Ashcroft capital: Additional 20% capital call

[Jon Zhou]

After many of the Ashcroft capital syndications paused distributions, I get this surprise email this morning saying all LP investors need to pay additional 19.7% of invested capital call  

anyone have experience with capital calls and syndications? Is there ever a position outcome to these or are we putting more money into a failing syndication?

“Thank you for your patience as we continue to navigate our way through this current economic cycle and unprecedented time in the capital markets. We recognize that this email contains a substantial amount of information, which is why a member of our Investor Relations team will be contacting you shortly to address any questions.

We need to solve for three major factors as it pertains to Elliot Roswell:

1. Allow the multifamily market time to stabilize.
   
2. Meet liquidity needs for the rate cap, capital expenditures and unexpectedly high debt payments.
   
3. Resume renovations which have been temporarily paused.
   

How do we achieve this?

Based on feedback from our existing lender, other potential partners, and the significant capital requirements to potentially buy down the loan to refinance, we determined the best path forward is a successful LP capital call of 19.7%. This will allow us to maintain flexibility to potentially sell the property within 24 months.

This is Ashcroft’s first capital call, and while it’s regrettable to take this step, our primary focus remains safeguarding your investment. Therefore, all LPs must participate 

Elliot Roswell is a strong asset that is poised for a strong rebound in value as markets improve. This is due to the property’s institutional quality and the continued growth within the Atlanta market. Moreover, demand and absorption rates are currently at 25-year highs and are continuing to trend in that direction with a 70% reduction in new construction permits and drop off in deliveries in early 2025.

We will maintain flexibility to sell Elliot Roswell as markets improve and anticipate doing so within the next 24 months. In the meantime, we need to cover rate caps costs and resume renovations so that we are best positioned to maximize your potential return.

Why is a capital call necessary?

• Preserving Capital: If this capital call is not successful, we will have to sell Elliot Roswell in an inopportune market. This would result in selling the asset below our basis and incurring a significant loss of LP-invested equity. Specifically, if forced to sell now it would be a total loss of capital for both Class A and Class B.
  
• Replacing Rate Caps: Our rate cap is expiring this year, and the projected replacement cost is $736k.
  
• Resuming Renovations: Given rising inflation and labor costs, our capital expenditure exceeded initial underwriting. This prompted a temporary pause to renovations. However, resuming renovations is essential to increasing revenue, and a capital infusion allows us to resume both interior and exterior renovations. We will consistently evaluate the cost vs. benefit, adjusting the renovation scope as necessary.
  
• Maintaining Lender Requirements & Loan Covenants: We (Joe & Frank) will consistently support you and our other investors through both favorable and challenging times. We’ve already extended a $2.9M interest-free short-term loan to cover various unexpected expenses, including the replacement rate cap over the past 12 months. While this was meant as a temporary solution, it must be repaid promptly to maintain compliance with loan agreements and ens

[Bobby Larsen]

Quote from @Jay Hinrichs:

me thing It could be my Banker was being more specific about commercial and Office.. but having lived through that to me it ALL got hammered :( And of course I try to just forget about those terrible years.  I do know clients of mine I sold MF to here in the PDX market though did not miss a beat.  

That was one of those periods where every investment was sold, no matter good or bad. PDX market has been good to me since and really the only MF market where we're close on pricing today.

[Carlos Ptriawan]

Quote from @Lane Kawaoka:

Current market conditions, especially with cap rates having risen from the low 4s to over 5-5.5%, essentially wipes out LP equity when the value of properties went down at least 30%.

Recent shifts due to 0 => 5.5% Fed Rate in the quickest time in history, has turned cap rates from the low 4s to over 6.5-7% in some markets for Class B apartments. This shift has notably impacted property values, leading to significant downturns. To illustrate, a property initially valued at $60 million might see its worth decrease by 30%, settling at around $45 million. In scenarios where senior debt (and renovation costs) hovers around the $50 million mark, the resultant cause pushes preferred, and LP and GP equity positions below the surface.

Basics on Property Evaluation:

To figure out how much your commercial property is worth, you can use the following simple math equation. You take the money you make (NOI) and divide it by something called the cap rate. The cap rate tells you what people are willing to pay for properties like yours.

So, the equation looks like this:

Value of Property = Net Operating Income / Cap Rate

Imagine your shopping center makes $100,000 a year after you pay all your costs (that's your NOI). And let's say the cap rate in your area is 0.05 (or 5%). You can figure out how much your shopping center is worth like this:

Value of Property = $100,000 / 0.05 = $2,000,000

But here's the tricky part: You don't get to decide the cap rate, it's decided by the market, kind of like how fashion trends decide what clothes are cool. If the cap rate goes up because the market changes, like from 0.05 (5%) to 0.06 (6%), even if you're still making $100,000, your property's value changes.

So with a cap rate of 6%, it looks like this:

Value of Property = $100,000 / 0.06 = $1,666,666.67

Even though you're making the same amount of money, your shopping center's value went down because the cap rate went up. It's important to remember that you have control over making your shopping center nicer and more profitable, but you can't control the cap rate, which can make your property's value go up or down without you changing a thing!

It's a sobering situation that no one has faced since 2009 faced with it firsthand (the dinosaurs who did are out of the game or in the institutional world not working with BP type retail investors like you and I). The stark reality is that a 30% market downturn, again caused by an unprecedented surge in interest rates – the highest in four decades – can profoundly affect market values. Such a scenario doesn't just bring values down by 30% but also places substantial pressure on property holders, especially when debt refinancing looms on the horizon, compelling action at these reduced market values.

Here is the double whammy that increases the cash in refinance needed, the capital markets (bank lending) terrain has tightened greatly. Banks, previously granted loans at 70% of the property's value, are now capping at 50%. This adjustment demands a greater cash input at the point of refinancing. This is the debt renewal tidal wave everyone is talking about and where we will start to see a lot more of.

From a personal perspective, this period has been particularly taxing. Having personally a lot of skin in the game, often being among the first to contribute when things got difficult. Witnessing the dissipation of substantial (multiple seven figures) personal capital, especially in efforts to steer through these turbulent times, has been a sobering experience. It became very apparent in Q4 2023 (point of no return for those in 2021-2022 vintage project) as the market cap rates deteriorate even more as pricing has not found a firm ground, particularly when it seems that additional capital infusion won't bridge the gap to more secure financial footing.

In these moments, the weight of the situation can feel particularly burdensome, and I speak from a place of shared experience. The recent period has been emotionally intense, marked by earnest discussions with investors navigating these very challenges. It's prompted a profound realization of the importance of compassion for everyone involved and those caught in this same situation.

If you find yourself in a similar position as a GP, grappling with the uncertainties and complexities of the current market, know that you're not navigating this alone (unverified data something like 25 million assets with renewing debt situation). In times like these, empathy and understanding are important. If you're an investor or a general partner facing similar challenges, I encourage prudence and reflection before funneling resources into uncertain ventures, building a bridge to no where as something where I did with my personal capital. While I might not be the first person you'd think of reaching out to, I'm here to lend an ear, to engage in a dialogue, I've seen operators commit suicide over this and some flee the country check I don't think either are viable actions. If you're navigating these turbulent waters, know that your experiences resonate, and you're not alone in this journey.

