List of Syndicators/GPs to AVOID?
Most Popular Reply
Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesAs always, it will be a case by case basis.
This thread is about GPs to avoid. Many LPs thanked their sponsors for good returns with millions of dollars in guaranteed fees, and tens of millions in carried interest. To those sponsors, LPs shouldn't say "thank you." They should say, "you're welcome."
GPs solicited investors by promising huge returns and citing their track records. Some did this very publicly. Then those GPs "earned" fees just for buying the buildings... the same buildings that will now result in many cases in total wipeout for their investors. Some of them are now asking for more capital to bail out these buildings and have very real risk of losing that too.
LPs absolutely have a right to be mad, and a total or near total wipeout of invested capital in the last 3-5 years absolutely invalidates a decade of performance in many, but not all, cases, in my view, especially in the 2010s, when almost anyone with a pulse could make money in multifamily.
However, what matters more to me than whether a fund or deal is wiped out, is how the sponsor handles it.
"Good" in the context of losing, to me, looks like this:
Sponsor honestly appraises the situation, and provides a blunt assessment of where they made a bad bet, failed in due diligence, operated poorly, or were totally irresponsible with leverage and timing. Sponsor realistically and honestly susses out this from market challenges, which of course are real.
Sponsor tells investors that they are committed to operating their current business and stewarding investor capital. Sponsor recommits full-time attention to their job, which is to oversee the tens of millions, hundreds of millions, and/or billions of Assets they deploy.
Sponsor is regularly seen on-site at every property in their portfolio, regardless of personal cost.
They raised the big bucks, and things aren't going well. Are they going to be on vacation? Are they going to start up the next fun side project or fund? Or are they going to go to work and do everything they can to make their investors whole on their CURRENT deals?
I'm in a deal that's gone south as an LP. My sponsor is doing "Good" in the context of losing.
We all knew what we were getting into. We knew the bet. He executed it. It's his full-time job. It's all he does. He lives within an easy drive of every property in the portfolio.
Doesn't change that I am getting flushed on the deal. But, I may/will invest with him again. He operated it well. Executed the plan, keeps the units occupied. Just supply and interest rates crushed us. I expect many investors will not be happy, but they also won't publicly roast him for fleecing them.
Other sponsors aren't doing "good" in the context of losing. They will get roasted.
Some deserve it.
134 Replies
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @John Cho:
I am a LP in over 50 deals invested over the years so could name groups that are capital calling or losing capital calling right now. Some of splashier defaults/foreclosures seems to be tied to Sumrock and his mentees including the Applesway guy but WWC and GVA is pretty much selling large chunks of their portfolio at a loss right now. There is also a whole ecosystem of capital raisers for these people that have basically misled investors in their involvement in the GP and dont have much to offer as deals go bad. I could name dozens and that are active in the BP forums.
Rather than recreating the wheel, I would just go to LP centric forums/groups like 506b or PIC group that dont allow GPs or capital raisers so people can post their bad experiences without intimidation. Wall street Oasis also but that seems to be geared more toward industry insiders than from the LP perspective.
This is my own opinion of the "LP Group" vs "Biggerpockets" vs "Aleksey LP Education (Services)".
In Biggerpockets, this is trusted post forum because everyone is using their own credibility, however , to use this forum correctly, we need to know this is intended for residential mainly and not commercial. Most posts however are biased on the sell side as forum is occupied with realtor that want to sell their market or their loan offering. Ratio of the well-informed investors maybe 25%. Need to develop system where if one is asking for debt you could ask Chris for example, if one is having question about PM then you follow someone else that's expert on SME.There're some LP groups, however, and this is the big but, in LP group folks are biased into following the leader or the founder of such and such group, so if the lead "thinks" investment in XYZ is good then people would follow, which argumentatively, it could be good but if the investment is not realized, still nobody would be blamed. In these groups, folks are trying to re-organize itself so it can get special deal from the GPs/syndication and they can invest individually or form an SPV. This kinda of SPV itself is good and bad in myopinion.
Avestor is another company that's offering these combination of investment to be available while they would collect another layer of commission.
In another LP group as well,the lead would also get some commission or kickback from the syndication (indirectly mostly).
But all these forums are still having same problem with BP. Most investors have not much experience and have ability to do proper due diligence, but...some of the lead in those forum are so good (and way more sophisticated than BP) to do proper DD.
Although however I found discussion for CRE that's merely generating 7% income and single digit IRR with high risk of default is going on for very very long time. AI can solve these problem in the future, way quicker and save everyone's time.Then in 2023 there's alexey service, which is basically a "curriculum based for LP education", where every LP has to be certified to understand these business and to do more advanced DD and understanding of the risk of CRE investment.
In my own view, folk has to go to basic. Get basic formal education first from such name, and get upgraded eventually.... question like "what sponsor has to be avoided ?", this kind of question, is not a good question in itself because even investor has to get basic education (and certified). Just because someone has money doesn't mean they in the position that can understand the investment business.
.... honestly I myself really enjoying SeekingAlpha's model as Fund money manager with credibility invest and share their knowledge to each other in paid membership model.
- CT · Member since 2018 · 50 posts · 27 votes2y
Sorry I am late to this party....
@Gino Barbaro thanks for the shout out. @Scott Trench thank you as well for the shout out especially as you are building PassivePockets. It shows the type of person you are and I appreciate that
@Forest Wu thanks for checking out the site and we understand your position relating to the majority being 5-star reviews...85% of them to be exact. We are still really early in our growth (we officially launched in Feb) and haven't spent any money getting the word out as we have been hyper focused on development. The more people that find us organically the more <5-star experiences hit the site. I understand in order for us to be a trusted resource we need a balance of the good and the bad and am actively campaigning for reviews on "not-so-happy" experiences. I am not doing this to be the "GP reaper" but to make sure we represent both sides of the coin. I believe as we grow, get more eyes on it, the more balance will come to the site. It is happening, but we'd like it to happen faster
In the meantime, we do verify every investors participation, whether or not they choose to review them publicly or anonymously, with the GP they are reviewing so the reviews you are reading do come from a true experience....we simply need more of them, good and bad. - 2yGino BarbaroPro MemberRental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
Better late than never! I've got your new nickname. The GP Reaper!
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
That's a great story to hear. Did you invest with the Praxis group? If so, it would be helpful to hear some of the stories - both bad and good! If you can share some specifics of what Brian Burke did to protect LPs, that'd be great!
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
Let me begin by stating I struggled with whether I wanted to share this info in this forum as I do think the issue of investing in syndications is complex. I'm writing this because I heard about Praxis Capital through BP so from one LP to another here goes...
