Syndication capital calls
Member since 2024 · 11 posts · 2 votes
Syndication capital calls
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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesQuote from @Jay Hinrichs:
Quote from @Mark Forest:
WOW, THIS PLACE HAS REALLY CHANGED. I dont want to hear about you selling me your course or advice at a "new customer price" . Stop the BS. I just want to hear from regular investors about their experience.
who is trying to sell you something on this thread.. I did not see that.
I too am confused. Multiple investors with decades of experience, some GP, some LP, some skeptics about the entire business in general sense and some bulls who have gotten rich from investing have all chimed in on this
you got links to specific case studies from Brian Burke, a seasoned syndicator, a guy check from Melanie p, who makes it a part time job taking the trash out and exposing the shenanigans of one syndicator after another.
Greg Scott has an excellent reputation on these forums, and provides a counterpoint to Melanie’s skepticism. Manny challenged that. Chris is telling you to provide more details.
The people on this thread have a combined hundred years of experience, conflicting opinions, and have been real with you. If you engage with them and seriously contemplate what they bring to the table, you will make a better decision in the end.
And no one has tried to sell you a thing, just a bunch of real estate multimillionaires trying to help you, for free.
37 Replies
- 1yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Ram Go "Initial Debt" may or may not be the same thing as the current loan balance. If the loan was fully funded at closing and since then the loan is in an interest-only payment period, these numbers would equal. But most of these bridge loans have future funding components where the lender will fund renovation work as the work is completed and add that to the loan balance. If that was the case here, the current balance could be quite a bit higher than the initial balance. It's important to find out.
But for now, let's assume that the property is worth $63 million as @Jason Piccolo indicated above and the loan balance is $59.8 million. If this is true, the good news is that the property is worth more than the loan balance. The bad news is the LTV is 95% currently, and after a $4 million paydown it's still 88.6%. If the property sold today, after 1% cost of sale there's only $2.5 million in cash coming from that sale and that's assuming that there's no exit fee on the loan and no outstanding payables. In other words, the investors are nearly wiped out already.
Such a situation is recoverable if there is enough time for a market recovery and the cash flow is at least break-even (or there is enough reserve cash to cover negative cash flow until it can turn positive). How long would that take? No one has that answer, but I'm fairly certain that nearly everyone would agree it's longer than a year, and it seems that's all this capital call gets you.
Next, consider why the lender is willing to make this extension. You can tell that the lender isn't granting this extension under the provisions of the loan's 1-year extension options. If they were, they wouldn't be asking for a $4 million paydown. This means that the property doesn't qualify for the extension, probably because it doesn't meet the covenants such as DSCR or debt yield, so the lender is making an exception and is willing to grant the extension in exchange for the $4 million. They don't have to do this, and they don't have to do it again a year from now. They reason why they would do this is to get $4 million, and they won't have to foreclose into a bad resale market. Instead, they can foreclose next year and sell into a better market, and they are starting off $4 million better than they were. They aren't doing it to help syndicate investors.
I don't know anything about this deal other than what I've read here, so take everything I say with a grain of salt...but this plan appears to kick the can for a year. Then, you'll be in the same boat, but the lender might not be as cooperative.
A better plan would be something that buys you 5-10 years. This would require a refinance into a loan with a 5-10 year maturity. At 70% LTV that loan would size around $44 million (less if cash flow causes a coverage constraint). You'd need a capital call of at least $16-$17 million to make that work, assuming the current loan balance equals the "initial balance". My guess is that's probably around 50% to 100% of the amount of capital initially raised when this deal went out.
This scenario is illustrative of the risks of short-term loans. If there is a maturity in the midst of an adverse market cycle, the options for escape are pretty thin.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
I am also curious what the investor equity position is. I am guessing they probably raised $15-25M from investors for the deal, so while the bank would still be covered investors would appear to collect maybe 10-20 cents on the dollar if they were to liquidate.
if that's the case then I don't see buying one year really does anything unless I am missing something ?
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- Real Estate Agent · Arlington, VA · Member since 2014 · 78 posts · 37 votes1y
Thanks @Brian Burke. I appreciate your insight into the situation.Yes, the initial loan period was 3 years interest only so it was unlikely any of the loan balance got paid down. I am not sure it would be prudent to throw more money into this deal on a hope and a prayer.
Thanks for feedback @Brian Burke. This capital call only makes sense if asset value appreciates in 1 year and after paying down debt, there is enough cash to pay investors. Unfortunately, based on the Trailing twelve month trends, it is unlikely rent will increase and appreciate asset value.
i wouldn't be throwing more money into this deal.
- 1yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Quote from @Chris Seveney:
I am also curious what the investor equity position is. I am guessing they probably raised $15-25M from investors for the deal, so while the bank would still be covered investors would appear to collect maybe 10-20 cents on the dollar if they were to liquidate.
if that's the case then I don't see buying one year really does anything unless I am missing something ?
If the market value mentioned above is accurate and the “initial” loan balance hasn’t increased by rehab funding, I wrote above that the proceeds are just a couple million after closing costs and commissions. I don’t know how much initial equity but if your guess is right 10 cents on the dollar is about right.
The investors can get back to whole, it’ll just take time. They don’t have time. They can get time, but they’d all have to double or more their investment (if any of these assumptions are right). I imagine that the investors cannot or would not pony that up. It’s just too big of an ask. And therein lies the risk of high-leverage. If the market moves against you, it takes too much capital to fix it.
