What’s Worse? Capital Call? Rescue Preferred Equity? Or Foreclosure

Syndications & Passive Real Estate Investing

What’s Worse? Capital Call? Rescue Preferred Equity? Or Foreclosure

Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes

We are seeing more and more syndications and funds getting into trouble.

And while years will have to pass before we can really understand the nuances of what leads to losses in each deal, and how to parse out what is due to gross negligence, what is due to incompetence, what is due to fraud, and what is due to bad luck, there are decisions that GP and LP investors have to make right now, to get the “least bad” outcome in a given investment.

Some GPs are trying to raise capital via capital calls. Others are handing the keys back to senior lenders. And others still are raising preferred equity to inject liquidity into the deal.

My question for the experienced capital raisers on this forum is this:

-What’s least bad?

I feel like if a deal is millions of dollars underwater at present valuations, it’s better for everyone to just hand the keys back. Why wait for a day that might not come for a decade? I could be investing the dollars going into a capital call into something else.

Similarly, a preferred equity raise can be the worst case scenario for investors, but it is being billed by some syndicators as a great tool and “safe”.

When I see a fund injecting a preferred or "protected" equity raise into a deal to meet DSCR requirements from the senior lender and pretending like this is somehow any different from a foreclosure and total equity wipeout, I'm confused. This is a disaster, and may be worse than foreclosure for both new and existing investors. It's an alternative, and not necessarily a good one, to capital call or foreclosure.

I think that as a community we need to hold all syndicators accountable to outcomes for investors, yes, but also we need to be practical about what the right thing to do is.

A few syndications have handed the keys back, for nearly total wipeouts. They are getting beat up in the forums here.

However, I wonder if their investors, though angry now, will in time greatly prefer this approach to the extend and pretend approach of those raising rescue preferred equity, or those calling more capital on deals that have little to no equity in them, even after the call.

Should we be giving a little more grace to the folks who have handed it in and admitted defeat, simply because they will not compound losses on those deals?

And, should we be a little more tough on the folks who are in the same position but raising EVEN MORE capital to double down on failing investments?

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Brian BurkePro Member

Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes

@Scott Trench there is no single correct answer here because the best course of action depends on the totality of the circumstances. Not to mention that what is thought to be the best course of action could later turn out to be wrong.

I’ll use some hypothetical examples to illustrate:

1. Phoenix apartment deal purchased in 2021 with 90% LTC 3-1-1 bridge debt. Since, prices have fallen 25% so the property is now worth nearly 20% less than the loan amount. There are 1-year extensions available but the property doesn't meet the extension covenants due to underwater DSCR and debt yield. Lender will grant the first extension with a 20% principal pay down. The syndicate ran out of cash reserves and doesn't have enough to purchase the required replacement rate cap.

Foreclosure/DIL/short sale may be the best option. With 90% LTC initial debt it’s likely the LPs have about 20-25% of the capital stack. To do the loan pay down for the extension or to get new permanent debt investors would likely be subject to a 100% capital call. Better to invest that cash into a new deal because even if the value recovers the investor would recover the same in a new investment as in the existing. Pref equity makes no sense because if the LPs are essentially wiped out already that would put pref equity too high in the capital stack. Pref equity isn’t priced for that risk—that’s for common equity.

2. Tampa apartment deal purchased in 2020 with 10-year fixed or floating debt (doesn't matter for this example) at 65% LTV. During COVID, evictions stacked up costing tons of legal fees and bad debt. Last year, rent growth fell off, occupancies dropped, insurance skyrocketed 4X, and interest rates rose (if floating). For whatever mix of these factors, the property burned through its cash reserves and has slightly negative cash flow.

In this case, a capital call might be the best option. The syndicate needs to rebuild cash reserves and bulk up for the slightly negative cash flow enough to get through to the other side of the market cycle. Because the initial purchase had 65% LTV debt the LPs might have 40-50% of the capital stack, so this might be only a 10% capital call. Even if the investment ultimately only breaks even after 5 more years, putting in $10K to save $100K is a good return on the $10K.

Pref equity could be an option for example 2 if the investors did not wish to pony up. But pref is really best as an option of last resort because the current pay makes the problems worse, and pushing back the LPs to a subordinate position isn’t ideal.

There are a multitude of variations on these examples that shift the decision. My guess is there will be dozens, hundreds, or thousands of case studies to examine a few years down the road to use 20/20 hindsight to evaluate outcomes.

On your second question about extending grace vs being tough: that also depends. For too long many GPs and LPs had too cavalier of an attitude for the risks, and too many GPs made poor risk mitigation decisions and the LPs didn’t know any better. Just last week I saw a deal from a syndicator that was full of misrepresentations and financial manipulation. This operator will likely implode one day and should suffer every consequence coming their way. But we are also likely to see experienced, competent groups that get struck by market factors largely beyond their control.

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V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
2y
Quote from @Scott Trench:

We are seeing more and more syndications and funds getting into trouble.

And while years will have to pass before we can really understand the nuances of what leads to losses in each deal, and how to parse out what is due to gross negligence, what is due to incompetence, what is due to fraud, and what is due to bad luck, there are decisions that GP and LP investors have to make right now, to get the “least bad” outcome in a given investment.

Some GPs are trying to raise capital via capital calls. Others are handing the keys back to senior lenders. And others still are raising preferred equity to inject liquidity into the deal.

My question for the experienced capital raisers on this forum is this:

-What’s least bad?

I feel like if a deal is millions of dollars underwater at present valuations, it’s better for everyone to just hand the keys back. Why wait for a day that might not come for a decade? I could be investing the dollars going into a capital call into something else.

Similarly, a preferred equity raise can be the worst case scenario for investors, but it is being billed by some syndicators as a great tool and “safe”.

When I see a fund injecting a preferred or "protected" equity raise into a deal to meet DSCR requirements from the senior lender and pretending like this is somehow any different from a foreclosure and total equity wipeout, I'm confused. This is a disaster, and may be worse than foreclosure for both new and existing investors. It's an alternative, and not necessarily a good one, to capital call or foreclosure.

I think that as a community we need to hold all syndicators accountable to outcomes for investors, yes, but also we need to be practical about what the right thing to do is.

A few syndications have handed the keys back, for nearly total wipeouts. They are getting beat up in the forums here.
However, I wonder if their investors, though angry now, will in time greatly prefer this approach to the extend and pretend approach of those raising rescue preferred equity, or those calling more capital on deals that have little to no equity in them, even after the call.

Should we be giving a little more grace to the folks who have handed it in and admitted defeat, simply because they will not compound losses on those deals?

And, should we be a little more tough on the folks who are in the same position but raising EVEN MORE capital to double down on failing investments?

As an investor, there's no grace given. Just caused they folded doesn't mean we forgive them and appreciate it. They screwed up and they did not have any inputs in for headwinds.

It really depends on whose heading the syndication for me to answer that. I jumped onto more active REI Q4 22 when i realized some managers had no grasp of a changing environment, and others were way ahead of it. What I noticed was the ones who invested just post GR were completely behind the mark, the one's who've been in it for longer were great at anticipation.

