Syndications Gone South
Wall Street Journal today I summarize if you don't want to $ paywall. Author credit Will Parker
#syndications #syndicator #apartments #grifter #ponzi #SEC
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"Gajavelli built a real-estate empire using funds from dozens of small investors who wanted a chance to earn a landlord’s riches without any work. He pitched double-your-money returns in ebullient, can-do talks at investor conferences and on YouTube videos . . .
In April, Gajavelli’s company lost more than 3,000 apartments at four rental complexes to foreclosure, one of the biggest commercial real estate blowups since 2008 financial crisis. Investors lost millions . . .
His signed commercial real-estate loans that carried floating interest rates and were adjusted monthly. Starting teaser rates 2021 initial rates at 3.25%. When the Federal Reserve began raising rates last year, driving up monthly loan payments, inflation rose expenses, and Applesway couldn’t raise rents fast enough to keep pace. After bills went unpaid, company properties went into foreclosure . . .
Gajavelli is one of thousands of real estate entrepreneurs in the U.S. known as syndicators. Many have come under similar financial pressures and hold properties they can no longer afford. From 2020 through 2022, real estate syndicators reported raising at least $115 billion from investors.
Congress in 2012 opened the door to the syndicators with a law that made it easier to market real-estate investments online. The law, intended to open financial opportunities to lower-income people, greatly expanded the reach and audience for syndicator deals.
Syndicators chose apartment complexes in the South and Southwest, where real-estate prices were lower, rents were rising and housing regulations were looser. Locations favored landlords with fewer renter protections, which made it easier to evict tenants and raise rents . . .
Most hold balloon-payment loans that require repayment when they come due 2023 . . .
Syndicators invest little of their own money. They collect acquisition fees from investors that typically go from about 2% to as high as 5% of an apartment building’s purchase price. They also take management fees of 2% to 3% from the building’s gross income. Syndicators often profit even if the investment is a failure, which real-estate analysts say encourages excessive risk-taking at the expense of inexperienced investors."
Think all the moaning about adjustable rate loans in 2008...
So what I predict is all the syndication laws and SEC filings are now going to be overturned.
link here https://www.wsj.com/articles/a...
What say you?
The problems is not the syndication business model, it's the floating interest rate loans.
But then again, some people love risk more than others (Risk vs. Return)--Risk tolerance might be better termed risk desire for some investors.
These loans should have been brought to light in the offering paperwork, and an the LP side only sophisticated and accredited investors can buy into them.
Non-accredited investors (most of the public) are not allowed to buy into these things, neither those with standard loans or those with adjustable loans.
There is a flavor of pie for everyone. Conservative to High Risk--no different than stocks.
Just my 2 cents.
https://archive.is/2023.05.23-...
Full text sans paywall...
Quote from @Scott Mac:
The problems is not the syndication business model, it's the floating interest rate loans.
But then again, some people love risk more than others (Risk vs. Return)--Risk tolerance might be better termed risk desire for some investors.
These loans should have been brought to light in the offering paperwork, and an the LP side only sophisticated and accredited investors can buy into them.
Non-accredited investors (most of the public) are not allowed to buy into these things, neither those with standard loans or those with adjustable loans.
There is a flavor of pie for everyone. Conservative to High Risk--no different than stocks.
Just my 2 cents.
Unfortunately small investors (not accredited not even middle level income) bought into syndications in fractional and other spin off shares.
Floating rates, ARM's, loans that are required to refinance every five years is the norm for multifamily apartment loans in the south. Yes risk appetite is a driver to make money for the young. Someone old like me checked if the principals have any track record with investing and passed. When these get investigated, the SEC filings unaudited and inaccurate will change regulation. I didn't buy FTX or Genesis either.
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#3 Multi-Family and Apartment Investing Contributor
- Cincinnati, OH
I think we are seeing a somewhat extreme case. This is the second story in the WSJ about this operator: the first being the 3,200 unit foreclosure.
I really like the WSJ and am a frequent reader, but in this case, this article feels a bit sensational overall.
I may be naive, but I don't see this rising to the level of creating any major change, as it would clearly very hard to bifurcate between real estate private offerings and every other private offering type that is out there.
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@Caroline Gerardo
Syndication laws are not getting overturned. These offerings are for accredited investors and thus the sec views these investors as “sucks to be you” when they lose. This was a sponsor who appeared not to do anything illegal they were just way in over their head because they paid $20k for a course that made them feel invincible and not look at risk.
Syndication laws have opened up over last decade with regulation cf and regulation a which allows non accredited investors.
There are 100 good syndications for a bad one, unfortunately the defaults on syndications will be higher this time around because of too many inexperienced investors, but not enough to change any laws.
Articles like this make many small time investors comfortable staying small time. I looked into becoming a syndicator before and got cold feet.
#2 All Forums Contributor
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Quote from @Joe S.:Here is another one.
Articles like this make many small time investors comfortable staying small time. I looked into becoming a syndicator before and got cold feet.
Nightingale Misappropriated Millions From Crowdfunding Investors, Fiduciary Says (bisnow.com)