Just because a sponsor loses the investor's principal does not make them a poor sponsor but I do think it's imp't for me to share this info as I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).One unsolicited piece of advice to anyone considering parking their money with a capital company/sponsor. Don't go it alone. There are many forums where LPs share their experience with Sponsors, can ask if anyone has heard about a Sponsor, rank them, network w/other LPs, benefit from the due diligence of others that are more experienced, etc. I HIGHLY recommend you join a few (the names have already been mentioned in previous posts).
Quote from @Sook Kim:
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
That's a great story to hear. Did you invest with the Praxis group? If so, it would be helpful to hear some of the stories - both bad and good! If you can share some specifics of what Brian Burke did to protect LPs, that'd be great!
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
Let me begin by stating I struggled with whether I wanted to share this info in this forum as I do think the issue of investing in syndications is complex. I'm writing this because I heard about Praxis Capital through BP so from one LP to another here goes...
Just because a sponsor loses the investor's principal does not make them a poor sponsor but I do think it's imp't for me to share this info as I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).One unsolicited piece of advice to anyone considering parking their money with a capital company/sponsor. Don't go it alone. There are many forums where LPs share their experience with Sponsors, can ask if anyone has heard about a Sponsor, rank them, network w/other LPs, benefit from the due diligence of others that are more experienced, etc. I HIGHLY recommend you join a few (the names have already been mentioned in previous posts).
Thanks for sharing your experience. I really appreciate your courage and decision to talk about the good and bad. Too often BP is just an echo chamber of success stories and a place for GPs to market. There isn't really any critical feedback or a way to assess what people's actual returns are.
Quote from @Forest Wu:
Quote from @Sook Kim:
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
That's a great story to hear. Did you invest with the Praxis group? If so, it would be helpful to hear some of the stories - both bad and good! If you can share some specifics of what Brian Burke did to protect LPs, that'd be great!
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
Let me begin by stating I struggled with whether I wanted to share this info in this forum as I do think the issue of investing in syndications is complex. I'm writing this because I heard about Praxis Capital through BP so from one LP to another here goes...
Just because a sponsor loses the investor's principal does not make them a poor sponsor but I do think it's imp't for me to share this info as I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).One unsolicited piece of advice to anyone considering parking their money with a capital company/sponsor. Don't go it alone. There are many forums where LPs share their experience with Sponsors, can ask if anyone has heard about a Sponsor, rank them, network w/other LPs, benefit from the due diligence of others that are more experienced, etc. I HIGHLY recommend you join a few (the names have already been mentioned in previous posts).
Thanks for sharing your experience. I really appreciate your courage and decision to talk about the good and bad. Too often BP is just an echo chamber of success stories and a place for GPs to market. There isn't really any critical feedback or a way to assess what people's actual returns are.
All that being said, hope to hear from Praxis about what's going on!
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes2y
Quote from @Sook Kim:
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
That's a great story to hear. Did you invest with the Praxis group? If so, it would be helpful to hear some of the stories - both bad and good! If you can share some specifics of what Brian Burke did to protect LPs, that'd be great!
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
Let me begin by stating I struggled with whether I wanted to share this info in this forum as I do think the issue of investing in syndications is complex. I'm writing this because I heard about Praxis Capital through BP so from one LP to another here goes...
Just because a sponsor loses the investor's principal does not make them a poor sponsor but I do think it's imp't for me to share this info as I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).One unsolicited piece of advice to anyone considering parking their money with a capital company/sponsor. Don't go it alone. There are many forums where LPs share their experience with Sponsors, can ask if anyone has heard about a Sponsor, rank them, network w/other LPs, benefit from the due diligence of others that are more experienced, etc. I HIGHLY recommend you join a few (the names have already been mentioned in previous posts).
Curious if you have confirmed independently the value of the assets that have held their value? Or are the GP's merely holding them on their books at said value and reporting that number to the LPs?
District Invest Group545 Reviews Quote from @Pasquale Zingarella:
Sorry I am late to this party....
@Gino Barbaro thanks for the shout out. @Scott Trench thank you as well for the shout out especially as you are building PassivePockets. It shows the type of person you are and I appreciate that
@Forest Wu thanks for checking out the site and we understand your position relating to the majority being 5-star reviews...85% of them to be exact. We are still really early in our growth (we officially launched in Feb) and haven't spent any money getting the word out as we have been hyper focused on development. The more people that find us organically the more <5-star experiences hit the site. I understand in order for us to be a trusted resource we need a balance of the good and the bad and am actively campaigning for reviews on "not-so-happy" experiences. I am not doing this to be the "GP reaper" but to make sure we represent both sides of the coin. I believe as we grow, get more eyes on it, the more balance will come to the site. It is happening, but we'd like it to happen faster
In the meantime, we do verify every investors participation, whether or not they choose to review them publicly or anonymously, with the GP they are reviewing so the reviews you are reading do come from a true experience....we simply need more of them, good and bad.Thanks for the response. Completely understand - it'll take time to get more reviews. Look forward to seeing things develop and glad that you're able to verify every investor's participation. This is definitely a move in the right direction.
- 2yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Quote from @Sook Kim:
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).@Sook Kim thank you for setting the record straight, I should have caught this when it was posted. While I wish that the statement about selling my portfolio by 2021 were true, it's only about 75% true. Approaching what we now see (using 20/20 hindsight) was the peak of the market in 2022, I had a portfolio of around 4,000 units. I began aggressively selling and by the middle of 2022, right as the market was peaking, I had just under 1,000 units left. I had 200 units go into contract about a month before the market's light switch was flipped, but that deal failed to close because the market had collapsed in the subsequent weeks and the buyer was unable to cross the finish line, so I still have that one.
These last 1,000 units were all part of my last two multifamily funds, fund VI and VII. Fund VI did get one sale with a large gain but still has properties left, as does fund VII which had no sales.
Had I been able to sell all of these properties by 2Q2022, this would have been a great story to tell! It's still a pretty good story, but investors who are in funds VI and VII rightfully couldn't care less about the great timing of sales they had no part of.
Sook, I appreciate your kind words about not being "fly by night", our rigorous accounting, K-1 delivery, and comprehensive reporting--your trust in us is not taken for granted.
You say that you've invested with other sponsors who's properties have held their value--if you are ever in the mood to share more specifics on that with us I'd love to see what they are doing differently and perhaps I can learn something. The industry as a whole benefits when sponsors do a better job and I'm always seeking improvement. I've seen values fall across the board in almost every market so I'm very curious to see how they avoided this.
As it relates to returns, we never sell ourselves as the leader in investment returns. Our value proposition is over 100,000 units of experience across multiple decades and having survived multiple market cycles. We try to achieve good returns at a lower risk than syndicators who use high leverage, short-term debt, invest in sketchy properties, or financially engineer their capital stack, so finding higher returns elsewhere is something I hear often. I'm not willing to extend further out on the risk curve, so this is unlikely to change.