I've asked all for updated pro formas and seeing how they evaluate the headwinds this time off updated rates, insurances, taxes, etc., If it's a reasonable, the capital call in my opinion is less of an issue than folding like a lawn chair. I just don't consider the fact it may be the least bad that it's synonymous with acceptable.

Preferred equity raise is a hard no for me, though. Capital calls it depends who & how that pro forma looks. If they are like a BP-er where they thought their skill was what made them successful for the decade prior, then yes folding is the right solution. Because now that the dust has settled we've seen it was luck that prevailed, no skill in this 2010-2020 era. That decade was anomalous. Much like the BP guy who runs the syndication, compare him to some better syndications his experience is garbage. If anything, it's truly detrimental.

I could pick up in Aug22-Oct22 on the responses I was getting then versus the various syndications on who had the right idea, and I knew I was about to get ****ed. And decided I needed to get more control over RE investments, hence owning the property myself. Curious on the lender's takes, too.
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Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
2y
Great post, Scott. I do not believe you can say whether a capital call, a pref equity investment or handing back the keys amongst a number of other possible decisions a GP can make is the right decision. It's really circumstantial and dependent on the transaction and more importantly, who the GP is and their track record/ past experience. Bringing in pref equity might appear bad on its face, but if done by a GP with a substantiated trackrecord, and the current LP's don't have the means for a capital call, this should be viewed differently than the the GP who is green.

Unfortunately, there are a lot of inexperienced GP's that are now tasked with making these decisions and even scarier, and beleive this needs more attention is the fact their LP's aren't even aware of their lack of experience or trackrecord. This is something I've observed and has become increasingly common practice with a laundry list of educators out there teaching others how to be GP's. The problem is these aren't people with the balance sheets or experience to do so effectively just enough money to dream big and be taught bad and misleading practices on how to raise capital. By way of example, many of what I refer to as "Course Educated GP's" are taught to associate and provide services for legitimate GP's in return for permission to market themselves as a Co-GP. This could be assistance with capital raising, finding a deal etc. None of which are indicative of a GP's ability to execute on a syndication with or without economic headwinds or tailwinds for that matter. However they have websites, BP Profiles and social media suggesting years of experience and success.

I believe this is where the focus of the conversation should be....who exactly is the GP and what is their true background and level of experience. I want to know that first and foremost, and then we can have a conversation about what the right call is to make with respect to the underlying investment because I will trust the decision making of a GP with years of substantited experience and a few losses on the board over the novice who purports to have a perfect track record.

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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Stuart Udis:

Great post, Scott. I do not believe you can say whether a capital call, a pref equity investment or handing back the keys amongst a number of other possible decisions a GP can make is the right decision. It's really circumstantial and dependent on the transaction and more importantly, who the GP is and their track record/ past experience. Bringing in pref equity might appear bad on its face, but if done by a GP with a substantiated trackrecord, and the current LP's don't have the means for a capital call, this should be viewed differently than the the GP who is green.

Unfortunately, there are a lot of inexperienced GP's that are now tasked with making these decisions and even scarier, and beleive this needs more attention is the fact their LP's aren't even aware of their lack of experience or trackrecord. This is something I've observed and has become increasingly common practice with a laundry list of educators out there teaching others how to be GP's. The problem is these aren't people with the balance sheets or experience to do so effectively just enough money to dream big and be taught bad and misleading practices on how to raise capital. By way of example, many of what I refer to as "Course Educated GP's" are taught to associate and provide services for legitimate GP's in return for permission to market themselves as a Co-GP. This could be assistance with capital raising, finding a deal etc. None of which are indicative of a GP's ability to execute on a syndication with or without economic headwinds or tailwinds for that matter. However they have websites, BP Profiles and social media suggesting years of experience and success.

I beleive this is where the focus of the conversation shoudl be....who exactly is the GP and what is their true background and level of experience. I want to know that first and foremost, and then we can have a conversation about what the right call is to make with respect to the underlying investment because I will trust the decision making of a GP with years of substantited experience and a few losses on the board over th the novice who purports to have a perfect track record.

nahhhh .... experienced GP Fund got hammered too because in their 15 holdings or so they use bridge loan and floating.
there's almost no such thing as good and bad as it's 90% losing money in there when they are not using fixed debt.
it's just simple math.
the only way real estate could have better risk/reward is to have long term 10 years or so financing with fixed rate.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Scott Trench:

We are seeing more and more syndications and funds getting into trouble.

And while years will have to pass before we can really understand the nuances of what leads to losses in each deal, and how to parse out what is due to gross negligence, what is due to incompetence, what is due to fraud, and what is due to bad luck, there are decisions that GP and LP investors have to make right now, to get the “least bad” outcome in a given investment.

Some GPs are trying to raise capital via capital calls. Others are handing the keys back to senior lenders. And others still are raising preferred equity to inject liquidity into the deal.

My question for the experienced capital raisers on this forum is this:

-What’s least bad?
Lender needs to do loan modification but they have to stretch it to three years or more. Debt restructurization is common when rate-sensitive project is hammered when there's change in rate especially with these massive volatility.
Now what I see is project with 1.4 DSCR initially is becoming 0.80 DSCR after rate increases 400-500bps.
So in theory the rate should move down to 150-200bps at least for them "to survive".
Will the Fed do it ? nobody knows because stock market is at all time high.
In other word, rather than capital call, it's best to admit defeat especially if your DSCR is less than 0.90.
With DSCR above 0.9 there are some hope.
ps: i heard one self storage guy is having 0.2 dscr
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Stuart UdisPro Member
Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes
2y
@Carlos Ptriawan I couldn't disagree with you more. First, there a number of investment thesis' carried out by syndicators with unexpected headwinds, not solely betting on rates. I beleive this is an important distinction because you appear focused solely on apartment buildings that were acquired because of favorable debt or other bad projections.
What about the ground up developer that exhausted their interest reserve because the construction debt was tied to the fed rate, but the project is still perfoming well and they want to hold off on refinancing a bit longer because its still a great long term hold but given the pre-payment penalties they are opting not to lock into a perm rate yet beleiving favorable financing will be available with a patient approach..... Or what about the syndicator who wanted to complete a condo conversion but the units are going to be geared towards empty nesters and that buyer is not motivated to make that next move until rates calm down & the GP is forced to continue to carry a building as a rental asset when that's not its true or highest and best use but still projects to be an excellent development once the market conditions are better aligned..... Or what about the syndicator who did purchase the multi-family building in your narrow investment thesis and did bet wrong on rates but a major employer just announced significant relocation to the municipality where the apartment building is located or a restrictive zoning overlay was just enacted making it difficult to add new density or maybe its the new commercial development just anounced that is anchored by a wholefoods and exciting nightlife exeriences a block away.
The point I am making is the decision the GP makes is circumstantial and very specific to the fact pattern of their particular deal and to tie back to my first post in this thread, who that decision maker really is is important.
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y

there's also one large fund that makes money when interest rate increases as they purchased a swap before rate hike lol so there's that, one out of ten folks are doing the right thing.
most of these newbie GP, they just follow their teacher, so their teacher is telling them to switch from debt to floating when rate is near zero, there's article on realdeal that mentioning that. bad teacher i guess lol
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
2y
4th Option stop all distributions and horde cash to get the project over the current crisis to me is first step. i know with one of my deals we have distributed profits on time every time however we also went into it with Monster reserves that lowered our Rate of return . but now we are on the other side and the market kind of surprisingly has been very kind to us.. As well as I charged no fee's I only get paid if we have a profit..