I began investing in 2009 and started out of state turnkeys in 2012 a period that remarkably coincided with a great time to enter the market, I've witnessed the past 12 to 13 years have showcased an impressive and steady bull market. However, it's also clear that markets naturally ebb and flow, and corrections, though challenging, are a part of the investment landscape.

One of the key insights from this journey has been the importance of diversification. Today involved in over 2B of deals or 65 plus projects - most of these ventures are secured with fixed-rate debt or long-term notes, extending beyond five and even ten years, or particularly in the realm of developments through substantial completion. Spreading investments across various sectors and over time has proven to be a prudent strategy, especially for navigating through market corrections. Abet it still sucks.

Another undeveloped takeaway that I have is how influential interest rates are with real estate prices especially when you get such a synthetic change to interest rates we have seen this year, whereas we have seen the stock market react counterintuitively positive (perhaps due to fake money being produced). This as an investor has forced me to look for Alpha in different asset classes potentially outside of the BiggerPockets world of real estate. From late 2022, we did not do traditional value add multifamily deals because we could not make the numbers work due to the distressed capital markets terms that were available in the market... this is essentially why the market came down so much because buyers like us were not buying. There are a lot of operators out there saying that they can get properties at 30-50% off the highs (they are correct on that) but without the debt package, the deal ROI numbers don't work.

 So there's this GP , I got their offering last week, their offering is exactly like what you said and I predicted ; their offering is mocking the seller/ the FOMO GP that sell their asset for 25% discount, with all renovation has been completed by them. In the middle of class B "stabilized" asset in  Dallas. Mocking the seller is so ugy they have to do value-add for free and end up divesting from real estate LOL.

Their new financing is 7 years Fanni Mae fixed-rate at 5.95% 60% LTV.

Same story would happen to Tides/Ashcroft as well. Or I bet they would buy their own asset with different name LOL

[Carlos Ptriawan]

Quote from @Brian Burke:

Quote from @Carlos Ptriawan:

------------------------------------
My question to @Brian Burke and @Chris Seveney and @Scott Trench :
1. Don't you think the lender is playing with free-wheel assets (for lack of better word), lets say borrower use 80%LTV and cap rate went down 20% so now it's 100-110%LTV. What's really the math logic for the lender to charge the LP $20 million, $40 million or even $1 million ? it seems for me the asset (as long as the valuation remains between 100-110%LTV) becomes a hostage at certain times.

In residential, it's easy to understand that the bank could help the situation because the gov. is intercepting and giving help to the borrower so loan modification is possible, but what's the mechanism in CRE case?

2. If that's the case, then.... as LP we donot care about who is managing the asset, but don't you think it's always safer/better to invest directly to the lender? with their reserves, their risk is very minimal (especially in multifamily asset class).

 @Carlos Ptriawan I’ll answer as best as I can from the perspective of a borrower (I’ve borrowed on bridge debt way back in the day), GP of 4,000+ units (75% of which I sold in 2021/2022), LP (I have passive investments), and lender (a mortgage banker I co-founded did over $2 billion prior to selling in 2022). 

With the exception of a few “loan to own” shops, the lenders don’t want these properties.  They don’t make loans hoping the borrower will fail.  They might not always make the best decisions, resulting in failures, but some of those decisions were driven by bad data (whether from the borrower, appraiser, inspector, or whoever).  And some of these lenders just did a poor job because they got caught up in the same unjustifiable market euphoria as the borrowers.

But now as those bad decisions or incompetence or inappropriate market enthusiasm rise to the surface, most lenders have only one goal:  to get their principal (and hopefully interest and costs) back.

So as it relates to negotiating an extension with a borrower…these are individualized conversations with ala carte selections, not a prix fixe menu.  The lender knows that as long as the GP has some thread of hope in saving the deal, or just saving face, they have a fish on.  What the servicer will do is figure out how much they can squeeze out of the borrower in exchange for kicking the can down the road.  $X principal reduction gets you X extra months.  Both the GP and the lender can tell their investors that they won.

To your question on how this is calculated, there’s no math formula, instead it’s more like that scene in National Lampoon’s Vacation where the Griswold Family Truckster gets repaired at the only gas station in the desert.  When Clark Griswold asks the mechanic how much is the bill, the mechanic looks at the gas station attendant, they both laugh, then looks at Clark with a serious look and asks Clark, “How much you got?”.  Clark says “you can’t do that, I’m going to call the Sheriff.”  The mechanic laughs even harder and whips out his Sheriff badge.

These are very very interesting topic related to distressed debt. I checked from one of the CRE CLO loan issuer earning call, they said the following :

....
Compared to the peer group as it relates to rent growth, our 2020, '22 vintages benefited from our proprietary GEO tier model, which ranks markets 1 through 5, 1 being the best with projected negative absorption a major factor. Recent data shows significant dispersion in rent metrics with supply influx in overbuilt markets causing mid-single digit rent declines. As of March 31, 91% of our originated portfolio is in markets ranked 3 or better. Overall, multifamily industry prices are down 16% from '22 peak with an additional 5% forecast for the 2024 bottom. Given our going-in LTV of 62%, these changes result in a portfolio mark-to-market under 100% versus office where a 50% decline has created over 100% LTVs.

We do not believe the increased delinquency in our multifamily portfolio is indicative of further principal loss.
The financial effect will be short-term earnings pressure for the interim period between defaults and modification, forbearance or refinance. Unlike other CRE sectors subject to the vagaries of the regional bank and CMBS markets, multifamily benefits from the government put with $150 billion of annual GSE allocation providing a pathway for takeout of bridge loans requiring additional time to execute a business plan. Across the $1.3 billion of our loans that reached initial maturity over the last 12 months, 42% paid off with 90% of the remaining loans qualifying for extension.

......So you're right when saying the capital cost to do loan modification is very custom , in wolfstreet the author mentioned how one JV can continue 4% rate ; but in most other MF case, the new family loan is 9% ; it seems it's dictated more on how lender positioning their own capital and CRE CLO positioning. This is very sophisticated.

So from the CEO earning call above I can summarise:
- we expected the valuation of MF to be down around 21-24% from 2022 peak
- the aggregate MF LTV looks like is around 90-100%  LTV from 62% during original issuance 
- It seems Gov. is actively participating in helping bridge lender to do loan modification to offset the losses.

Also, this information from the Cred_IQ financial analyst is relatively have a good insight :


nonperforming loan backleverage has also become increasingly interesting. Loan to acquisition cost varies widely but is typically in the 60% range +/- 10%. Terms range from SOFR +400 for a relatively low leverage note on note product to prime +200 with a 10.5% rate floor for note buyers seeking 75% leverage. Origination fees are typically one to two points for a two year term with extension option.



my opinion: It looks to me from a reward/risk perspective, between now to 2027 could be one of the best year to invest in distressed multifamily debts.

[Carlos Ptriawan]

now I can understand few things:
- how the losses in the office is started to hit the bank and AAA tranche as LTV is over 100%
- while in multifamily almost every GP is very active in purchasing that distressed asset. The bridge-lender has really in good position here in the game of chess as their aggregated LTV is still below 100% , they received capital injection from government while at the same time they receive interest from the capital call. Even if they lost money a bit they can resell the asset to another GP. They still don't lost money if LTV is below 100.
- having said that the best strategy for the new GP that purchase the MFF, is just to simply buy 5-7% fixed CMBS rate with 60%LTV , while previous GP/LP is wiped out the new GP and/or lender)is really in good position. Almost like riding a riskless investment vehicle.