@Forest Wu thanks for asking what's going on. Sook already knows because our last quarterly report was 16 pages long (mostly text) describing exactly what is happening, but certainly anyone not in the fund who is reading this thread doesn't have that information. I'll spare you a 16 page description and summarize. The markets today are like a 4-way intersection, approaching from each of the four directions were rent growth, interest rates, cap rates, and expenses. They all collided in the intersection. Rent growth turned negative, interest rates skyrocketed, cap rates rose (meaning values fell), and expenses increased (inflation hits everything, payroll goes up, insurance--you know that story) pretty much all at the same time (around 2Q2022).
We did one smart thing--we financed with long-term debt and we used low leverage (60% +/-) so we have a wide margin of safety and no threat of a loan maturity until 2031, so we have plenty of time to ride this out until the next market cycle. But we made one decision that history may one day show was the wrong choice--our rate is floating. This has served us well for decades because floating rate debt allows us to escape yield maintenance risk, but the tradeoff is we must accept interest rate risk (I wrote an entire article on interest rate risk vs. yield maintenance risk so I won't rehash here). Long story long, our interest rate skyrocketed and when you couple that with declining rents and increasing expenses, distributable cash flow erodes.
We don't hide that by continuing distributions--so we cut those off early to preserve cash reserves. That turned out to be a good move so far. Investors hate it, but they hate losing their money even more. Preserving cash is the other key to surviving to the next cycle.
Regarding capital call--there are threads here on BP where investors have posted that they were surprised by a capital call, or were issued a sudden capital call. I wouldn't do that to my investors, so even though I am not sure that a capital call will be needed, and if it is, it would be small relative to capital invested and likely not even this year, I felt it was my responsibility to give investors a distant heads-up that this is a possibility so they can be prepared if and when we have to take this step (and I should note we've never issued a capital call in our multi-decade history so I don't take this lightly). The only purpose of such a move is to provide the reserves to get to the next cycle should it turn out that we don't have enough already.
Sook astutely pointed out in his post that investing in syndications is complex. So is managing them--we have never lost investor principal and don't plan to start now, and we will fight to the end of the earth to protect our investor's interests. Sometimes this requires making tough and unpopular decisions. We have and will continue to make those tough decisions and clearly explain them, and the reasons for them, to our investors. We are hands-on managers--we have our own management company and manage our assets internally, so we have complete control over what is controllable. What we cannot control, we can only take every step we can to mitigate and communicate.
Happy to answer any other questions, too, and clarify if I've missed anything.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
@Brian Burke
Never met you but give you kudos and applaud you.
Reason why is because it’s no secret about certain asset classes are having challenges but you appear to very communicative, open and transparent about it. Sharing the news whether it’s good or bad or in between.
Where we see a lot of others getting lambasted here on BP is due to compete lack of professionalism and communication. (And threatening the LP’s) but what adds salt on wound is every Facebook ad you see is that other sponsor touting a new training course or a new fund but won’t return a call or email from a current investor.
7e investments53 Reviews - 2yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
Quote from @Chris Seveney:
@Brian Burke
Never met you but give you kudos and applaud you.
Reason why is because it’s no secret about certain asset classes are having challenges but you appear to very communicative, open and transparent about it. Sharing the news whether it’s good or bad or in between.
Where we see a lot of others getting lambasted here on BP is due to compete lack of professionalism and communication. (And threatening the LP’s) but what adds salt on wound is every Facebook ad you see is that other sponsor touting a new training course or a new fund but won’t return a call or email from a current investor.
Really appreciate that, Chris, thank you. You won’t see posts from me about new funds any time soon, I’ve been pretty vocal about my distaste for the current market.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes2y
Quote from @Brian Burke:
Quote from @Chris Seveney:
@Brian Burke
Never met you but give you kudos and applaud you.
Reason why is because it’s no secret about certain asset classes are having challenges but you appear to very communicative, open and transparent about it. Sharing the news whether it’s good or bad or in between.
Where we see a lot of others getting lambasted here on BP is due to compete lack of professionalism and communication. (And threatening the LP’s) but what adds salt on wound is every Facebook ad you see is that other sponsor touting a new training course or a new fund but won’t return a call or email from a current investor.
Really appreciate that, Chris, thank you. You won’t see posts from me about new funds any time soon, I’ve been pretty vocal about my distaste for the current market.
oh so no debt fund to prop up an underforming offering so you do not have to say you had a capital call? Or a short term rental fund in an overpriced community, a self storage fund in the backhills of pick a state, an ATM fund to invest in ATM's ?
Most importantly, add some crypto in all of them and accept payments via crypto.
Seeing these real estate gurus going after anything they can to feed their ego.
7e investments53 Reviews - 2yBrian BurkePro MemberInvestor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
@Chris Seveney yeah you’re spot on. We do have a debt fund but we don’t loan to our own properties—that was created because I just had an exit from a bridge lending company I started 7 years ago and I like that slice of the capital stack right now.
These groups touting all these other investments you mentioned aren’t just feeding their egos—some of them are struggling to keep the lights on so they are looking for revenue. It isn’t about the investors.
This is why I think a lot of sponsors continue to make distributions despite poor operational performance, conceal the fact that their property values have fallen, and conduct investor update webinars to say “nothing to see here! We’re doing great!”. It’s all about raising money for their next fund, not about telling investors what’s really going on.
I stuck about 7 years of burn into my corporate account so that I have zero pressure to buy anything, including crypto, STR, self storage and ATMs. If my core competency is out of season, I'm perfectly happy managing the hell out of the properties I have left, and playing golf when the gift of spare time comes around.
Since I’m not worried about raising money for my next fund, I’m free to “tell it like it is” (which I’d do regardless), and make unpopular decisions that bolster our chances of success, knowing full well that after issuing difficult news our investors would be lighting up forums on LFI, 506 group, and BP. And I don’t mind that at all—investors have every right to be concerned about their money. I’ll be most accurately judged in 5-7 years after all this dust has settled and people see which sponsors are still here, which got foreclosed, and which liquidated at massive losses. I’m patient enough to wait for that.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @Brian Burke:
@Chris Seveney yeah you’re spot on. We do have a debt fund but we don’t loan to our own properties—that was created because I just had an exit from a bridge lending company I started 7 years ago and I like that slice of the capital stack right now.
These groups touting all these other investments you mentioned aren’t just feeding their egos—some of them are struggling to keep the lights on so they are looking for revenue. It isn’t about the investors.
This is why I think a lot of sponsors continue to make distributions despite poor operational performance, conceal the fact that their property values have fallen, and conduct investor update webinars to say “nothing to see here! We’re doing great!”. It’s all about raising money for their next fund, not about telling investors what’s really going on.
