it. I'd want to know why they can't operate at a net-0, that should be an attainable mark or the entire thing was BS from the start.

Todd Dexheimer

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

3y

Thats a bummer, sorry to hear. Hard to answer your specific situation, but I was talking with a guy that has invested in a ton of deals since the early 2000's and he had 11 capital calls from 2009-2012. All of those deals ended up making it through and returning him double digit AAR's.

Not saying this will be the case with your deals, but if you believe in the operator, the deal and the market, then I would highly consider putting in the funds.

2 Reply

Dan Rowley

Investor · Cary, NC · Member since 2012 · 218 posts · 196 votes

3y

who is/are the sponsors? There are likely others on this forum that would benefit from knowing.