[Bobby Larsen]

Quote from @Carlos Ptriawan:

now I can understand few things:
- how the losses in the office is started to hit the bank and AAA tranche as LTV is over 100%
- while in multifamily almost every GP is very active in purchasing that distressed asset. The bridge-lender has really in good position here in the game of chess as their aggregated LTV is still below 100% , they received capital injection from government while at the same time they receive interest from the capital call. Even if they lost money a bit they can resell the asset to another GP. They still don't lost money if LTV is below 100.
- having said that the best strategy for the new GP that purchase the MFF, is just to simply buy 5-7% fixed CMBS rate with 60%LTV , while previous GP/LP is wiped out the new GP and/or lender)is really in good position. Almost like riding a riskless investment vehicle.

Is this a sense of optimism in new MF investments that I sense @Carlos Ptriawan? I never thought I would see this day.

[Carlos Ptriawan]

Quote from @Bobby Larsen:

Quote from @Carlos Ptriawan:

now I can understand few things:
- how the losses in the office is started to hit the bank and AAA tranche as LTV is over 100%
- while in multifamily almost every GP is very active in purchasing that distressed asset. The bridge-lender has really in good position here in the game of chess as their aggregated LTV is still below 100% , they received capital injection from government while at the same time they receive interest from the capital call. Even if they lost money a bit they can resell the asset to another GP. They still don't lost money if LTV is below 100.
- having said that the best strategy for the new GP that purchase the MFF, is just to simply buy 5-7% fixed CMBS rate with 60%LTV , while previous GP/LP is wiped out the new GP and/or lender)is really in good position. Almost like riding a riskless investment vehicle.

Is this a sense of optimism in new MF investments that I sense @Carlos Ptriawan? I never thought I would see this day.

 Yes , but I am specifically referring to distressed Multifamily debts in debt form such as CLO, but not a GP equity deal.

So if the lender is sophistically enough to  assume that the bottom for multifamily is near , and for multifamily only , then if I can buy your debt for 85 cent per 1 dollar thruCLO or other means, it is a good deal. Key is to invest with good fund manager.

I am extremely surprised that these bridge lender that are issuing multifamily CLO  are even able to increase their dividend during these times and do buyback, it's extremely complicated to understand (but then I understand it's doable when the CLO is actively managed).

This week alone I see Goldman is offering 12% private debt financing, and Bezo's backup HML is offering 7-9%. From now on the investment in MF has better risk/reward as rent growth is neutral in the last 6 months and Fed would not increase the rate.

(Btw the latest GP equity offering that I received is the GP purchased with 25% from 2022 valuation of prev. GP with 60% 5.9% CMBS, so I started seeing something that's better).

[Brian Burke]

Quote from @Carlos Ptriawan:

So from the CEO earning call above I can summarise:

- we expected the valuation of MF to be down around 21-24% from 2022 peak
- the aggregate MF LTV looks like is around 90-100%  LTV from 62% during original issuance 
- It seems Gov. is actively participating in helping bridge lender to do loan modification to offset the losses.

 my opinion: It looks to me from a reward/risk perspective, between now to 2027 could be one of the best year to invest in distressed multifamily debts.

 One thing I am seeing a lot of is sugar-coating and hopeful optimism on the part of GPs and lenders—and that’s my takeaway from your notes on this CEO call.  They probably don’t want to admit the real story to themselves or their investors.

My observation is MF values are down 25% to 37% from peak—I have a case study with a reliable value at the moment of peak and a semi-reliable current value estimate—the drop is 37% and this is not a distressed property. 

LTVs are all over the place, depending on vintage. Originations pre-pandemic are likely fine if the LTV at origination was reasonable. But all that 90% LTC stuff in 2021-2022 is likely deeply underwater.

Your inference that the government is participating to mitigate bridge lender losses is incorrect. The government isn't giving these lenders a dime. What this CEO was referring to is the government's support of housing through the GSEs, which provide very good loan terms for multifamily owners, and his statement was that this is a good source of takeout financing for their borrowers. Ok, great, but the troubled loans in his portfolio won't be able to refinance into GSE debt without massive cash injections by the borrower because agencies are topping out at 60-ish LTV (current value).

I agree with you that there is an opportunity here—but I wouldn’t want to touch any of this bridge debt unless bought at a very steep discount, and so far those trades don’t seem to be happening.

[Andrew Syrios]

Quote from @Aman S.:

What happens if someone does not participate in a capital call? I have invested in Ashcroft, but haven't received any capital call yet. 

Usually (I don't know about Ashcroft Capital in this particular case) if you don't invest further capital your shares are diluted. So say you investing $100,000 in a $10 million syndication. You would own 1%. If they required an additional million and you didn't put anything in, your share would go down to 0.9% (or thereabout). The PPM should contain the methodology for how such capital calls will work. So I would look at that. 

[Carlos Ptriawan]

Quote from @Brian Burke:

Quote from @Carlos Ptriawan:

So from the CEO earning call above I can summarise:

- we expected the valuation of MF to be down around 21-24% from 2022 peak
- the aggregate MF LTV looks like is around 90-100%  LTV from 62% during original issuance 
- It seems Gov. is actively participating in helping bridge lender to do loan modification to offset the losses.

 my opinion: It looks to me from a reward/risk perspective, between now to 2027 could be one of the best year to invest in distressed multifamily debts.

 One thing I am seeing a lot of is sugar-coating and hopeful optimism on the part of GPs and lenders—and that’s my takeaway from your notes on this CEO call.  They probably don’t want to admit the real story to themselves or their investors.

My observation is MF values are down 25% to 37% from peak—I have a case study with a reliable value at the moment of peak and a semi-reliable current value estimate—the drop is 37% and this is not a distressed property. 

LTVs are all over the place, depending on vintage. Originations pre-pandemic are likely fine if the LTV at origination was reasonable. But all that 90% LTC stuff in 2021-2022 is likely deeply underwater.

Your inference that the government is participating to mitigate bridge lender losses is incorrect. The government isn't giving these lenders a dime. What this CEO was referring to is the government's support of housing through the GSEs, which provide very good loan terms for multifamily owners, and his statement was that this is a good source of takeout financing for their borrowers. Ok, great, but the troubled loans in his portfolio won't be able to refinance into GSE debt without massive cash injections by the borrower because agencies are topping out at 60-ish LTV (current value).

I agree with you that there is an opportunity here—but I wouldn’t want to touch any of this bridge debt unless bought at a very steep discount, and so far those trades don’t seem to be happening.

 Thanks Brian , so from what I see , all these CLO CLO can be managed in two ways: by active management of the static management ; the lender that uses static management approach needs to use third party service before they able to do loan modification. The sample of loan issuer in this category is RC.

RC itself is already flagging 15 percent of their book as default and this lender is in dangerous position. 

The second kind of CLO management is using active management where distress property can be taken in and out from the pool to still generate income to the debt investor. I read it is kind of sophisticated operation. Lender can just buy those asset with the cash reserves from their operation. Some of these lenders are not just issuing beidge loan but they also acting as Reaidential services where they generate 2 percent spread. So from bridge lender POv although MF is in distress but due to floating rate mechanism they actually make more money thru other business. Their revenues are actually up in 2024.

What is interesting is that the investor of original CLO is paid 3-4 percent and if I am correct that payment is fixed for 5 years. Now that the lender is asking for capital call for 9 percent , the bridge lender is actually making 5 percent spread — until 2027 — and if my understanding is correct.