I stuck about 7 years of burn into my corporate account so that I have zero pressure to buy anything, including crypto, STR, self storage and ATMs. If my core competency is out of season, I'm perfectly happy managing the hell out of the properties I have left, and playing golf when the gift of spare time comes around.
Since I’m not worried about raising money for my next fund, I’m free to “tell it like it is” (which I’d do regardless), and make unpopular decisions that bolster our chances of success, knowing full well that after issuing difficult news our investors would be lighting up forums on LFI, 506 group, and BP. And I don’t mind that at all—investors have every right to be concerned about their money. I’ll be most accurately judged in 5-7 years after all this dust has settled and people see which sponsors are still here, which got foreclosed, and which liquidated at massive losses. I’m patient enough to wait for that.
I think investors by and large somehow get the impression that the stock market is really risky but Real estate never fails.. And when you do go through a cycle and have to tighten your belt or some deals just dont/or did not work.. The investors are quick to throw stones having the thought process that if their deal is not working for some reason that the sponsors are solely at fault. We all mitigate risk in our investments and returns are very much risk related as we know so for MF deals to be paying what had been very high returns the investors need to understand your taking some risk compared to other investment vehicles. And investors need to understand ( which I know they really dont) that sometimes return of Capital is a HUGE win.. We are seeing that play out now with some Syndicates losing props for 100% capital wipe out for their investors or locking up capital for looong time etc etc.. Capital Calls dilutions etc etc. .All of us in the industry will have a bummer my self included.. So boils down to Character And with Brian you have that in spades. - Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @Jay Hinrichs:
Quote from @Brian Burke:
@Chris Seveney yeah you’re spot on. We do have a debt fund but we don’t loan to our own properties—that was created because I just had an exit from a bridge lending company I started 7 years ago and I like that slice of the capital stack right now.
These groups touting all these other investments you mentioned aren’t just feeding their egos—some of them are struggling to keep the lights on so they are looking for revenue. It isn’t about the investors.
This is why I think a lot of sponsors continue to make distributions despite poor operational performance, conceal the fact that their property values have fallen, and conduct investor update webinars to say “nothing to see here! We’re doing great!”. It’s all about raising money for their next fund, not about telling investors what’s really going on.
I stuck about 7 years of burn into my corporate account so that I have zero pressure to buy anything, including crypto, STR, self storage and ATMs. If my core competency is out of season, I'm perfectly happy managing the hell out of the properties I have left, and playing golf when the gift of spare time comes around.
Since I’m not worried about raising money for my next fund, I’m free to “tell it like it is” (which I’d do regardless), and make unpopular decisions that bolster our chances of success, knowing full well that after issuing difficult news our investors would be lighting up forums on LFI, 506 group, and BP. And I don’t mind that at all—investors have every right to be concerned about their money. I’ll be most accurately judged in 5-7 years after all this dust has settled and people see which sponsors are still here, which got foreclosed, and which liquidated at massive losses. I’m patient enough to wait for that.
I think investors by and large somehow get the impression that the stock market is really risky but Real estate never fails.. And when you do go through a cycle and have to tighten your belt or some deals just dont/or did not work.. The investors are quick to throw stones having the thought process that if their deal is not working for some reason that the sponsors are solely at fault. We all mitigate risk in our investments and returns are very much risk related as we know so for MF deals to be paying what had been very high returns the investors need to understand your taking some risk compared to other investment vehicles. And investors need to understand ( which I know they really dont) that sometimes return of Capital is a HUGE win.. We are seeing that play out now with some Syndicates losing props for 100% capital wipe out for their investors or locking up capital for looong time etc etc.. Capital Calls dilutions etc etc. .All of us in the industry will have a bummer my self included.. So boils down to Character And with Brian you have that in spades.Accredited investor got it wrong thinking AI investment was and is good return , in fact this accreditation exist because it is a very high risk investment so one should know what they are doing
- 2yJim PfeiferBusiness MemberInvestor · Dublin, OH · Member since 2014 · 241 posts · 495 votes
Quote from @Brian Burke:
Quote from @Sook Kim:
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).@Sook Kim thank you for setting the record straight, I should have caught this when it was posted. While I wish that the statement about selling my portfolio by 2021 were true, it's only about 75% true. Approaching what we now see (using 20/20 hindsight) was the peak of the market in 2022, I had a portfolio of around 4,000 units. I began aggressively selling and by the middle of 2022, right as the market was peaking, I had just under 1,000 units left. I had 200 units go into contract about a month before the market's light switch was flipped, but that deal failed to close because the market had collapsed in the subsequent weeks and the buyer was unable to cross the finish line, so I still have that one.
These last 1,000 units were all part of my last two multifamily funds, fund VI and VII. Fund VI did get one sale with a large gain but still has properties left, as does fund VII which had no sales.
Had I been able to sell all of these properties by 2Q2022, this would have been a great story to tell! It's still a pretty good story, but investors who are in funds VI and VII rightfully couldn't care less about the great timing of sales they had no part of.
Sook, I appreciate your kind words about not being "fly by night", our rigorous accounting, K-1 delivery, and comprehensive reporting--your trust in us is not taken for granted.
You say that you've invested with other sponsors who's properties have held their value--if you are ever in the mood to share more specifics on that with us I'd love to see what they are doing differently and perhaps I can learn something. The industry as a whole benefits when sponsors do a better job and I'm always seeking improvement. I've seen values fall across the board in almost every market so I'm very curious to see how they avoided this.
As it relates to returns, we never sell ourselves as the leader in investment returns. Our value proposition is over 100,000 units of experience across multiple decades and having survived multiple market cycles. We try to achieve good returns at a lower risk than syndicators who use high leverage, short-term debt, invest in sketchy properties, or financially engineer their capital stack, so finding higher returns elsewhere is something I hear often. I'm not willing to extend further out on the risk curve, so this is unlikely to change.
@Forest Wu thanks for asking what's going on. Sook already knows because our last quarterly report was 16 pages long (mostly text) describing exactly what is happening, but certainly anyone not in the fund who is reading this thread doesn't have that information. I'll spare you a 16 page description and summarize. The markets today are like a 4-way intersection, approaching from each of the four directions were rent growth, interest rates, cap rates, and expenses. They all collided in the intersection. Rent growth turned negative, interest rates skyrocketed, cap rates rose (meaning values fell), and expenses increased (inflation hits everything, payroll goes up, insurance--you know that story) pretty much all at the same time (around 2Q2022).