I can see in apartment deals if reserves were at a minimum and floating debt and sponsor taking fee's off the top and its like I see on BP were folks are constantly putting rental increases and appreciation into their day one profromas. But I do understand that buildings do turn around and rents do go up.. Anyway I dont have a dog in the cash flow hunt. Just what I observe. my little partnership is a development deal.
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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
2y
Two thoughts come to mind on this discussion
1) The best route on what to do is often very different for the GPs & for the LPs.
2) Most of the GPs and the LPs in these syndications did not properly price their risk, or simply thought that risk did not exist. The reality is the entirety of your investment can disappear just like that, but novice LPs have not considered that when they invest in these deals.
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Brian BurkePro Member
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
2y
@Scott Trench there is no single correct answer here because the best course of action depends on the totality of the circumstances. Not to mention that what is thought to be the best course of action could later turn out to be wrong.
I’ll use some hypothetical examples to illustrate:
1. Phoenix apartment deal purchased in 2021 with 90% LTC 3-1-1 bridge debt. Since, prices have fallen 25% so the property is now worth nearly 20% less than the loan amount. There are 1-year extensions available but the property doesn't meet the extension covenants due to underwater DSCR and debt yield. Lender will grant the first extension with a 20% principal pay down. The syndicate ran out of cash reserves and doesn't have enough to purchase the required replacement rate cap.
Foreclosure/DIL/short sale may be the best option. With 90% LTC initial debt it’s likely the LPs have about 20-25% of the capital stack. To do the loan pay down for the extension or to get new permanent debt investors would likely be subject to a 100% capital call. Better to invest that cash into a new deal because even if the value recovers the investor would recover the same in a new investment as in the existing. Pref equity makes no sense because if the LPs are essentially wiped out already that would put pref equity too high in the capital stack. Pref equity isn’t priced for that risk—that’s for common equity.
2. Tampa apartment deal purchased in 2020 with 10-year fixed or floating debt (doesn't matter for this example) at 65% LTV. During COVID, evictions stacked up costing tons of legal fees and bad debt. Last year, rent growth fell off, occupancies dropped, insurance skyrocketed 4X, and interest rates rose (if floating). For whatever mix of these factors, the property burned through its cash reserves and has slightly negative cash flow.

In this case, a capital call might be the best option. The syndicate needs to rebuild cash reserves and bulk up for the slightly negative cash flow enough to get through to the other side of the market cycle. Because the initial purchase had 65% LTV debt the LPs might have 40-50% of the capital stack, so this might be only a 10% capital call. Even if the investment ultimately only breaks even after 5 more years, putting in $10K to save $100K is a good return on the $10K.
Pref equity could be an option for example 2 if the investors did not wish to pony up. But pref is really best as an option of last resort because the current pay makes the problems worse, and pushing back the LPs to a subordinate position isn’t ideal.
There are a multitude of variations on these examples that shift the decision. My guess is there will be dozens, hundreds, or thousands of case studies to examine a few years down the road to use 20/20 hindsight to evaluate outcomes.
On your second question about extending grace vs being tough: that also depends. For too long many GPs and LPs had too cavalier of an attitude for the risks, and too many GPs made poor risk mitigation decisions and the LPs didn’t know any better. Just last week I saw a deal from a syndicator that was full of misrepresentations and financial manipulation. This operator will likely implode one day and should suffer every consequence coming their way. But we are also likely to see experienced, competent groups that get struck by market factors largely beyond their control.

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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y
Quote from @Scott Trench:

We are seeing more and more syndications and funds getting into trouble.

And while years will have to pass before we can really understand the nuances of what leads to losses in each deal, and how to parse out what is due to gross negligence, what is due to incompetence, what is due to fraud, and what is due to bad luck, there are decisions that GP and LP investors have to make right now, to get the “least bad” outcome in a given investment.

Some GPs are trying to raise capital via capital calls. Others are handing the keys back to senior lenders. And others still are raising preferred equity to inject liquidity into the deal.

My question for the experienced capital raisers on this forum is this:

-What’s least bad?

I feel like if a deal is millions of dollars underwater at present valuations, it’s better for everyone to just hand the keys back. Why wait for a day that might not come for a decade? I could be investing the dollars going into a capital call into something else.

Similarly, a preferred equity raise can be the worst case scenario for investors, but it is being billed by some syndicators as a great tool and “safe”.

When I see a fund injecting a preferred or "protected" equity raise into a deal to meet DSCR requirements from the senior lender and pretending like this is somehow any different from a foreclosure and total equity wipeout, I'm confused. This is a disaster, and may be worse than foreclosure for both new and existing investors. It's an alternative, and not necessarily a good one, to capital call or foreclosure.

I think that as a community we need to hold all syndicators accountable to outcomes for investors, yes, but also we need to be practical about what the right thing to do is.

A few syndications have handed the keys back, for nearly total wipeouts. They are getting beat up in the forums here.
However, I wonder if their investors, though angry now, will in time greatly prefer this approach to the extend and pretend approach of those raising rescue preferred equity, or those calling more capital on deals that have little to no equity in them, even after the call.

Should we be giving a little more grace to the folks who have handed it in and admitted defeat, simply because they will not compound losses on those deals?

And, should we be a little more tough on the folks who are in the same position but raising EVEN MORE capital to double down on failing investments?

This is a great question and the underlying question to this is, what is the truth to the situation.
What do I mean by this? My question boils down to - is the GP making the decision which is best for investors or best for themselves?

Brian gave some great examples which of course the answer to this is "it depends". But lets also look at this through another lens. Many of these GP's are trying to uphold a status or reputation. They will protect that at all costs. What is the best way to protect their reputation? The answer is simple, raise preferred equity and kick the can down the road as you can say "the deal is still alive" versus giving back the deal and there is some conclusion. Many of these offerings are basically on life support and should have the plug pulled.

Whether or not that is their real intention, like the book "how to be a great boss", do your actions match your words? If you are raising preferred equity and continuing to charge fees all the while raising money for your next fund and out there on the conference circuit speaking at events about your next fund and ignoring your investors. Well to me that answer is clear.
To answer the initial question: the least bad is "what outcome protects the investors interest as that is your fiduciary duty to them, the investors. For example, is 40% back to investors today better than 100% or 0% in 5 years.
Well this is where a simple IRR calculation comes in whereas if you invested $100k and got $40k back today, to get back to even would be 8% over the next five years. Very achievable. The syndication believes it can get back there but you also could lose everything? Well today getting 8% is historical norms with a diverse portfolio so I would take the $ today and as a GP would give the money back to investors in 100% of these situations.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
2y
Quote from @Chris Seveney:

Quote from @Scott Trench:

We are seeing more and more syndications and funds getting into trouble.

And while years will have to pass before we can really understand the nuances of what leads to losses in each deal, and how to parse out what is due to gross negligence, what is due to incompetence, what is due to fraud, and what is due to bad luck, there are decisions that GP and LP investors have to make right now, to get the “least bad” outcome in a given investment.