Having said that the lender is really in good position if fed decide to cut rate in 2025 and asset going for foreclosure with LtV 100%.

[Bobby Larsen]

Quote from @Andrew Syrios:

Quote from @Aman S.:

What happens if someone does not participate in a capital call? I have invested in Ashcroft, but haven't received any capital call yet. 

Usually (I don't know about Ashcroft Capital in this particular case) if you don't invest further capital your shares are diluted. So say you investing $100,000 in a $10 million syndication. You would own 1%. If they required an additional million and you didn't put anything in, your share would go down to 0.9% (or thereabout). The PPM should contain the methodology for how such capital calls will work. So I would look at that. 

Certainly read the PPM to understand the methodology of how a capital call would work for your particular investment. @Andrew Syrios's example of a pari passu capital call is the most straightforward and typical approach but with it, there is an inherit issue and that issue is valuations. In that capital call scenario, the additional equity is being invested based on the original value of the property which, like today, values are down 25-35% so it's an immediate loss of value of 25-35% on the capital called equity if investing alongside the original equity. 

Most capital calls solve this issue by structuring new capital as a type of preferred equity which I believe is how Ashcroft is handling but again, please read the PPM and/or consult an attorney to provide specific guidance. Either the preferred equity structure or providing an updated valuation for the capital call to invest at, makes the most sense. Scenarios are complicated further if the original equity included a share class that was already preferred equity.

[Carlos Ptriawan]

btw to summarise, from the point of view of bridge lenders that issue "capital call" to multifamily it seems they are very well positioned financially to handle this multifamily downfall, this is not unpredictable but rather already assume by the fund manager , so, through active management the (institutional) investors into CLO seems would NOT see losses. The CLO manager could just buy the property out from their reserves ; and/or resell to different GP group and/or keep modifying the loan and transfer the CLO into future CLO package (move current debt into future debt) and/or they could refinance the entire loan with agency loan.

Most of these individuals asset are IO only anyway, with range of LTV between 65-75% from as-is DSCR of 0.25 to 1.50x so the risk is well known. Most of GP also has interest rate cap. That itself is already interest income to the lender.

There's extremely sophisticated bond agency review that review everything to the point that the risk rating for every apartment is known before the CLO is being sold.

my opinion: The more I researched about this the more I understand this is like tug of war between debt equity orchestrated and financed by wall street banks  vs  common people LP equity in the middle. The winner is obviously Wall Street. They want to be paid only by rate of 7%. 

I would say in multifamily area the biggest winner in term or risk/reward profile is the lender ; then the CLO buyer that receive 7% ; then the GP's that has equity and then the LP.   

The lender is in good position because the spread between CLO buyer and Fed note is only 2% !
And Think the LP that need to generate business and make profit of 5-7%. 

What's being funny is actually from the lender side of business they calculate the MF in historical basis -- when rate is not changing, the minimum IRR is at 7.1%. So between dividend of 7% and IRR of 7% that's historically not significant difference. I have been thinking about these over the years how come those financial institution could still alive with all the financial trouble.

.......

As side note, I am able to find out whacca really going on with Ashcroft like in this thread, the problem in this GP is there're too much over-leverage with not too much equity where their stabilized DSCR is 0.80x ; at the same time, bond agency rated their NOI target is off as wide as 30%. But this kind of risk profile has been addressed prior to the sale of its CLO issuance so nothing is unknown (

here's their analysis:

The sponsor for this transaction is LP serving as the guarantors. As of July 2022, the guarantors reported a combined net worth and liquidity of $169.3 million and $24.5 million, respectively, resulting in low respective loan multiples of 0.46x and 0.07x. Additionally, the borrowing entity consists of 10 TICs with syndicated equity, with key principals accounting for 7.5% of the total equity. As such, it applied as Weak sponsor strength in its analysis.

The as-is and as-stabilized appraised values of $457.8 million and $575.0 million yield as-is
and as stabilized fully funded LTVs of 73.6% and 63.6%, respectively, indicating relatively high initial leverage.

Based on elevated leverage, the portfolio’s suburban locations, Weak sponsorship, and other credit
metrics, the loan has an elevated loss that is higher than the pool average.  

[JD Martin]

Quote from @Bobby Larsen:

Quote from @Andrew Syrios:

Quote from @Aman S.:

What happens if someone does not participate in a capital call? I have invested in Ashcroft, but haven't received any capital call yet. 

Usually (I don't know about Ashcroft Capital in this particular case) if you don't invest further capital your shares are diluted. So say you investing $100,000 in a $10 million syndication. You would own 1%. If they required an additional million and you didn't put anything in, your share would go down to 0.9% (or thereabout). The PPM should contain the methodology for how such capital calls will work. So I would look at that. 

Certainly read the PPM to understand the methodology of how a capital call would work for your particular investment. @Andrew Syrios's example of a pari passu capital call is the most straightforward and typical approach but with it, there is an inherit issue and that issue is valuations. In that capital call scenario, the additional equity is being invested based on the original value of the property which, like today, values are down 25-35% so it's an immediate loss of value of 25-35% on the capital called equity if investing alongside the original equity. 

Most capital calls solve this issue by structuring new capital as a type of preferred equity which I believe is how Ashcroft is handling but again, please read the PPM and/or consult an attorney to provide specific guidance. Either the preferred equity structure or providing an updated valuation for the capital call to invest at, makes the most sense. Scenarios are complicated further if the original equity included a share class that was already preferred equity.

I'd say you are right since according to the webinar with them I watched all capital call investments will move to front of the line on recapture. Aside from the fact that they are desperate for cash injection it's a good way to play the LPs against each other in the (perhaps inevitable) end result that the properties they unload, if not unwinding the entire fund, end up in a shortfall; anyone who doesn't participate will be that much further behind in hopes of collecting anything. My gut feeling is that at least this particular fund is going to wipe out all the LPs anyway and that the GPs are attempting to keep things alive long enough that they won't take any haircut at all. Maybe I'm just a cynical person but when I look at the numbers they provide the entire scenario looks like a train wreck, with nowhere near enough DSCR to make this thing profitable and more refinancing coming due. I think the bottom line is that this thing only had legs with free money, and once the Fed took that away it was the equivalent of seeing who's swimming naked when the tide goes out.

[Melanie P.]

@Carlos Ptriawan I don't think the lenders on these projects are very excited about the state of the market. Nothing is going to happen in 2024 that will bail out these bad deals. If there's some major interest rate easing in 2025 you might see a rebound in multi family investments in 2026. Keep in mind the defaults and distressed sales that flow from them will further suppress cap rates until all of that inventory works its way out of the market and investors don't see more of it on the horizon. Highly possible prices won't hit their floor until 2027-28. This would be a pretty typical down cycle that we've seen many times in the past. 

A lot of podcasters content is not going to age well, LOL!

[Carlos Ptriawan]

Quote from @Melanie P.:

@Carlos Ptriawan I don't think the lenders on these projects are very excited about the state of the market. Nothing is going to happen in 2024 that will bail out these bad deals. If there's some major interest rate easing in 2025 you might see a rebound in multi family investments in 2026. Keep in mind the defaults and distressed sales that flow from them will further suppress cap rates until all of that inventory works its way out of the market and investors don't see more of it on the horizon. Highly possible prices won't hit their floor until 2027-28. This would be a pretty typical down cycle that we've seen many times in the past. 