We did one smart thing--we financed with long-term debt and we used low leverage (60% +/-) so we have a wide margin of safety and no threat of a loan maturity until 2031, so we have plenty of time to ride this out until the next market cycle. But we made one decision that history may one day show was the wrong choice--our rate is floating. This has served us well for decades because floating rate debt allows us to escape yield maintenance risk, but the tradeoff is we must accept interest rate risk (I wrote an entire article on interest rate risk vs. yield maintenance risk so I won't rehash here). Long story long, our interest rate skyrocketed and when you couple that with declining rents and increasing expenses, distributable cash flow erodes.
We don't hide that by continuing distributions--so we cut those off early to preserve cash reserves. That turned out to be a good move so far. Investors hate it, but they hate losing their money even more. Preserving cash is the other key to surviving to the next cycle.
Regarding capital call--there are threads here on BP where investors have posted that they were surprised by a capital call, or were issued a sudden capital call. I wouldn't do that to my investors, so even though I am not sure that a capital call will be needed, and if it is, it would be small relative to capital invested and likely not even this year, I felt it was my responsibility to give investors a distant heads-up that this is a possibility so they can be prepared if and when we have to take this step (and I should note we've never issued a capital call in our multi-decade history so I don't take this lightly). The only purpose of such a move is to provide the reserves to get to the next cycle should it turn out that we don't have enough already.
Sook astutely pointed out in his post that investing in syndications is complex. So is managing them--we have never lost investor principal and don't plan to start now, and we will fight to the end of the earth to protect our investor's interests. Sometimes this requires making tough and unpopular decisions. We have and will continue to make those tough decisions and clearly explain them, and the reasons for them, to our investors. We are hands-on managers--we have our own management company and manage our assets internally, so we have complete control over what is controllable. What we cannot control, we can only take every step we can to mitigate and communicate.
Happy to answer any other questions, too, and clarify if I've missed anything.
These are the type of thoughtful, non-combative responses to LP questions and comments that all GPs would benefit from reading - and putting in to practice. Proactive communication, addressing issues head-on with plain language, acknowledging mistakes and not just blaming "the market" or "interest rates".
I am invested with a few operators who have made capital calls - all of them came as a surprise and only one was messaged appropriately. I am an investor with Praxis and if that call comes, I will understand completely why and I will have been adequately prepared.
Syndication investments are long-term, illiquid investments completely out of the control of the LP investor - after we send our wire the only thing we have is communication. GPs communicate through sending (or not) distributions and sending (or not) comprehensive reports. This should include a future outlook for the asset - good or bad. Too many operators are VERY poor at communicating and many more compound poor communication by thinking that if they don't share bad information, the bad stuff won't come. This is why an LP should always ask for prior reports from an operator BEFORE they invest - it will tell you a lot about the operator and how they handle business and just as important, how they value LPs.
I don't see many other GPs on this Forum being this transparent and it's greatly appreciated! I also don't need the GPs to share on public forums, but they should absolutely be this clear and transparent in their communication with LPs. That is my number one takeaway from this difficult time in syndication investing - invest with operators who communicate transparently and often and those who will answer the hard questions.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Brian Burke, I always appreciate your candor. There are a few points you make that I think perfectly align with the dozens of other real estate operators that have been around for DECADES, not just years.
You take on long-term debt. While, as you note, the floating vs fixed rate bet may or may not pay off, you have no maturities until 2031. Maturity laddering is one of the key metrics the public REITs are held to, and when looking at the financial crisis, whether it be the automakers needing a bail out or the real estate operators that did, or almost, went under, it came down to not having major debt loads mature all at the same time.
You have an operating account. I know there is a lot of nuance that comes into play with various offerings, commingling funds, etc. but I feel many syndicators take their acquisition fee and spend it, or immediately reinvest in more marketing, or more head count, or new offices. While I appreciate growing a business, as you note, the existing LPs likely don't care about how much you are out of pocket for marketing your next fund, they want to make sure their current deal stays afloat, and sometimes that means chipping in GP money into the deal, or having reserves to cover expenses when you need to fire a manager or regional team that isn't performing.
You raise through Funds. As you noted, if you only have a single deal, your debt maturity is set. You can't create debt laddering to mitigate risk. When you have a single deal, you can't have a larger operating account without significantly diluting overall returns. But a Fund is allowed to commingle funds amongst that Fund's holdings. And by scale, you can hold more money back knowing that some assets may need an injection from the cash flow of other assets.
You have focused on the core component of real estate: LONG TERM. Market cycles will come and go. When you structure your entire company on 3 yr holds, take out loans with 3 yr maturities, buy interest rate caps for only 3 years, etc, there is likely to be a reconning if the market cycle doesn't switch quickly. And, while each cycle is different, looking at financial crisis: peak in 2006/07, bottom in 2010 (3 yrs-ish out) and full recovery to peak levels was roughly 2013/14. Roughly 7 yrs from peak to break even.
So when I see groups selling 3-5 yr deals today assuming major cap rate compression within that period... well I am skeptical, at best.
Quote from @Jay Hinrichs:
Quote from @Brian Burke:
@Chris Seveney yeah you’re spot on. We do have a debt fund but we don’t loan to our own properties—that was created because I just had an exit from a bridge lending company I started 7 years ago and I like that slice of the capital stack right now.
These groups touting all these other investments you mentioned aren’t just feeding their egos—some of them are struggling to keep the lights on so they are looking for revenue. It isn’t about the investors.
This is why I think a lot of sponsors continue to make distributions despite poor operational performance, conceal the fact that their property values have fallen, and conduct investor update webinars to say “nothing to see here! We’re doing great!”. It’s all about raising money for their next fund, not about telling investors what’s really going on.
I stuck about 7 years of burn into my corporate account so that I have zero pressure to buy anything, including crypto, STR, self storage and ATMs. If my core competency is out of season, I'm perfectly happy managing the hell out of the properties I have left, and playing golf when the gift of spare time comes around.
Since I’m not worried about raising money for my next fund, I’m free to “tell it like it is” (which I’d do regardless), and make unpopular decisions that bolster our chances of success, knowing full well that after issuing difficult news our investors would be lighting up forums on LFI, 506 group, and BP. And I don’t mind that at all—investors have every right to be concerned about their money. I’ll be most accurately judged in 5-7 years after all this dust has settled and people see which sponsors are still here, which got foreclosed, and which liquidated at massive losses. I’m patient enough to wait for that.
I think investors by and large somehow get the impression that the stock market is really risky but Real estate never fails.. And when you do go through a cycle and have to tighten your belt or some deals just dont/or did not work.. The investors are quick to throw stones having the thought process that if their deal is not working for some reason that the sponsors are solely at fault. We all mitigate risk in our investments and returns are very much risk related as we know so for MF deals to be paying what had been very high returns the investors need to understand your taking some risk compared to other investment vehicles. And investors need to understand ( which I know they really dont) that sometimes return of Capital is a HUGE win.. We are seeing that play out now with some Syndicates losing props for 100% capital wipe out for their investors or locking up capital for looong time etc etc.. Capital Calls dilutions etc etc. .All of us in the industry will have a bummer my self included.. So boils down to Character And with Brian you have that in spades.I don't think that's the case; I just don't think they know how risky syndications actually are. I don't think they assume that real estate never fails.