Some GPs are trying to raise capital via capital calls. Others are handing the keys back to senior lenders. And others still are raising preferred equity to inject liquidity into the deal.

My question for the experienced capital raisers on this forum is this:

-What’s least bad?

I feel like if a deal is millions of dollars underwater at present valuations, it’s better for everyone to just hand the keys back. Why wait for a day that might not come for a decade? I could be investing the dollars going into a capital call into something else.

Similarly, a preferred equity raise can be the worst case scenario for investors, but it is being billed by some syndicators as a great tool and “safe”.

When I see a fund injecting a preferred or "protected" equity raise into a deal to meet DSCR requirements from the senior lender and pretending like this is somehow any different from a foreclosure and total equity wipeout, I'm confused. This is a disaster, and may be worse than foreclosure for both new and existing investors. It's an alternative, and not necessarily a good one, to capital call or foreclosure.

I think that as a community we need to hold all syndicators accountable to outcomes for investors, yes, but also we need to be practical about what the right thing to do is.

A few syndications have handed the keys back, for nearly total wipeouts. They are getting beat up in the forums here.
However, I wonder if their investors, though angry now, will in time greatly prefer this approach to the extend and pretend approach of those raising rescue preferred equity, or those calling more capital on deals that have little to no equity in them, even after the call.

Should we be giving a little more grace to the folks who have handed it in and admitted defeat, simply because they will not compound losses on those deals?

And, should we be a little more tough on the folks who are in the same position but raising EVEN MORE capital to double down on failing investments?

This is a great question and the underlying question to this is, what is the truth to the situation.
What do I mean by this? My question boils down to - is the GP making the decision which is best for investors or best for themselves?

Brian gave some great examples which of course the answer to this is "it depends". But lets also look at this through another lens. Many of these GP's are trying to uphold a status or reputation. They will protect that at all costs. What is the best way to protect their reputation? The answer is simple, raise preferred equity and kick the can down the road as you can say "the deal is still alive" versus giving back the deal and there is some conclusion. Many of these offerings are basically on life support and should have the plug pulled.

Whether or not that is their real intention, like the book "how to be a great boss", do your actions match your words? If you are raising preferred equity and continuing to charge fees all the while raising money for your next fund and out there on the conference circuit speaking at events about your next fund and ignoring your investors. Well to me that answer is clear.
To answer the initial question: the least bad is "what outcome protects the investors interest as that is your fiduciary duty to them, the investors. For example, is 40% back to investors today better than 100% or 0% in 5 years.
Well this is where a simple IRR calculation comes in whereas if you invested $100k and got $40k back today, to get back to even would be 8% over the next five years. Very achievable. The syndication believes it can get back there but you also could lose everything? Well today getting 8% is historical norms with a diverse portfolio so I would take the $ today and as a GP would give the money back to investors in 100% of these situations.

I have mentioned this many times.. But for me living through tax reform ( working for a syndicator in the Bay Area in late 80s) this was their playbook.

"
Whether or not that is their real intention, like the book "how to be a
great boss", do your actions match your words? If you are raising
preferred equity and continuing to charge fees all the while raising
money for your next fund and out there on the conference circuit
speaking at events about your next fund and ignoring your investors.
Well to me that answer is clear. "

Everything except the conference circuit that did not really exist then. Did not end well. trying desperately to not have a failure as they felt if they did it would just ruin them.. When in fact a few of the bummers as Brian has mentioned above should have been liquidated took their lumps and carried on..
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Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Chris Seveney:

Quote from @Scott Trench:

We are seeing more and more syndications and funds getting into trouble.

And while years will have to pass before we can really understand the nuances of what leads to losses in each deal, and how to parse out what is due to gross negligence, what is due to incompetence, what is due to fraud, and what is due to bad luck, there are decisions that GP and LP investors have to make right now, to get the “least bad” outcome in a given investment.

Some GPs are trying to raise capital via capital calls. Others are handing the keys back to senior lenders. And others still are raising preferred equity to inject liquidity into the deal.

My question for the experienced capital raisers on this forum is this:

-What’s least bad?

I feel like if a deal is millions of dollars underwater at present valuations, it’s better for everyone to just hand the keys back. Why wait for a day that might not come for a decade? I could be investing the dollars going into a capital call into something else.

Similarly, a preferred equity raise can be the worst case scenario for investors, but it is being billed by some syndicators as a great tool and “safe”.

When I see a fund injecting a preferred or "protected" equity raise into a deal to meet DSCR requirements from the senior lender and pretending like this is somehow any different from a foreclosure and total equity wipeout, I'm confused. This is a disaster, and may be worse than foreclosure for both new and existing investors. It's an alternative, and not necessarily a good one, to capital call or foreclosure.

I think that as a community we need to hold all syndicators accountable to outcomes for investors, yes, but also we need to be practical about what the right thing to do is.

A few syndications have handed the keys back, for nearly total wipeouts. They are getting beat up in the forums here.
However, I wonder if their investors, though angry now, will in time greatly prefer this approach to the extend and pretend approach of those raising rescue preferred equity, or those calling more capital on deals that have little to no equity in them, even after the call.

Should we be giving a little more grace to the folks who have handed it in and admitted defeat, simply because they will not compound losses on those deals?

And, should we be a little more tough on the folks who are in the same position but raising EVEN MORE capital to double down on failing investments?

This is a great question and the underlying question to this is, what is the truth to the situation.
What do I mean by this? My question boils down to - is the GP making the decision which is best for investors or best for themselves?

Brian gave some great examples which of course the answer to this is "it depends". But lets also look at this through another lens. Many of these GP's are trying to uphold a status or reputation. They will protect that at all costs. What is the best way to protect their reputation? The answer is simple, raise preferred equity and kick the can down the road as you can say "the deal is still alive" versus giving back the deal and there is some conclusion. Many of these offerings are basically on life support and should have the plug pulled.

Whether or not that is their real intention, like the book "how to be a great boss", do your actions match your words? If you are raising preferred equity and continuing to charge fees all the while raising money for your next fund and out there on the conference circuit speaking at events about your next fund and ignoring your investors. Well to me that answer is clear.
To answer the initial question: the least bad is "what outcome protects the investors interest as that is your fiduciary duty to them, the investors. For example, is 40% back to investors today better than 100% or 0% in 5 years.
Well this is where a simple IRR calculation comes in whereas if you invested $100k and got $40k back today, to get back to even would be 8% over the next five years. Very achievable. The syndication believes it can get back there but you also could lose everything? Well today getting 8% is historical norms with a diverse portfolio so I would take the $ today and as a GP would give the money back to investors in 100% of these situations.

these are great question, but most gp these days are just trying to keep floating by modifying the loan, to a year or two.
in my opinion, and this is my opinion, it's good if gov. can give subsidize them by allowing further debt restructization , lets say there's program for goverment to give them extension of 5 years with lets say 5% debt.
this would stabilize lot of CRE market i know this strategy has been used outside USA.
0 Reply
Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
2y
@Scott Trench, as others noted, there is too much nuance here, and all an LP can do, once in this position is try to get as full of a picture as possible. Sponsors need to provide FULL transparency. I have seen a fair number of monthly/quarterly reports from syndicators. I am not talking about what I see from most.