A lot of podcasters content is not going to age well, LOL!

They are not excited but they already know that the project such as Ashgord would likely to fail when they issue the loan.

also because their nature of business in floating rate MREIT both as CLO issuer and agency. they can offset the loss on their CLO from the agency side of business.

their business is not like GP where they can only survive when rate is stable.

i am quite amazed by how these lender works , they have navigated 2008 pretty well as well.

[Chris Seveney]

Quote from @Carlos Ptriawan:

btw to summarise, from the point of view of bridge lenders that issue "capital call" to multifamily it seems they are very well positioned financially to handle this multifamily downfall, this is not unpredictable but rather already assume by the fund manager , so, through active management the (institutional) investors into CLO seems would NOT see losses. The CLO manager could just buy the property out from their reserves ; and/or resell to different GP group and/or keep modifying the loan and transfer the CLO into future CLO package (move current debt into future debt) and/or they could refinance the entire loan with agency loan.

Most of these individuals asset are IO only anyway, with range of LTV between 65-75% from as-is DSCR of 0.25 to 1.50x so the risk is well known. Most of GP also has interest rate cap. That itself is already interest income to the lender.

There's extremely sophisticated bond agency review that review everything to the point that the risk rating for every apartment is known before the CLO is being sold.

my opinion: The more I researched about this the more I understand this is like tug of war between debt equity orchestrated and financed by wall street banks  vs  common people LP equity in the middle. The winner is obviously Wall Street. They want to be paid only by rate of 7%. 

I would say in multifamily area the biggest winner in term or risk/reward profile is the lender ; then the CLO buyer that receive 7% ; then the GP's that has equity and then the LP.   

The lender is in good position because the spread between CLO buyer and Fed note is only 2% !
And Think the LP that need to generate business and make profit of 5-7%. 

What's being funny is actually from the lender side of business they calculate the MF in historical basis -- when rate is not changing, the minimum IRR is at 7.1%. So between dividend of 7% and IRR of 7% that's historically not significant difference. I have been thinking about these over the years how come those financial institution could still alive with all the financial trouble.

.......

As side note, I am able to find out whacca really going on with Ashcroft like in this thread, the problem in this GP is there're too much over-leverage with not too much equity where their stabilized DSCR is 0.80x ; at the same time, bond agency rated their NOI target is off as wide as 30%. But this kind of risk profile has been addressed prior to the sale of its CLO issuance so nothing is unknown (

here's their analysis:

The sponsor for this transaction is LP serving as the guarantors. As of July 2022, the guarantors reported a combined net worth and liquidity of $169.3 million and $24.5 million, respectively, resulting in low respective loan multiples of 0.46x and 0.07x. Additionally, the borrowing entity consists of 10 TICs with syndicated equity, with key principals accounting for 7.5% of the total equity. As such, it applied as Weak sponsor strength in its analysis.

The as-is and as-stabilized appraised values of $457.8 million and $575.0 million yield as-is
and as stabilized fully funded LTVs of 73.6% and 63.6%, respectively, indicating relatively high initial leverage.

Based on elevated leverage, the portfolio’s suburban locations, Weak sponsorship, and other credit
metrics, the loan has an elevated loss that is higher than the pool average.  

 I am curious in what instance do people get their money back and when? For example has anyone who had the capital call asked what needs to happen such as:

1. Raise $20M in new equity

2. Vacancy rate goes to X%

3. Net rent per sf is $x

4. Borroworing rate goes to Y

5. Exit cap rates got Z

And compare those with where they are at now and run what-if scenarios in excel if one goes up or down....

[Paul Azad]

Quote from @Melanie P.:

@Carlos Ptriawan I don't think the lenders on these projects are very excited about the state of the market. Nothing is going to happen in 2024 that will bail out these bad deals. If there's some major interest rate easing in 2025 you might see a rebound in multi family investments in 2026. Keep in mind the defaults and distressed sales that flow from them will further suppress cap rates until all of that inventory works its way out of the market and investors don't see more of it on the horizon. Highly possible prices won't hit their floor until 2027-28. This would be a pretty typical down cycle that we've seen many times in the past. 

A lot of podcasters content is not going to age well, LOL!

 Not sure this will be a typical down cycle, might be much worse, given extreme leverage at play both publicly and privately. Most new MF construction ever entering market now and next 24 months, and Macro, no reason for FED to cut rates as economy growing and lowest unemployment ever and most importantly FED screwed up with a slow/weak response to inflation in 2021/2022. This great/brief article by Research Affiliates

Res Affil Nov 2022 -history-lessons-how-transitory-is-inflation (1).pdf

shows that historically will take about 9-10 yrs on average for the US inflation to drop to below 3%, and the 20%/80% range of certainties puts that drop at between 6 yrs and 19 yrs. So if correct then we are looking at higher 10 Yr yields/cap rates for a very long time, like most of last century. Gone are the 42 yrs of falling interest rates where any Chimp with traumatic brain injury could make great returns in Stocks/Bond/Real Estate or any risk on Asset. Time for much more or "any" Due Diligence as Gravity ie the 10yr Yield will be much less forgiving. 

[Carlos Ptriawan]

Quote from @Chris Seveney:

Quote from @Carlos Ptriawan:

btw to summarise, from the point of view of bridge lenders that issue "capital call" to multifamily it seems they are very well positioned financially to handle this multifamily downfall, this is not unpredictable but rather already assume by the fund manager , so, through active management the (institutional) investors into CLO seems would NOT see losses. The CLO manager could just buy the property out from their reserves ; and/or resell to different GP group and/or keep modifying the loan and transfer the CLO into future CLO package (move current debt into future debt) and/or they could refinance the entire loan with agency loan.

Most of these individuals asset are IO only anyway, with range of LTV between 65-75% from as-is DSCR of 0.25 to 1.50x so the risk is well known. Most of GP also has interest rate cap. That itself is already interest income to the lender.

There's extremely sophisticated bond agency review that review everything to the point that the risk rating for every apartment is known before the CLO is being sold.

my opinion: The more I researched about this the more I understand this is like tug of war between debt equity orchestrated and financed by wall street banks  vs  common people LP equity in the middle. The winner is obviously Wall Street. They want to be paid only by rate of 7%. 

I would say in multifamily area the biggest winner in term or risk/reward profile is the lender ; then the CLO buyer that receive 7% ; then the GP's that has equity and then the LP.   

The lender is in good position because the spread between CLO buyer and Fed note is only 2% !
And Think the LP that need to generate business and make profit of 5-7%. 

What's being funny is actually from the lender side of business they calculate the MF in historical basis -- when rate is not changing, the minimum IRR is at 7.1%. So between dividend of 7% and IRR of 7% that's historically not significant difference. I have been thinking about these over the years how come those financial institution could still alive with all the financial trouble.

.......

As side note, I am able to find out whacca really going on with Ashcroft like in this thread, the problem in this GP is there're too much over-leverage with not too much equity where their stabilized DSCR is 0.80x ; at the same time, bond agency rated their NOI target is off as wide as 30%. But this kind of risk profile has been addressed prior to the sale of its CLO issuance so nothing is unknown (

here's their analysis:

The sponsor for this transaction is LP serving as the guarantors. As of July 2022, the guarantors reported a combined net worth and liquidity of $169.3 million and $24.5 million, respectively, resulting in low respective loan multiples of 0.46x and 0.07x. Additionally, the borrowing entity consists of 10 TICs with syndicated equity, with key principals accounting for 7.5% of the total equity. As such, it applied as Weak sponsor strength in its analysis.

