What do you think of this behavior of RE syndicator

[Eric M.]

I wasn't sure what category to put this in and I am not ready to name names quite yet but I am in the middle of a very frustrating RE deal. I would like your input on some things I have just learned.

I am a former flipper and landlord and private lender and was wanting to get involved in some more passive ways of investing. I came across a local developer who seemed to have a good reputation and a track record buying small to medium multi-families, doing some work refurbishing and repositioning the properties and flipping them in a couple of years. Returns were stellar. They were looking for investors, split was 70/30 to the investor. A new LLC was formed for each property, a few investors would split the deal and the developer would manage.

The contract was a bit concerning because it gave all the power to the GP but that seemed understandable.

Anyway, fast forward 3 years and the project has not gone as expected. There have been delays and stories that don't come true and lower cash flow than expected etc etc etc. During the process they "refinanced" the property and paid back some principle to the investors.  I did know that the loan they put on the property was transferred from another of their properties when those were sold.  I was told the reason for this was it saved loan fees. I was uncomfortable but I thought that maybe this was the way commercial deals worked.

The GP predicted selling the property for $3.1 and then signed a deal in January for 2.78, which seemed low given the hot nature of the market and the improvements done to the property but I didn't really have any recourse. The original closing date in May was missed and I was told the buyer was asking for 300-400K in "extras" and we were negotiating with them.  Now 3 more months later there is no end in sight and the deal. I can't understand why we don't just put the property back on the market so I start asking more questions.  I get no believable answers so I go ahead and call the buyer hoping to at least get a sense of whether the deal is legit.

So here is what I learned that I need your input on.  Basically the loan that was transferred to my property is a crappy, high interest loan through an insurance company. And it has a high pre-payment penalty on it.  So the GP took out this loan several years ago for another property that was his and then he sold that property and transferred the loan to a property owned mostly if not wholly by investors.  So we are paying higher interest. But that is not all.  Because of the pre-payment penalty we are basically forcing the new buyer to take the property with the crappy loan. This causes them to pay less for our property.  And it turns out the loan was only supposed to be transferred once so they need special permission to do it again which is causing delays. Big mess.

So my question is what do you think about the fact that they hung their crappy loan from their property on to ours? My guess is that when I dig into the contract I will find that they have the legal right to do whatever they want.  But I am not sure.  Seems scummy to me.

Thoughts?

[Jay Hinrichs]

@Eric M.   was their a PPM offering document that spelled out what the BP could do or not do.

or is this a LLC with them as managing member and all you investors as members.

If its the later I ran into a company that sounds a lot like this.. and when I queried how many members could be in the LLC they obviously did not know and said 100 if they wanted to.

Well this is simply not correct you have security issues here .. If your deal is set up as I suggested I would be talking to a securities attorney.. they could be in some hot Kim chee...

if there is a PPM and 506 type offering then read the fine print  LOL