Full budget v actuals for last 12+ months

Full outline of various options and projected outcomes for each
If the GP has already contributed capital to the deal, how much, and where it falls relative to LP equity (both initial and any current calls)

And, while it isn't required, the right thing to do would be to hold a live conference call with investors, allowing for full q&a time.

And to @Carlos Ptriawan point about fixed debt, there are are syndicators that are in certain levels of trouble, not because of floating rate debt, but because their loans went from IO to amortizing at exactly the wrong time. So I would not say fixed rate debt is the answer, although it does help A LOT.
I also like how you bring up swaps vs caps. I am not sure most on these forums would understand the differences (learn more: https://www.chathamfinancial.com/insights/interest-rate-caps...). At the end of the day (and in hindsight) swaps are much more advantageous in this market, BUT require true credit worthiness. With how I see most of the syndications presented on these forums, I don't know that the syndicator would qualify. When you are forming all sorts of small partnerships with no real "corporate" backing and pooled asset base to provide security for the counterparty, typically you can't get a swap.
At the end of the day, I was just talking to an LP in some deals that are going south. I, personally, have mixed views on this. First, I feel for the LPs and hope the market turns around and can rescue their capital. BUT, I also know there are a lot of syndicators that should have never been in the business, and if the market improves and helps their deals, they will simply go out and start raising more capital again.

3 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
right so one of this big group that brought swap is making huge win when rate is going up, i would not reveal their name, you are right it's not for everyone juice. but for us small LP, investing to those big group and the small newbie sndication, is just about the same.
for swap, i read in pensford website and they are really sophisticated, leant tons about interest rate.
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Scott Trench:

We are seeing more and more syndications and funds getting into trouble.

And while years will have to pass before we can really understand the nuances of what leads to losses in each deal, and how to parse out what is due to gross negligence, what is due to incompetence, what is due to fraud, and what is due to bad luck, there are decisions that GP and LP investors have to make right now, to get the “least bad” outcome in a given investment.

Some GPs are trying to raise capital via capital calls. Others are handing the keys back to senior lenders. And others still are raising preferred equity to inject liquidity into the deal.

My question for the experienced capital raisers on this forum is this:

-What’s least bad?

I feel like if a deal is millions of dollars underwater at present valuations, it’s better for everyone to just hand the keys back. Why wait for a day that might not come for a decade? I could be investing the dollars going into a capital call into something else.

Similarly, a preferred equity raise can be the worst case scenario for investors, but it is being billed by some syndicators as a great tool and “safe”.

When I see a fund injecting a preferred or "protected" equity raise into a deal to meet DSCR requirements from the senior lender and pretending like this is somehow any different from a foreclosure and total equity wipeout, I'm confused. This is a disaster, and may be worse than foreclosure for both new and existing investors. It's an alternative, and not necessarily a good one, to capital call or foreclosure.

I think that as a community we need to hold all syndicators accountable to outcomes for investors, yes, but also we need to be practical about what the right thing to do is.

A few syndications have handed the keys back, for nearly total wipeouts. They are getting beat up in the forums here.
However, I wonder if their investors, though angry now, will in time greatly prefer this approach to the extend and pretend approach of those raising rescue preferred equity, or those calling more capital on deals that have little to no equity in them, even after the call.

Should we be giving a little more grace to the folks who have handed it in and admitted defeat, simply because they will not compound losses on those deals?

And, should we be a little more tough on the folks who are in the same position but raising EVEN MORE capital to double down on failing investments?

this is also why some prefs equity is a scam :
https://twitter.com/theohicksLP/status/1775520773622362396
Like our friend mentioned, the GP needs to open their book, once we read their book and sales pich, lot of things could be very funny.
0 Reply
Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
2y
So I have 2 syndications for NNN one value add single tenant and one single tenant core plus with tenant already in place.

We buy the properties ALL CASH. I do not like using loans if it can be avoided and being a slave to the debt market and timing of the loan coming due with economic and interest rate environment.

I find often there are 3 types of investors that get taken advantage of with syndications.

1. The very high income investor typically 700k a year and up income with job or business who is busy but gets googly eyes looking at some pro-forma high return and have no clue what they are looking at. They see less risk because they make so much money throwing 50k,100k,200k into something if it doesn't work can be a toe stub for them. Their monthly regeneration of capital can often get them out of bad investments and into the plus over time ( doctors are notorious ) for getting into investments they do not understand.

2. The newly accredited investor. This investor maybe makes 100k a year and has been grinding for years to make accredited investor. They like to get the highest pref possible and equity multiple potential because income is not that high to grow liquid and net worth so they want it working to the max. With that often comes very high risk. Some of those deals might do awesome but others could lose everything. It's more gambling than anything else. You have to understand that as you build your portfolio the risk versus the potential upside.

3. The non-accredited investor. Some syndicators know they can snooker that type of investor out of a quick 50k investment because they are so desperate to get into the game with limited options available to them.

Lots of syndicators sold courses like guru's telling these young bucks they can't lose. Now those syndicators are getting hammered hard. Sure there are still some projects that are doing good or might bounce back but I saw areas that are D areas being sold off as B areas at the height of the multifamily market. Those areas as soon as a downturn economically lots of those tenants start defaulting and crime ramps up higher in those areas. If you have been around for decades and saw the cycles you know what to look for in an investment.

There are also syndicators that their God is money at all costs and they have big teams to feed so when their asset class dries up for deals they go putting together other asset class deals hoping who they partnered with will save the day because they need those going in fees to keep paying staff and living their lifestyle.

My deals the pref is not super high for core plus but these are typically investment grade credit tenants with long term leases. We try to start out at a 6 pref which most REIT's doing what we do might payout 4% so still a better deal. We are smaller with less overhead so can offer a higher pref and still make it work well.

You want syndicators who like to make money but do not NEED IT. Some of my friends haven't bought a property themselves since 2022 to syndicate. They own way over ten million sq ft of retail centers and have been syndicating 40 plus years. The syndicator should only do a deal when they feel strongly about. For me if that is 1 deal a year great if it's 20 then also great. I do it by how I feel about a deal with my 20 years experience in the NNN field. I don't do it to make payroll or because someone wants to hit a certain net worth number goal at all costs. What I learned over decades of time is everything comes full circle.

You make your first 100k a year and feel you can breathe versus living paycheck to paycheck week to week with the bills and ask what do you want to do with life as a career or business. Then you make your first million and think being frugal with investments you could never work another day in your life.

Then the millions tend to turn into tens of millions but you are getting older in age now and see friends with health issues or people from high school that have passed away. I am 49 years old now. Then you come to the conclusion that it's more about the quality of life you live day to day and helping people try to achieve their dreams through investing. What that looks like is different for everyone.