The as-is and as-stabilized appraised values of $457.8 million and $575.0 million yield as-is
and as stabilized fully funded LTVs of 73.6% and 63.6%, respectively, indicating relatively high initial leverage.

Based on elevated leverage, the portfolio’s suburban locations, Weak sponsorship, and other credit
metrics, the loan has an elevated loss that is higher than the pool average.  

 I am curious in what instance do people get their money back and when? For example has anyone who had the capital call asked what needs to happen such as:

1. Raise $20M in new equity

2. Vacancy rate goes to X%

3. Net rent per sf is $x

4. Borroworing rate goes to Y

5. Exit cap rates got Z

And compare those with where they are at now and run what-if scenarios in excel if one goes up or down....

Their msa is class a MF portfolio in Atlanta and Dallas, their case is simply too aggressive and too high leverage financing, their biz target was to increase rent to 1960 usd from 1600 usd . Their 2020 rent is 1600 usd , 2022 t12 is still 1600. NOI target was 30 percent apart.

Just wrong leveraging at the wrong time also expecting rent to increase when rent growth is zero. But their vacancy rate is all good at 92%.

[Carlos Ptriawan]

Quote from @Paul Azad:

Quote from @Melanie P.:

@Carlos Ptriawan I don't think the lenders on these projects are very excited about the state of the market. Nothing is going to happen in 2024 that will bail out these bad deals. If there's some major interest rate easing in 2025 you might see a rebound in multi family investments in 2026. Keep in mind the defaults and distressed sales that flow from them will further suppress cap rates until all of that inventory works its way out of the market and investors don't see more of it on the horizon. Highly possible prices won't hit their floor until 2027-28. This would be a pretty typical down cycle that we've seen many times in the past. 

A lot of podcasters content is not going to age well, LOL!

 Not sure this will be a typical down cycle, might be much worse, given extreme leverage at play both publicly and privately. Most new MF construction ever entering market now and next 24 months, and Macro, no reason for FED to cut rates as economy growing and lowest unemployment ever and most importantly FED screwed up with a slow/weak response to inflation in 2021/2022. This great/brief article by Research Affiliates

Res Affil Nov 2022 -history-lessons-how-transitory-is-inflation (1).pdf

shows that historically will take about 9-10 yrs on average for the US inflation to drop to below 3%, and the 20%/80% range of certainties puts that drop at between 6 yrs and 19 yrs. So if correct then we are looking at higher 10 Yr yields/cap rates for a very long time, like most of last century. Gone are the 42 yrs of falling interest rates where any Chimp with traumatic brain injury could make great returns in Stocks/Bond/Real Estate or any risk on Asset. Time for much more or "any" Due Diligence as Gravity ie the 10yr Yield will be much less forgiving. 

 Ten years from now people going to impress with the real estate or mogul in 2034 that purchased the distressed assets/notes in 2024 as it becomes too obvious.

One thing that we know whether inflation is sticky at 2% or not is that w know interest rate in 2026 is lower than 2024, that itself could spur investment growth in 2025.

All these down cycle in CRE could rebound relatively quick because the root cause of issue is M2 prints in 2021 but that issue is resolvable by the market completely in 2026.

Meaning q3/4 2024 and q1 in 2025 could be one of the best time to invest for the new cycle.

[Jay Hinrichs]

Quote from @Carlos Ptriawan:

Quote from @Paul Azad:

Quote from @Melanie P.:

@Carlos Ptriawan I don't think the lenders on these projects are very excited about the state of the market. Nothing is going to happen in 2024 that will bail out these bad deals. If there's some major interest rate easing in 2025 you might see a rebound in multi family investments in 2026. Keep in mind the defaults and distressed sales that flow from them will further suppress cap rates until all of that inventory works its way out of the market and investors don't see more of it on the horizon. Highly possible prices won't hit their floor until 2027-28. This would be a pretty typical down cycle that we've seen many times in the past. 

A lot of podcasters content is not going to age well, LOL!

 Not sure this will be a typical down cycle, might be much worse, given extreme leverage at play both publicly and privately. Most new MF construction ever entering market now and next 24 months, and Macro, no reason for FED to cut rates as economy growing and lowest unemployment ever and most importantly FED screwed up with a slow/weak response to inflation in 2021/2022. This great/brief article by Research Affiliates

Res Affil Nov 2022 -history-lessons-how-transitory-is-inflation (1).pdf

shows that historically will take about 9-10 yrs on average for the US inflation to drop to below 3%, and the 20%/80% range of certainties puts that drop at between 6 yrs and 19 yrs. So if correct then we are looking at higher 10 Yr yields/cap rates for a very long time, like most of last century. Gone are the 42 yrs of falling interest rates where any Chimp with traumatic brain injury could make great returns in Stocks/Bond/Real Estate or any risk on Asset. Time for much more or "any" Due Diligence as Gravity ie the 10yr Yield will be much less forgiving. 

 Ten years from now people going to impress with the real estate or mogul in 2034 that purchased the distressed assets/notes in 2024 as it becomes too obvious.

One thing that we know whether inflation is sticky at 2% or not is that w know interest rate in 2026 is lower than 2024, that itself could spur investment growth in 2025.

All these down cycle in CRE could rebound relatively quick because the root cause of issue is M2 prints in 2021 but that issue is resolvable by the market completely in 2026.

Meaning q3/4 2024 and q1 in 2025 could be one of the best time to invest for the new cycle.

just think of the killing investors made picking through the bones of the Resolution Trust .  Or the huge bail outs in the GFC buying whole banks for pennies on the dollar with government tarp money.

[Eric Bilderback]

Quote from @Carlos Ptriawan:

Quote from @Paul Azad:

Quote from @Melanie P.:

@Carlos Ptriawan I don't think the lenders on these projects are very excited about the state of the market. Nothing is going to happen in 2024 that will bail out these bad deals. If there's some major interest rate easing in 2025 you might see a rebound in multi family investments in 2026. Keep in mind the defaults and distressed sales that flow from them will further suppress cap rates until all of that inventory works its way out of the market and investors don't see more of it on the horizon. Highly possible prices won't hit their floor until 2027-28. This would be a pretty typical down cycle that we've seen many times in the past. 

A lot of podcasters content is not going to age well, LOL!

 Not sure this will be a typical down cycle, might be much worse, given extreme leverage at play both publicly and privately. Most new MF construction ever entering market now and next 24 months, and Macro, no reason for FED to cut rates as economy growing and lowest unemployment ever and most importantly FED screwed up with a slow/weak response to inflation in 2021/2022. This great/brief article by Research Affiliates

Res Affil Nov 2022 -history-lessons-how-transitory-is-inflation (1).pdf

shows that historically will take about 9-10 yrs on average for the US inflation to drop to below 3%, and the 20%/80% range of certainties puts that drop at between 6 yrs and 19 yrs. So if correct then we are looking at higher 10 Yr yields/cap rates for a very long time, like most of last century. Gone are the 42 yrs of falling interest rates where any Chimp with traumatic brain injury could make great returns in Stocks/Bond/Real Estate or any risk on Asset. Time for much more or "any" Due Diligence as Gravity ie the 10yr Yield will be much less forgiving. 