Contrast that to this scenario: let's say that the acquisition loan was 60% LTV originally, and after a market drop of 30% the loan is now 85%. To refinance at 70% LTV (new value) you'd need a capital call of around 30-35% of the original equity raise. Thats far different than a 100% capital call to get out of a high-leverage loan.
- 1yMelanie P.Pro MemberRental Property Investor · Member since 2023 · 1k+ posts · 922 votes
Quote from @Greg Scott:
Can't say I agree with that statement.Quote from @Melanie P.:
Syndication multi-family investments are riskier and have less upside than gambling in Las Vegas.
Over the past decade I have invested as an LP in about 50 apartment complexes. At this point my average annualized return is about 45%. In today's tougher economic environment, I have recently experienced two cash calls. One of them has a clear path to return a profit and is executing that plan well. The other looks like it could lose about 40% of my original investment.
In Vegas, the odds are always in the house's favor.Greg, Would you recommend syndication investments to someone who comes here to learn real estate investing? No experience whatsoever? Possibly do not even yet own their primary home?
What's your rate of return after you mark down the principal from the two investments asking for cash calls? They have a present value of around 10% of whatever you put into them...
- 1yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votesMelanie:
Quote from @Melanie P.:
Quote from @Greg Scott:
Can't say I agree with that statement.Quote from @Melanie P.:
Syndication multi-family investments are riskier and have less upside than gambling in Las Vegas.
Over the past decade I have invested as an LP in about 50 apartment complexes. At this point my average annualized return is about 45%. In today's tougher economic environment, I have recently experienced two cash calls. One of them has a clear path to return a profit and is executing that plan well. The other looks like it could lose about 40% of my original investment.
In Vegas, the odds are always in the house's favor.Greg, Would you recommend syndication investments to someone who comes here to learn real estate investing? No experience whatsoever? Possibly do not even yet own their primary home?
What's your rate of return after you mark down the principal from the two investments asking for cash calls? They have a present value of around 10% of whatever you put into them...
I was responding to the original post. What made you think this person had no experience whatsoever and didn't own their own home?
I know from other posts you have not had a good experience with syndications. My experience has been very different. The cash lost from my one investment that sold at a loss last year was almost completely offset by three properties that executed cash-out refinances in 2024. - 1yMelanie P.Pro MemberRental Property Investor · Member since 2023 · 1k+ posts · 922 votes
@Greg Scott When you spout off your 45% annual return number is that based on actual math or just some number that is approximate and in your head? If it's actual math what was it before your 2024 losses?
Frankly, you sound like most operators of these investments... promising sky high returns and minimal downside risk. All total hogwash.
- 1yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
Melanie:
You say I sound like an operator, but you may have missed that I'm talking about my PASSIVE investments. I am not raising money. I am not operating these properties. These are just deals I have invested in with other people. And, yes, I have been blessed to have done very well. Deals like this do exist out there.
In a previous post, I put a graphic of my returns, and you accused me of using data for single family returns. So, this is the second thread in which you've attacked my ability to do math and my integrity. What does that make you sound like?
- 1yMelanie P.Pro MemberRental Property Investor · Member since 2023 · 1k+ posts · 922 votes
@Greg Scott I apologize for questioning your integrity as that is not my intent. I actually think your company, Drive Home Capital, does have a good track record in the space. You've had lots of investors, nobody is complaining, you aren't over hyping your past deals but they are easily verifiable and have the proper filings. I respect you and what you've accomplished.
i do suffer from a rush to judgment when someone who is in the business of raising money brags about 45% returns for LPs. Please take another look at the graphic you created. For example a 326% return for an investment held 5.6 years is an annualized return of 29%. Annualized Return = ((Money Out - Money In) ^ (1 / number of years held)) - 1. Undoubtedly a good return, but for it to be worthwhile you have to send a lot of money away and out of your control for a very long time.
I credit you as an expert marketer and believe that when you post returns and create these graphics at least sometimes people reach out to you for information on how to participate. That makes me nervous - because if the investments could be proved up to sophisticated investors why hunt for the guy who gets excited seeing 45%? I say this only to relate activity that sets off alarm bells, not to impugn what you are doing, which is better than 90% of what is hustled around these parts.
- 1yGreg ScottPro MemberRental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
Thank you for your response.
I agree with you there are a LOT of garbage syndications out there and I know a lot of people that have been burned by them. That's probably why BP bought Left Field Investing to create PassivePockets.
I've been pretty vocal on this platform against bad syndication practices out there. I've seen syndicators, (probably trying to raise money from people in the forums) post "investing advice" and I love to challenge them. I've vehemently argued against acquisition fees, syndicators that don't put a significant investment in their own deals, anything called a fund, large GP groups where you don't know who is in charge, and syndicators who ONLY raise money and don't manage the property, plus many other more minor sins. Most syndicators are not very motivated to put together profitable deals because they make money by putting together the syndication itself.
As I've mentioned, not all of my passive investments have done great, but in aggregate they have done better than average because none of them have any of the items mentioned above.
I'm invested with individuals who have each put much more cash into the deal than I have, and their only compensations is a fixed percent of total profit. When I make money, they make money. If I lose money, they lose BIG money. They are highly motivated to produce profit, and our interests are fully aligned.
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