Once you have enough you want to outpace inflation safely. The 50 year average taking out outlier years for negative inflation and super high inflations is about 2.75% annually. Making money drops down a few pegs on the list versus TIME. Time you cannot buy anymore of. You can leverage people to do more in a day but you do not stop that day turning over whether you are worth 1 cent or 10 billion. So chasing money is an endless black hole. There will always be someone with more. Having talked on the phone with thousands of millionaires over the decades from all wealth levels if they do not have their health, their family, and the time to enjoy the money the money is mostly meaningless for them. I found about a handful of people out of many thousands that say they want to count money everyday and are just about another dollar. My legacy I want future generations to see I was much more than someone who made a lot of money. That was part of who I am coming from nothing not 2 cents to rub together but I want them to see all sides of me and what I valued in life. There is an old saying. ( Use money and love people) and not the other way around. The problem with many newer syndicators is often they did not earn the millions the hard way. If they did they would want to treat every investors capital with the upmost respect above all else. That is because there is a story that goes with making that money for that investor investing in your deal. It's not just some money sitting around it was hard earned with their time and energy or it could be family legacy money that was passed down to them which is just as important.

Right now investors can get about 5% just sitting liquid in the bank but taxed at the highest rate. So getting 6% to start and getting tax depreciation with hopefully some property appreciation value in the future could be a good investment although any investment is not guaranteed. That is why knowing who the sponsor is and what they stand for is super important just as much as the deal itself.

Alot of multifamily guys used short term or floating debt to give rosy pro-forma's to entice investment. They never planned interest rates would double in a few years. Instead they might have planned for 50 basis points to 75 basis points uptick in underwriting. When rent grow of 100 a door happened it still wasn't enough for the high rates to refi the loan and they could not sell off for what they had into it. If you had assumable debt fixed in the 3's for 7 to 10 years you were looking pretty golden to sell in this market if you had to or wanted to. Nobody has the answers but really think the syndicators long time in the multifamily space with pencils down will mop up the lenders messes for them and upcycle net worth again.

Podcast Guest on Show #47
NNN Invest53 Reviews
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4 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
2y
Quote from @Joel Owens:

So I have 2 syndications for NNN one value add single tenant and one single tenant core plus with tenant already in place.

We buy the properties ALL CASH. I do not like using loans if it can be avoided and being a slave to the debt market and timing of the loan coming due with economic and interest rate environment.

I find often there are 3 types of investors that get taken advantage of with syndications.

1. The very high income investor typically 700k a year and up income with job or business who is busy but gets googly eyes looking at some pro-forma high return and have no clue what they are looking at. They see less risk because they make so much money throwing 50k,100k,200k into something if it doesn't work can be a toe stub for them. Their monthly regeneration of capital can often get them out of bad investments and into the plus over time ( doctors are notorious ) for getting into investments they do not understand.

2. The newly accredited investor. This investor maybe makes 100k a year and has been grinding for years to make accredited investor. They like to get the highest pref possible and equity multiple potential because income is not that high to grow liquid and net worth so they want it working to the max. With that often comes very high risk. Some of those deals might do awesome but others could lose everything. It's more gambling than anything else. You have to understand that as you build your portfolio the risk versus the potential upside.

3. The non-accredited investor. Some syndicators know they can snooker that type of investor out of a quick 50k investment because they are so desperate to get into the game with limited options available to them.

Lots of syndicators sold courses like guru's telling these young bucks they can't lose. Now those syndicators are getting hammered hard. Sure there are still some projects that are doing good or might bounce back but I saw areas that are D areas being sold off as B areas at the height of the multifamily market. Those areas as soon as a downturn economically lots of those tenants start defaulting and crime ramps up higher in those areas. If you have been around for decades and saw the cycles you know what to look for in an investment.

There are also syndicators that their God is money at all costs and they have big teams to feed so when their asset class dries up for deals they go putting together other asset class deals hoping who they partnered with will save the day because they need those going in fees to keep paying staff and living their lifestyle.

My deals the pref is not super high for core plus but these are typically investment grade credit tenants with long term leases. We try to start out at a 6 pref which most REIT's doing what we do might payout 4% so still a better deal. We are smaller with less overhead so can offer a higher pref and still make it work well.

You want syndicators who like to make money but do not NEED IT. Some of my friends haven't bought a property themselves since 2022 to syndicate. They own way over ten million sq ft of retail centers and have been syndicating 40 plus years. The syndicator should only do a deal when they feel strongly about. For me if that is 1 deal a year great if it's 20 then also great. I do it by how I feel about a deal with my 20 years experience in the NNN field. I don't do it to make payroll or because someone wants to hit a certain net worth number goal at all costs. What I learned over decades of time is everything comes full circle.

You make your first 100k a year and feel you can breathe versus living paycheck to paycheck week to week with the bills and ask what do you want to do with life as a career or business. Then you make your first million and think being frugal with investments you could never work another day in your life.

Then the millions tend to turn into tens of millions but you are getting older in age now and see friends with health issues or people from high school that have passed away. I am 49 years old now. Then you come to the conclusion that it's more about the quality of life you live day to day and helping people try to achieve their dreams through investing. What that looks like is different for everyone.

Once you have enough you want to outpace inflation safely. The 50 year average taking out outlier years for negative inflation and super high inflations is about 2.75% annually. Making money drops down a few pegs on the list versus TIME. Time you cannot buy anymore of. You can leverage people to do more in a day but you do not stop that day turning over whether you are worth 1 cent or 10 billion. So chasing money is an endless black hole. There will always be someone with more. Having talked on the phone with thousands of millionaires over the decades from all wealth levels if they do not have their health, their family, and the time to enjoy the money the money is mostly meaningless for them. I found about a handful of people out of many thousands that say they want to count money everyday and are just about another dollar. My legacy I want future generations to see I was much more than someone who made a lot of money. That was part of who I am coming from nothing not 2 cents to rub together but I want them to see all sides of me and what I valued in life. There is an old saying. ( Use money and love people) and not the other way around. The problem with many newer syndicators is often they did not earn the millions the hard way. If they did they would want to treat every investors capital with the upmost respect above all else. That is because there is a story that goes with making that money for that investor investing in your deal. It's not just some money sitting around it was hard earned with their time and energy or it could be family legacy money that was passed down to them which is just as important.

Right now investors can get about 5% just sitting liquid in the bank but taxed at the highest rate. So getting 6% to start and getting tax depreciation with hopefully some property appreciation value in the future could be a good investment although any investment is not guaranteed. That is why knowing who the sponsor is and what they stand for is super important just as much as the deal itself.

Alot of multifamily guys used short term or floating debt to give rosy pro-forma's to entice investment. They never planned interest rates would double in a few years. Instead they might have planned for 50 basis points to 75 basis points uptick in underwriting. When rent grow of 100 a door happened it still wasn't enough for the high rates to refi the loan and they could not sell off for what they had into it. If you had assumable debt fixed in the 3's for 7 to 10 years you were looking pretty golden to sell in this market if you had to or wanted to. Nobody has the answers but really think the syndicators long time in the multifamily space with pencils down will mop up the lenders messes for them and upcycle net worth again.

nice post Joel.. I am currently at one of my clients/friends condo's in Waikiki I met them when i brokered a 100 unit apartment to them in Portland 20 plus years ago.. at the time I asked them if I should be shopping for a lender and the response. Nope we only pay cash !!! that was a 5 mil purchase and they bought the one next door a few years later 35 units for cash and I think the whole thing even above todays caps is probably 15 5o 18 million with zero debt.,.