I think what investors should recognize is that investing in a syndicate is just as risky as investing in a single stock. Unfortunately, this is often not conveyed by the GPs/Operators as they like to tout massive returns. Often times, these GPs/Operators don't really have much - if any - skin in the game because of their acquisition/management fees. That being said, some blame should be put on the investors for not doing more diligence and not digging into the weeds (e.g., financials, assumptions etc.). I'd challenge every LP to think like this before investing in a syndicate: would you put $100K into a single stock that you couldn't liquidate at a moment's notice and had no control over?At least public company stocks have 10-Ks and other SEC reporting metrics. Most syndications don't have any transparency and quite a few will never share their pro forma. I think more investors should be warned to stay away from syndications altogether unless they understand the risks. Unfortunately, I think there are too many promotions about syndications and not enough awareness of the real hazards. Just look at what Brandon Turner is doing in promoting Open Door Capital despite losing a lot of investor capital. Every podcast praises all of his successes so a potential LP would have no idea what a disaster it's been for some of his investors.
Unfortunately, more people are going to lose capital that they can't afford to risk because there just isn't enough information out there on the downsides. It's censorship by omission. Any thoughts on adjusting this imbalance @Scott Trench? Is this what passivepockets will help to achieve? It's a shame that it costs $200-$400/month for access. Is this what it costs to get access to the truth?Risk-adjusted, I'm betting most (if not all) people will do better off with a ETF for returns. But for real estate exposure, one should stick with old fashion methods (e.g., house-hacking, buying small MF etc.)
- Agree with this 100%. Communication is key and managing LPs isn't easy - especially when it comes to sharing bad information. I honestly would expect what Praxis is doing to be the bare minimum a GP should do in situations like these. It's sad that we treat this as exceptional behavior rather than one that is expected. The bar is very low.
Quote from @Jim Pfeifer:
Quote from @Brian Burke:
Quote from @Sook Kim:
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).@Sook Kim thank you for setting the record straight, I should have caught this when it was posted. While I wish that the statement about selling my portfolio by 2021 were true, it's only about 75% true. Approaching what we now see (using 20/20 hindsight) was the peak of the market in 2022, I had a portfolio of around 4,000 units. I began aggressively selling and by the middle of 2022, right as the market was peaking, I had just under 1,000 units left. I had 200 units go into contract about a month before the market's light switch was flipped, but that deal failed to close because the market had collapsed in the subsequent weeks and the buyer was unable to cross the finish line, so I still have that one.
These last 1,000 units were all part of my last two multifamily funds, fund VI and VII. Fund VI did get one sale with a large gain but still has properties left, as does fund VII which had no sales.
Had I been able to sell all of these properties by 2Q2022, this would have been a great story to tell! It's still a pretty good story, but investors who are in funds VI and VII rightfully couldn't care less about the great timing of sales they had no part of.
Sook, I appreciate your kind words about not being "fly by night", our rigorous accounting, K-1 delivery, and comprehensive reporting--your trust in us is not taken for granted.
You say that you've invested with other sponsors who's properties have held their value--if you are ever in the mood to share more specifics on that with us I'd love to see what they are doing differently and perhaps I can learn something. The industry as a whole benefits when sponsors do a better job and I'm always seeking improvement. I've seen values fall across the board in almost every market so I'm very curious to see how they avoided this.
As it relates to returns, we never sell ourselves as the leader in investment returns. Our value proposition is over 100,000 units of experience across multiple decades and having survived multiple market cycles. We try to achieve good returns at a lower risk than syndicators who use high leverage, short-term debt, invest in sketchy properties, or financially engineer their capital stack, so finding higher returns elsewhere is something I hear often. I'm not willing to extend further out on the risk curve, so this is unlikely to change.
@Forest Wu thanks for asking what's going on. Sook already knows because our last quarterly report was 16 pages long (mostly text) describing exactly what is happening, but certainly anyone not in the fund who is reading this thread doesn't have that information. I'll spare you a 16 page description and summarize. The markets today are like a 4-way intersection, approaching from each of the four directions were rent growth, interest rates, cap rates, and expenses. They all collided in the intersection. Rent growth turned negative, interest rates skyrocketed, cap rates rose (meaning values fell), and expenses increased (inflation hits everything, payroll goes up, insurance--you know that story) pretty much all at the same time (around 2Q2022).
We did one smart thing--we financed with long-term debt and we used low leverage (60% +/-) so we have a wide margin of safety and no threat of a loan maturity until 2031, so we have plenty of time to ride this out until the next market cycle. But we made one decision that history may one day show was the wrong choice--our rate is floating. This has served us well for decades because floating rate debt allows us to escape yield maintenance risk, but the tradeoff is we must accept interest rate risk (I wrote an entire article on interest rate risk vs. yield maintenance risk so I won't rehash here). Long story long, our interest rate skyrocketed and when you couple that with declining rents and increasing expenses, distributable cash flow erodes.
We don't hide that by continuing distributions--so we cut those off early to preserve cash reserves. That turned out to be a good move so far. Investors hate it, but they hate losing their money even more. Preserving cash is the other key to surviving to the next cycle.
Regarding capital call--there are threads here on BP where investors have posted that they were surprised by a capital call, or were issued a sudden capital call. I wouldn't do that to my investors, so even though I am not sure that a capital call will be needed, and if it is, it would be small relative to capital invested and likely not even this year, I felt it was my responsibility to give investors a distant heads-up that this is a possibility so they can be prepared if and when we have to take this step (and I should note we've never issued a capital call in our multi-decade history so I don't take this lightly). The only purpose of such a move is to provide the reserves to get to the next cycle should it turn out that we don't have enough already.
Sook astutely pointed out in his post that investing in syndications is complex. So is managing them--we have never lost investor principal and don't plan to start now, and we will fight to the end of the earth to protect our investor's interests. Sometimes this requires making tough and unpopular decisions. We have and will continue to make those tough decisions and clearly explain them, and the reasons for them, to our investors. We are hands-on managers--we have our own management company and manage our assets internally, so we have complete control over what is controllable. What we cannot control, we can only take every step we can to mitigate and communicate.
Happy to answer any other questions, too, and clarify if I've missed anything.