 Ten years from now people going to impress with the real estate or mogul in 2034 that purchased the distressed assets/notes in 2024 as it becomes too obvious.

One thing that we know whether inflation is sticky at 2% or not is that w know interest rate in 2026 is lower than 2024, that itself could spur investment growth in 2025.

All these down cycle in CRE could rebound relatively quick because the root cause of issue is M2 prints in 2021 but that issue is resolvable by the market completely in 2026.

Meaning q3/4 2024 and q1 in 2025 could be one of the best time to invest for the new cycle.

Dude that insider real estate jargon is redonklous.  I thought I was in the weeds of this stuff it took me 5 minutes to figure out what the hell you were saying!  LOL.

[Carlos Ptriawan]

Quote from @Eric Bilderback:

Quote from @Carlos Ptriawan:

Quote from @Paul Azad:

Quote from @Melanie P.:

@Carlos Ptriawan I don't think the lenders on these projects are very excited about the state of the market. Nothing is going to happen in 2024 that will bail out these bad deals. If there's some major interest rate easing in 2025 you might see a rebound in multi family investments in 2026. Keep in mind the defaults and distressed sales that flow from them will further suppress cap rates until all of that inventory works its way out of the market and investors don't see more of it on the horizon. Highly possible prices won't hit their floor until 2027-28. This would be a pretty typical down cycle that we've seen many times in the past. 

A lot of podcasters content is not going to age well, LOL!

 Not sure this will be a typical down cycle, might be much worse, given extreme leverage at play both publicly and privately. Most new MF construction ever entering market now and next 24 months, and Macro, no reason for FED to cut rates as economy growing and lowest unemployment ever and most importantly FED screwed up with a slow/weak response to inflation in 2021/2022. This great/brief article by Research Affiliates

Res Affil Nov 2022 -history-lessons-how-transitory-is-inflation (1).pdf

shows that historically will take about 9-10 yrs on average for the US inflation to drop to below 3%, and the 20%/80% range of certainties puts that drop at between 6 yrs and 19 yrs. So if correct then we are looking at higher 10 Yr yields/cap rates for a very long time, like most of last century. Gone are the 42 yrs of falling interest rates where any Chimp with traumatic brain injury could make great returns in Stocks/Bond/Real Estate or any risk on Asset. Time for much more or "any" Due Diligence as Gravity ie the 10yr Yield will be much less forgiving. 

 Ten years from now people going to impress with the real estate or mogul in 2034 that purchased the distressed assets/notes in 2024 as it becomes too obvious.

One thing that we know whether inflation is sticky at 2% or not is that w know interest rate in 2026 is lower than 2024, that itself could spur investment growth in 2025.

All these down cycle in CRE could rebound relatively quick because the root cause of issue is M2 prints in 2021 but that issue is resolvable by the market completely in 2026.

Meaning q3/4 2024 and q1 in 2025 could be one of the best time to invest for the new cycle.

Dude that insider real estate jargon is redonklous.  I thought I was in the weeds of this stuff it took me 5 minutes to figure out what the hell you were saying!  LOL.

 Lol these are possible when floating rate mortgage REiT company makes more money when rate is increasing , let’s the AI explained it better

Based on the provided search results, floating rate mortgage REITs can potentially remain profitable and even benefit when interest rates rise, for a few key reasons:

1. Floating rate loans benefit from rising rates: Some commercial mortgage REITs like Ladder Capital (LADR), Jernigan Capital (JCAP), and Ares Commercial Real Estate Corporation (ACRE) lend at mostly floating interest rates. As rates rise, the interest income on their floating rate loans increases, boosting their profitability.
2. Fixed rate borrowing costs: If these REITs borrow at fixed rates but lend at floating rates, their cost of capital remains stable while their interest income grows as rates rise. This can strengthen their cash flows and make their dividends more secure in a rising rate environment.
3. Less impacted by falling asset values: Compared to residential mortgage REITs that use high leverage, commercial mortgage REITs use less leverage. This means their net asset values decline less from falling loan values when rates rise.
4. Potential for widening spreads: If short-term rates rise slowly but long-term rates rise faster, causing a steepening yield curve, a mortgage REIT's profitability can grow. The widening spread between their short-term borrowing costs and higher-yielding long-term investments increases their net interest margins.

However, risks remain even for floating rate mortgage REITs if rates rise too rapidly or if there is an economic downturn impacting commercial real estate. They still face some interest rate risk, prepayment risk if loans are repaid early, and credit risk from potential borrower defaults. In summary, while rising rates pose challenges for mortgage REITs in general, floating rate commercial mREITs are positioned to handle and even benefit from gradually rising interest rates better than fixed rate residential mREITs. However, careful analysis of specific mREIT portfolios and risk management is essential. Relatedhow do floating rate mortgage REITs compare to other types of REITs in a rising interest rate environmentwhat are the main risks for floating rate mortgage REITs when interest rates increasecan floating rate mortgage REITs hedge against rising interest rates.

….. then after that I realized bridge lender = Fannie Mae = government  = Wall Street ….. they are very convulated lol

Unlike the GP that can only make money from rent when rate is stable ; mREIT can makes more money even when rate is high and spread is widening as long as it is not too volatile ….

This industry is very high in insider trading I guess lol

[Steven Gesis]

Quote from @Carlos Ptriawan:

Quote from @Brian Burke:

Quote from @Carlos Ptriawan:

------------------------------------
My question to @Brian Burke and @Chris Seveney and @Scott Trench :
1. Don't you think the lender is playing with free-wheel assets (for lack of better word), lets say borrower use 80%LTV and cap rate went down 20% so now it's 100-110%LTV. What's really the math logic for the lender to charge the LP $20 million, $40 million or even $1 million ? it seems for me the asset (as long as the valuation remains between 100-110%LTV) becomes a hostage at certain times.

In residential, it's easy to understand that the bank could help the situation because the gov. is intercepting and giving help to the borrower so loan modification is possible, but what's the mechanism in CRE case?

2. If that's the case, then.... as LP we donot care about who is managing the asset, but don't you think it's always safer/better to invest directly to the lender? with their reserves, their risk is very minimal (especially in multifamily asset class).

 @Carlos Ptriawan I’ll answer as best as I can from the perspective of a borrower (I’ve borrowed on bridge debt way back in the day), GP of 4,000+ units (75% of which I sold in 2021/2022), LP (I have passive investments), and lender (a mortgage banker I co-founded did over $2 billion prior to selling in 2022). 

With the exception of a few “loan to own” shops, the lenders don’t want these properties.  They don’t make loans hoping the borrower will fail.  They might not always make the best decisions, resulting in failures, but some of those decisions were driven by bad data (whether from the borrower, appraiser, inspector, or whoever).  And some of these lenders just did a poor job because they got caught up in the same unjustifiable market euphoria as the borrowers.

But now as those bad decisions or incompetence or inappropriate market enthusiasm rise to the surface, most lenders have only one goal:  to get their principal (and hopefully interest and costs) back.

So as it relates to negotiating an extension with a borrower…these are individualized conversations with ala carte selections, not a prix fixe menu.  The lender knows that as long as the GP has some thread of hope in saving the deal, or just saving face, they have a fish on.  What the servicer will do is figure out how much they can squeeze out of the borrower in exchange for kicking the can down the road.  $X principal reduction gets you X extra months.  Both the GP and the lender can tell their investors that they won.