The real high net worth folks I have worked with over the years pretty much all operate the same way little to no debt.. I know as I age out thats my goal all my real estate paid for. I know it goes against the refi till U die get as many doors as possible BP bias. But I am 90% there and lovin it.

the one PPM I did I followed your play book we paid cash.. granted returns are lower but safety is much better and we are not having these discussions you see on BP right now with other PPM or syndicators that did exactly what you are talking about.

Bottom line when your RE is paid for you need far less of it.
Podcast Guest on Show #222
JLH Capital Partners51 Review
Website View Page
2 Reply
JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
2y
Quote from @Jay Hinrichs:

Quote from @Joel Owens:

So I have 2 syndications for NNN one value add single tenant and one single tenant core plus with tenant already in place.

We buy the properties ALL CASH. I do not like using loans if it can be avoided and being a slave to the debt market and timing of the loan coming due with economic and interest rate environment.

I find often there are 3 types of investors that get taken advantage of with syndications.

1. The very high income investor typically 700k a year and up income with job or business who is busy but gets googly eyes looking at some pro-forma high return and have no clue what they are looking at. They see less risk because they make so much money throwing 50k,100k,200k into something if it doesn't work can be a toe stub for them. Their monthly regeneration of capital can often get them out of bad investments and into the plus over time ( doctors are notorious ) for getting into investments they do not understand.

2. The newly accredited investor. This investor maybe makes 100k a year and has been grinding for years to make accredited investor. They like to get the highest pref possible and equity multiple potential because income is not that high to grow liquid and net worth so they want it working to the max. With that often comes very high risk. Some of those deals might do awesome but others could lose everything. It's more gambling than anything else. You have to understand that as you build your portfolio the risk versus the potential upside.

3. The non-accredited investor. Some syndicators know they can snooker that type of investor out of a quick 50k investment because they are so desperate to get into the game with limited options available to them.

Lots of syndicators sold courses like guru's telling these young bucks they can't lose. Now those syndicators are getting hammered hard. Sure there are still some projects that are doing good or might bounce back but I saw areas that are D areas being sold off as B areas at the height of the multifamily market. Those areas as soon as a downturn economically lots of those tenants start defaulting and crime ramps up higher in those areas. If you have been around for decades and saw the cycles you know what to look for in an investment.

There are also syndicators that their God is money at all costs and they have big teams to feed so when their asset class dries up for deals they go putting together other asset class deals hoping who they partnered with will save the day because they need those going in fees to keep paying staff and living their lifestyle.

My deals the pref is not super high for core plus but these are typically investment grade credit tenants with long term leases. We try to start out at a 6 pref which most REIT's doing what we do might payout 4% so still a better deal. We are smaller with less overhead so can offer a higher pref and still make it work well.

You want syndicators who like to make money but do not NEED IT. Some of my friends haven't bought a property themselves since 2022 to syndicate. They own way over ten million sq ft of retail centers and have been syndicating 40 plus years. The syndicator should only do a deal when they feel strongly about. For me if that is 1 deal a year great if it's 20 then also great. I do it by how I feel about a deal with my 20 years experience in the NNN field. I don't do it to make payroll or because someone wants to hit a certain net worth number goal at all costs. What I learned over decades of time is everything comes full circle.

You make your first 100k a year and feel you can breathe versus living paycheck to paycheck week to week with the bills and ask what do you want to do with life as a career or business. Then you make your first million and think being frugal with investments you could never work another day in your life.

Then the millions tend to turn into tens of millions but you are getting older in age now and see friends with health issues or people from high school that have passed away. I am 49 years old now. Then you come to the conclusion that it's more about the quality of life you live day to day and helping people try to achieve their dreams through investing. What that looks like is different for everyone.

Once you have enough you want to outpace inflation safely. The 50 year average taking out outlier years for negative inflation and super high inflations is about 2.75% annually. Making money drops down a few pegs on the list versus TIME. Time you cannot buy anymore of. You can leverage people to do more in a day but you do not stop that day turning over whether you are worth 1 cent or 10 billion. So chasing money is an endless black hole. There will always be someone with more. Having talked on the phone with thousands of millionaires over the decades from all wealth levels if they do not have their health, their family, and the time to enjoy the money the money is mostly meaningless for them. I found about a handful of people out of many thousands that say they want to count money everyday and are just about another dollar. My legacy I want future generations to see I was much more than someone who made a lot of money. That was part of who I am coming from nothing not 2 cents to rub together but I want them to see all sides of me and what I valued in life. There is an old saying. ( Use money and love people) and not the other way around. The problem with many newer syndicators is often they did not earn the millions the hard way. If they did they would want to treat every investors capital with the upmost respect above all else. That is because there is a story that goes with making that money for that investor investing in your deal. It's not just some money sitting around it was hard earned with their time and energy or it could be family legacy money that was passed down to them which is just as important.

Right now investors can get about 5% just sitting liquid in the bank but taxed at the highest rate. So getting 6% to start and getting tax depreciation with hopefully some property appreciation value in the future could be a good investment although any investment is not guaranteed. That is why knowing who the sponsor is and what they stand for is super important just as much as the deal itself.

Alot of multifamily guys used short term or floating debt to give rosy pro-forma's to entice investment. They never planned interest rates would double in a few years. Instead they might have planned for 50 basis points to 75 basis points uptick in underwriting. When rent grow of 100 a door happened it still wasn't enough for the high rates to refi the loan and they could not sell off for what they had into it. If you had assumable debt fixed in the 3's for 7 to 10 years you were looking pretty golden to sell in this market if you had to or wanted to. Nobody has the answers but really think the syndicators long time in the multifamily space with pencils down will mop up the lenders messes for them and upcycle net worth again.

nice post Joel.. I am currently at one of my clients/friends condo's in Waikiki I met them when i brokered a 100 unit apartment to them in Portland 20 plus years ago.. at the time I asked them if I should be shopping for a lender and the response. Nope we only pay cash !!! that was a 5 mil purchase and they bought the one next door a few years later 35 units for cash and I think the whole thing even above todays caps is probably 15 5o 18 million with zero debt.,.

The real high net worth folks I have worked with over the years pretty much all operate the same way little to no debt.. I know as I age out thats my goal all my real estate paid for. I know it goes against the refi till U die get as many doors as possible BP bias. But I am 90% there and lovin it.

the one PPM I did I followed your play book we paid cash.. granted returns are lower but safety is much better and we are not having these discussions you see on BP right now with other PPM or syndicators that did exactly what you are talking about.

Bottom line when your RE is paid for you need far less of it.

Well for sure the one major advantage of all cash is that you are virtually guaranteed a return regardless of what's going on around you, assuming you bought a good asset. That return might be half a percent in bad times or 20 in good times but there's always something there. Still, most people will have to use some kind of leverage to grow at all. I think part of the trick is knowing how sturdy your limb is that you're out on and knowing when to stand pat. Just look at smart corporations; when it makes sense, they issue debt, and when it doesn't they buy it back. Too many people think you can just chase debt non stop and that is dangerous.
Podcast Guest on Show #243
Skyline Properties
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1 Reply
Bobby Larsen
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
2y
@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Bobby Larsen:

@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.

Pref just means dilution to common investor and one is giving very high risk to new investor while returning little bit of money.
the real solution for this is not capital call to investor , in other country the solution is debt restructuring aka let’s say loan modification to another 4 years with the same rate schedule.