These are the type of thoughtful, non-combative responses to LP questions and comments that all GPs would benefit from reading - and putting in to practice. Proactive communication, addressing issues head-on with plain language, acknowledging mistakes and not just blaming "the market" or "interest rates".
I am invested with a few operators who have made capital calls - all of them came as a surprise and only one was messaged appropriately. I am an investor with Praxis and if that call comes, I will understand completely why and I will have been adequately prepared.
Syndication investments are long-term, illiquid investments completely out of the control of the LP investor - after we send our wire the only thing we have is communication. GPs communicate through sending (or not) distributions and sending (or not) comprehensive reports. This should include a future outlook for the asset - good or bad. Too many operators are VERY poor at communicating and many more compound poor communication by thinking that if they don't share bad information, the bad stuff won't come. This is why an LP should always ask for prior reports from an operator BEFORE they invest - it will tell you a lot about the operator and how they handle business and just as important, how they value LPs.
I don't see many other GPs on this Forum being this transparent and it's greatly appreciated! I also don't need the GPs to share on public forums, but they should absolutely be this clear and transparent in their communication with LPs. That is my number one takeaway from this difficult time in syndication investing - invest with operators who communicate transparently and often and those who will answer the hard questions.
- 2yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesForest,
Quote from @Forest Wu:
Agree with this 100%. Communication is key and managing LPs isn't easy - especially when it comes to sharing bad information. I honestly would expect what Praxis is doing to be the bare minimum a GP should do in situations like these. It's sad that we treat this as exceptional behavior rather than one that is expected. The bar is very low.Quote from @Jim Pfeifer:
Quote from @Brian Burke:
Quote from @Sook Kim:
Quote from @Scott Trench:
Quote from @Forest Wu:
Quote from @Allan C.:
@Brian Burke I think a great sponsor is someone who pulls out of the market when all signs point to a very frothy bubble, even while every other sponsor is forging ahead.
I applaud you and the Praxis group for having discipline and integrity. You gained credibility when you took personal risk to protect your LPs during the prior downturn, and you’ve secured my trust with your actions during this cycle.
Counter-cyclic investing is an aspiration that few achieve - kudos to you.
My understanding is that Brian Burke sold his portfolio by 2021, and has by and large sat on the beach twiddling his thumbs and working on his tan for the last three years. Dabbled in some low risk first position debt and credit funds.
During this period he was also a vocal bear on the market, including here on BiggerPockets. His warnings were largely unheeded.
I feel as if Praxis Capital is being held up as a model of a preeminent Sponsor with a pristine reputation that knew exactly how to time the market and knew how to time their exit. It is not true that they exited from MF offerings before the downturn and quickly pivoted to an equity/lending fund. I'm invested in their last multifamily fund and that fund has not paid out distributions for close to/over 2 years, my equity is less than the $100K I initially invested since the value of the properties have gone down AND in the last newsletter Brian Burke planted the seeds for a POTENTIAL capital call in the future (contrast to the 2023 newsletters about having a fixed rate for a few more years and a long runway).
Again, I will emphasize I am NOT stating that Praxis Capital is a "bad" sponsor - they are not a fly by night Syndicator that is going to abscond w/your money by any means and I believe their accounting is likely very rigorous (and they do get generate their K-1s in a timely manner) but I have done better w/other Sponsors in terms of return for my money, investing in properties or assets that have held their value even during this high interest rate environment and perhaps even work more hands on w/direct management of their properties (w/their property mgr). I receive some very thorough quarterly newsletters but that's it (I did ask if we could have quarterly online calls like some other Sponsors and I was informed this would be taken under consideration).@Sook Kim thank you for setting the record straight, I should have caught this when it was posted. While I wish that the statement about selling my portfolio by 2021 were true, it's only about 75% true. Approaching what we now see (using 20/20 hindsight) was the peak of the market in 2022, I had a portfolio of around 4,000 units. I began aggressively selling and by the middle of 2022, right as the market was peaking, I had just under 1,000 units left. I had 200 units go into contract about a month before the market's light switch was flipped, but that deal failed to close because the market had collapsed in the subsequent weeks and the buyer was unable to cross the finish line, so I still have that one.
These last 1,000 units were all part of my last two multifamily funds, fund VI and VII. Fund VI did get one sale with a large gain but still has properties left, as does fund VII which had no sales.
Had I been able to sell all of these properties by 2Q2022, this would have been a great story to tell! It's still a pretty good story, but investors who are in funds VI and VII rightfully couldn't care less about the great timing of sales they had no part of.
Sook, I appreciate your kind words about not being "fly by night", our rigorous accounting, K-1 delivery, and comprehensive reporting--your trust in us is not taken for granted.
You say that you've invested with other sponsors who's properties have held their value--if you are ever in the mood to share more specifics on that with us I'd love to see what they are doing differently and perhaps I can learn something. The industry as a whole benefits when sponsors do a better job and I'm always seeking improvement. I've seen values fall across the board in almost every market so I'm very curious to see how they avoided this.
As it relates to returns, we never sell ourselves as the leader in investment returns. Our value proposition is over 100,000 units of experience across multiple decades and having survived multiple market cycles. We try to achieve good returns at a lower risk than syndicators who use high leverage, short-term debt, invest in sketchy properties, or financially engineer their capital stack, so finding higher returns elsewhere is something I hear often. I'm not willing to extend further out on the risk curve, so this is unlikely to change.
@Forest Wu thanks for asking what's going on. Sook already knows because our last quarterly report was 16 pages long (mostly text) describing exactly what is happening, but certainly anyone not in the fund who is reading this thread doesn't have that information. I'll spare you a 16 page description and summarize. The markets today are like a 4-way intersection, approaching from each of the four directions were rent growth, interest rates, cap rates, and expenses. They all collided in the intersection. Rent growth turned negative, interest rates skyrocketed, cap rates rose (meaning values fell), and expenses increased (inflation hits everything, payroll goes up, insurance--you know that story) pretty much all at the same time (around 2Q2022).
We did one smart thing--we financed with long-term debt and we used low leverage (60% +/-) so we have a wide margin of safety and no threat of a loan maturity until 2031, so we have plenty of time to ride this out until the next market cycle. But we made one decision that history may one day show was the wrong choice--our rate is floating. This has served us well for decades because floating rate debt allows us to escape yield maintenance risk, but the tradeoff is we must accept interest rate risk (I wrote an entire article on interest rate risk vs. yield maintenance risk so I won't rehash here). Long story long, our interest rate skyrocketed and when you couple that with declining rents and increasing expenses, distributable cash flow erodes.
We don't hide that by continuing distributions--so we cut those off early to preserve cash reserves. That turned out to be a good move so far. Investors hate it, but they hate losing their money even more. Preserving cash is the other key to surviving to the next cycle.