To your question on how this is calculated, there’s no math formula, instead it’s more like that scene in National Lampoon’s Vacation where the Griswold Family Truckster gets repaired at the only gas station in the desert.  When Clark Griswold asks the mechanic how much is the bill, the mechanic looks at the gas station attendant, they both laugh, then looks at Clark with a serious look and asks Clark, “How much you got?”.  Clark says “you can’t do that, I’m going to call the Sheriff.”  The mechanic laughs even harder and whips out his Sheriff badge.

These are very very interesting topic related to distressed debt. I checked from one of the CRE CLO loan issuer earning call, they said the following :

....
Compared to the peer group as it relates to rent growth, our 2020, '22 vintages benefited from our proprietary GEO tier model, which ranks markets 1 through 5, 1 being the best with projected negative absorption a major factor. Recent data shows significant dispersion in rent metrics with supply influx in overbuilt markets causing mid-single digit rent declines. As of March 31, 91% of our originated portfolio is in markets ranked 3 or better. Overall, multifamily industry prices are down 16% from '22 peak with an additional 5% forecast for the 2024 bottom. Given our going-in LTV of 62%, these changes result in a portfolio mark-to-market under 100% versus office where a 50% decline has created over 100% LTVs.

We do not believe the increased delinquency in our multifamily portfolio is indicative of further principal loss.
The financial effect will be short-term earnings pressure for the interim period between defaults and modification, forbearance or refinance. Unlike other CRE sectors subject to the vagaries of the regional bank and CMBS markets, multifamily benefits from the government put with $150 billion of annual GSE allocation providing a pathway for takeout of bridge loans requiring additional time to execute a business plan. Across the $1.3 billion of our loans that reached initial maturity over the last 12 months, 42% paid off with 90% of the remaining loans qualifying for extension.

......So you're right when saying the capital cost to do loan modification is very custom , in wolfstreet the author mentioned how one JV can continue 4% rate ; but in most other MF case, the new family loan is 9% ; it seems it's dictated more on how lender positioning their own capital and CRE CLO positioning. This is very sophisticated.

So from the CEO earning call above I can summarise:
- we expected the valuation of MF to be down around 21-24% from 2022 peak
- the aggregate MF LTV looks like is around 90-100%  LTV from 62% during original issuance 
- It seems Gov. is actively participating in helping bridge lender to do loan modification to offset the losses.

Also, this information from the Cred_IQ financial analyst is relatively have a good insight :


nonperforming loan backleverage has also become increasingly interesting. Loan to acquisition cost varies widely but is typically in the 60% range +/- 10%. Terms range from SOFR +400 for a relatively low leverage note on note product to prime +200 with a 10.5% rate floor for note buyers seeking 75% leverage. Origination fees are typically one to two points for a two year term with extension option.



my opinion: It looks to me from a reward/risk perspective, between now to 2027 could be one of the best year to invest in distressed multifamily debts.

 Time to assemble capital! - It will be the best times to buy again! 

[Steven Gesis]

Quote from @Carlos Ptriawan:

it's very common these days for gp syndicator to take asset as hostage ; but in mathmatical probability, is that the chance you would be wiped out this year is 97% ; if you send 20% , your chance of being wiped out two years from now on is like 80%. Two years from now I bet they would say 

"I am sorry my LP friend, the situation is still not improved and all your investment is going to go zero for this asset; but please get excited, because, we have new investment offering for 15% IRR and 7% COC, this is the best location on earth"

 Carlos, you may be onto something here

The issue I am seeing is the war is on 3 fronts: 

-Cap Rate

-High Interest Rate

-Did not complete construction (PAUSED)

Here is what I know for sure, if you are in a tough spot now, you will not be able to afford to take units offline to renovate them, further cutoff cashflow.  How would they implement or restart construction, does anyone know if /how many units are offline pending construction? 

If they have already placed $2.9M in equity @ 0% interest as a short-term loan, how will they increase the asset value by nearly $3M in the near future if they do not renovate and get new increased market rents. 

This is a challenging case, because it does feel as though you are dmaned if you do and damned if you do not - 

Carlos, I really like your thought approach, you do not give the necessary capital call you are 90% risk of losing, you give the capital call you slightly lower chance of losing - but still feels like a tough hill to climb 

Our team at Smartland purchased all heavy value add through-out the same time period, large multifamily - we went into with a strong basis an arsenal of capital to do the construction work and kept one focus, get through the business plan, renovate the units, but this had to be done in a very high velocity as fast as the interest rates were rising, we felt the need to press hard on the construction gas and work through units  - so if we were faced with this climate that we are in now and interest rates do not soften we would not be deep in construction but rather focused on  administrative costs controls and lease-up. In our case majority of assets we acquired we used bridge fixed swap debt, so we are not under the same pressures as these, with expiring rate caps and non-renovated units looking at market repricing  - 

not sure who said it on this forum but kudos to you, this is the truth - " It looks to me from a reward/risk perspective, between now to 2027 could be one of the best year to invest in distressed multifamily debts." 

[Steven Gesis]

Quote from @Steve Vaughan:

Quote from @Jon Zhou:

1. all LPs must participate 
   

If this capital call is not successful, it would be a total loss of capital for both Class A and Class B.

• (Joe & Frank) already extended a $2.9M interest-free short-term loan (that) must be repaid promptly to maintain compliance with loan agreements and ens
  

Basically, you will be bailing out Joe and Frank. 

Seems they could recharacterize their $2.9M from a loan to a capital injection to meet lender requirements, but instead they are 'asking' (threatening complete loss of your investment) for you to repay them. 

I'd want to hear how the bail-ees have reduced/refunded their fees in good faith as contributions to the haircut you are all facing in these messes.  I'd ask the same of any sponsor/deal facing similar.  

Steve Vaughn BINGO

[Steven Gesis]

Quote from @Jay Hinrichs:

Quote from @Chris John:

@Wesley Leung

In my opinion (and I know what that's worth), your tone isn't really normal for biggerpockets.  I'd save this for twitter, reddit, or whatever.  @Carlos Ptriawan is a gem on these boards and deserves more respect, even if you don't like his answers or agree with him. 

I've never participated in a syndication (and probably never will), but are the syndicators that follow through and produce for their investors also scammers?  Or just those that come up short?  I mean, I guess I'm asking if you can imagine a world in which they thought the investment would come good or do you think they were cynical from the get?

Jay, we will define these folks as they work through this time - I keep saying this to everyone, we will all see who comes out the other side - As an established operator, we will see who stands up to this market and those who do will be victors and have ample buying opportunity. 

To call syndicators that made a bad bet or a business model that is wobbly to failing Scammers is just simply the voice of someone with not a lot of experience in the business.. Scammers are premeditated thieves.. Our syndicators that are having issues are hardly that.

All Real estate has its inherent risks full stop.

What will define these folks is how they work through the tough times.  @Brian Burke Brian has some very deep experience in the space in good times and bad. I think what we are seeing is with most of these folks having these issues and now with the internet these issues are broadcast wide far.  I would venture to guess most of these companies we are talking about on BP right now are all led by GPs that started in syndication Post GFC and to compete they took the same play book as others starting out.. And now that playbook is showing some significant weakness's or failures.

But to paint these syndicators as Scammers and Crooks I think is simply an ignorant statement.