Capital call is sort of punishing small people by GP and lender.
0 Reply
Bobby Larsen
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
2y
Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.

Pref just means dilution to common investor and one is giving very high risk to new investor while returning little bit of money.
the real solution for this is not capital call to investor , in other country the solution is debt restructuring aka let’s say loan modification to another 4 years with the same rate schedule.

Capital call is sort of punishing small people by GP and lender.

Two different topics, in my opinion. I was just commenting that a 0.88 DSCR doesn't indicate the value of a property is underwater. There's a higher likelihood but it could also just mean the sponsor made a poor decision on the type of loan they put on the property and it could make sense to restructure the capital stack with a new loan and a capital call and/or preferred equity.
0 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Bobby Larsen:

Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.

Pref just means dilution to common investor and one is giving very high risk to new investor while returning little bit of money.
the real solution for this is not capital call to investor , in other country the solution is debt restructuring aka let’s say loan modification to another 4 years with the same rate schedule.

Capital call is sort of punishing small people by GP and lender.

Two different topics, in my opinion. I was just commenting that a 0.88 DSCR doesn't indicate the value of a property is underwater. There's a higher likelihood but it could also just mean the sponsor made a poor decision on the type of loan they put on the property and it could make sense to restructure the capital stack with a new loan and a capital call and/or preferred equity.

If deck is saying DSCR should be 1.5 but in reality it is 0.88, it means the biz execution plan has been wrong 40%.
Restructure the capital is okay but the first thing the GP should do is to renegotiate with the lender first.
Capital call is sort of business hostility act when GP can't perform their biz plan (or dumb enough to do business) and/or can't negotiate with lender.
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Bobby Larsen
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
2y
Quote from @Scott Trench:

My question for the experienced capital raisers on this forum is this:

-What’s least bad?

Great topic and one that I think is very helpful to many LPs on BP today.
However, I do disagree on preferred equity. When used correctly and in moderation, it can be an effective tool at times. The first sanity check is if there is a sizeable spread between preferred rates and rates of return that LPs should be expecting on value-add projects. On small balance preferred equity, rates are 15%+ so this fails that test in my opinion. However, with larger balance preferred equity ($5m+), rates become more interest. Typically between 12% to 13%. If it passes the first sanity check, preferred equity should be viewed akin to debt and be analyzed with a blended rate with a potential loan.

Example, Property A was acquired with a loan from a debt fund at 3.75% + SOFR and a 3% interest rate cap that is expiring. Property A does not have reserves to buy a new rate cap or maybe it just doesn't make sense but at the current 3.75% + 3% (rate cap), Property A is cash flowing 1-2% a year. They have the option to do a capital call or preferred equity.

Capital Call - to either buy the rate cap (likely a bad decision) or a capital call to buy down loan principal and execute a fixed rate loan at 6%. Investors need to pony up additional capital and investors that don't, will be diluted. Property will cashflow at 3% with an expected total annual return of 13%.

Preferred Equity at 12% - to either buy the rate cap (definitely a bad decision) or preferred equity to buy down loan principal and execute a fixed rate loan at 6% for an all in (loan + preferred) blended rate of 6.6%. Investors do not need to provide additional capital or be diluted. The property will cashflow at 2.25% with an expected total annual return of 15%.

I don't view either of these to be the right or wrong answer but I would expect different LPs to have different preferences here.
This approach can also be used on new acquisitions. It's very surprising to me that investors will often rather see a property purchased with a 75% loan to cost debt fund at 4% + SOFR (all-in rate today of 9.33%) than a 60% loan to cost agency fixed rate loan at 6% combined with 15% loan to cost preferred equity at a rate of 12% (7.2% blended rate). Both sound risky to me and we're a sponsor that typically executes with 65% agency debt, but if I were choosing between the two as an LP investor, I would be choosing agency debt + preferred.
1 Reply
Bobby Larsen
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
2y
Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.

Pref just means dilution to common investor and one is giving very high risk to new investor while returning little bit of money.
the real solution for this is not capital call to investor , in other country the solution is debt restructuring aka let’s say loan modification to another 4 years with the same rate schedule.

Capital call is sort of punishing small people by GP and lender.

Two different topics, in my opinion. I was just commenting that a 0.88 DSCR doesn't indicate the value of a property is underwater. There's a higher likelihood but it could also just mean the sponsor made a poor decision on the type of loan they put on the property and it could make sense to restructure the capital stack with a new loan and a capital call and/or preferred equity.

If deck is saying DSCR should be 1.5 but in reality it is 0.88, it means the biz execution plan has been wrong 40%.
Restructure the capital is okay but the first thing the GP should do is to renegotiate with the lender first.
Capital call is sort of business hostility act when GP can't perform their biz plan (or dumb enough to do business) and/or can't negotiate with lender.

Lenders aren't performing acts of kindness. If they're open to a renegotiation, 99% of the times it means that the common equity is wiped out and the loan is at risk. The 1% is when it's a bank and the sponsor has VERY significant deposits and/or other business with them and uses that as leverage but that's not applicable to anywhere here. I have yet to see a loan modification that has resulted in the common equity better off. Most likely, it kicks the can down the road and provides the lender with additional protection and guarantees the common equity's position is gone.
Have you seen renegotiated loan terms that were accretive to common equity?
2 Reply
Carlos Ptriawan
Member since 2019 · 7k+ posts · 4k+ votes
2y
Quote from @Bobby Larsen:

Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

Quote from @Carlos Ptriawan:

Quote from @Bobby Larsen:

@Carlos Ptriawan I understand your point of view but DSCR does not indicate value. A sub-1.0x dscr indicates poor financial structuring which can still be corrected with a capital call or preferred equity IF the value still justifies that approach.

Pref just means dilution to common investor and one is giving very high risk to new investor while returning little bit of money.
the real solution for this is not capital call to investor , in other country the solution is debt restructuring aka let’s say loan modification to another 4 years with the same rate schedule.

Capital call is sort of punishing small people by GP and lender.

Two different topics, in my opinion. I was just commenting that a 0.88 DSCR doesn't indicate the value of a property is underwater. There's a higher likelihood but it could also just mean the sponsor made a poor decision on the type of loan they put on the property and it could make sense to restructure the capital stack with a new loan and a capital call and/or preferred equity.

If deck is saying DSCR should be 1.5 but in reality it is 0.88, it means the biz execution plan has been wrong 40%.
Restructure the capital is okay but the first thing the GP should do is to renegotiate with the lender first.
Capital call is sort of business hostility act when GP can't perform their biz plan (or dumb enough to do business) and/or can't negotiate with lender.

Lenders aren't performing acts of kindness. If they're open to a renegotiation, 99% of the times it means that the common equity is wiped out and the loan is at risk. The 1% is when it's a bank and the sponsor has VERY significant deposits and/or other business with them and uses that as leverage but that's not applicable to anywhere here. I have yet to see a loan modification that has resulted in the common equity better off. Most likely, it kicks the can down the road and provides the lender with additional protection and guarantees the common equity's position is gone.
Have you seen renegotiated loan terms that were accretive to common equity?

I heard about it that it's common to see loan negotiation/extension to be succesful. What I don't know is whethr it's gov. loan or private lender, some insider in MF should know about it more.
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