Regarding capital call--there are threads here on BP where investors have posted that they were surprised by a capital call, or were issued a sudden capital call. I wouldn't do that to my investors, so even though I am not sure that a capital call will be needed, and if it is, it would be small relative to capital invested and likely not even this year, I felt it was my responsibility to give investors a distant heads-up that this is a possibility so they can be prepared if and when we have to take this step (and I should note we've never issued a capital call in our multi-decade history so I don't take this lightly). The only purpose of such a move is to provide the reserves to get to the next cycle should it turn out that we don't have enough already.
Sook astutely pointed out in his post that investing in syndications is complex. So is managing them--we have never lost investor principal and don't plan to start now, and we will fight to the end of the earth to protect our investor's interests. Sometimes this requires making tough and unpopular decisions. We have and will continue to make those tough decisions and clearly explain them, and the reasons for them, to our investors. We are hands-on managers--we have our own management company and manage our assets internally, so we have complete control over what is controllable. What we cannot control, we can only take every step we can to mitigate and communicate.
Happy to answer any other questions, too, and clarify if I've missed anything.
These are the type of thoughtful, non-combative responses to LP questions and comments that all GPs would benefit from reading - and putting in to practice. Proactive communication, addressing issues head-on with plain language, acknowledging mistakes and not just blaming "the market" or "interest rates".
I am invested with a few operators who have made capital calls - all of them came as a surprise and only one was messaged appropriately. I am an investor with Praxis and if that call comes, I will understand completely why and I will have been adequately prepared.
Syndication investments are long-term, illiquid investments completely out of the control of the LP investor - after we send our wire the only thing we have is communication. GPs communicate through sending (or not) distributions and sending (or not) comprehensive reports. This should include a future outlook for the asset - good or bad. Too many operators are VERY poor at communicating and many more compound poor communication by thinking that if they don't share bad information, the bad stuff won't come. This is why an LP should always ask for prior reports from an operator BEFORE they invest - it will tell you a lot about the operator and how they handle business and just as important, how they value LPs.
I don't see many other GPs on this Forum being this transparent and it's greatly appreciated! I also don't need the GPs to share on public forums, but they should absolutely be this clear and transparent in their communication with LPs. That is my number one takeaway from this difficult time in syndication investing - invest with operators who communicate transparently and often and those who will answer the hard questions.
What else would you recommend Praxis do other than what they have done.. IE quarterly reports and one that was 14 pages long.. What else would bring them over the top from bare minimum as you describe.. I am really curious from your LP view point what that would be.
Myself I have one partnership I put together with 6 investors for 6.1 million total cash raise. I am the GP manager Its a new build housing project in Oregon.. All the construction loans are in my name personally Just like MF GP .. of course I had to PG those loans :( But thats what you have to do to get them at my level.. about 50 million in loans.
My returns have hit proforma but time lines are longer given we started our first house then one month later covid hit.. So we worked through Covid shut downs.. Lumber sky rocketing other materials you could not get like garage doors or refer's etc etc. So I wrote a report about every quarter and I included a drone shot Picture worth a thousand words right.. so shows the streets being built and the houses going up.. etc etc. I dont know what othere detail or reporting I could give folks.. My project is a success profits at or above proforma except time line extended a tad. Plus with each sale they get principal returned.. so its not like all accrued and then you get it at once. No tax bene's though.. So I guess seeing whats happened to others that started when we did I feel pretty good about it. And this has been conveyed as I said quarterly along with a few of the investors made trips and walked through the project during the build out. - Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes2y
Quote from @Account Closed:
No one wants to name names and understandably so. I think any list of bad sponsors needs to be broken down into two categories: 1) Inexperienced sponsors that got caught up in a rising interest rate environment, and 2) Bad sponsors that are either acting malicious and/or greedy.
There are many many many sponsors, particularly those on BP and raising capital on social media, that fall within the first category.
Category #1 - Inexperienced Sponsors:
Ashcroft, Opendoor, Elevate, Western Wealth, Tides, ZMR, GVA
Category #2 - Malicious/Greedy sponsors:
Appleway, Nitya, Rise48, any "fund of fund" sponsor that's come out of Rise 48, Grant Cardone, Affinity, Nightingdale, Rockstar Capital
This is just a short list but I think it's important to protect LPs. The wall street oasis community does a good job at calling out the terrible sponsors. https://www.wallstreetoasis.com/forum/real-estate/mf-syndica...
As an LP in several Rise48 deals, I am very interested as to what you are basing your putting Rise48 in Category 2?
- Investor · Member since 2024 · 19 posts · 51 votes2yI will speak generically about hypothetical sponsors because they too are pursuing legal action to quiet investors. A sponsor goes from category 1 to category 2 when they continue to lie to investors about the current status of their portfolio and continue to invest in new offerings with a structure that victimizes new investors and props up their old (bad) investments. A structure that belongs in category 2 is also one built on this new twisted version of "fund of funds" which convinces inexperienced individuals with no real estate experience to raise capital for an unaffiliated sponsor. This is especially a red flag when a sponsor goes as far as creating investor portals providing the tax reporting for these "fund managers". This structure creates a revolving cycle of unsophisticated investors that can continuously get burned because the equity is raised by outside individuals.
The team is entirely unsophisticated as well and they made TERRIBLE investments in 2021-2022 but so did many others. What differentiates a category 1 and category 2 is that instead of recognizing the 2021-2022 mistakes, a sponsor denies them and instead increases their acquisition fees (3.75% last I saw) so that they can withdraw cash immediately from new bad investments in order to fund the need for capital calls in their old investments. This cash transfer is the only reason that you have not seen capital calls but rest assured 1) those GP loans sit ahead of LP equity and 2) capital calls are still coming. Ask your sponsors for recent BOVs, they've received them on all of their 2021 and 2022 purchases and they will show a 30%+ value declines. You won't find any mention of them in the updates though. And, speaking of those updates, their "budgeted" numbers are nowhere near the numbers they were originally budgeting. Just take a look at the original investment offering versus the updates they send.
Another sign of a category 2 sponsor is one that structures new investments today so costly and so poorly that it almost immediately assures loss of equity. And, the only reason they do this is because it gives them the talking points they know they need with new investors. For example, using very expensive debt (9%+) but paying down the interest upfront so that you can claim a low interest rate and positive financial leverage. Spoiler alert - purchasing interest rate caps are just another way of paying interest on your loans. Second, raising millions of dollars of extra equity upfront so that you can then redistribute it back to investors and claim 5% distributions, is fraud. You may not recognize it for years to come and it will allow that sponsor to continue to invest and collect a 3.75% acquisition fee, but this type of poorly structured investment will result in a loss of equity. The last offering that I saw was purchased for $125,000 per apartment but because of all the extra fees and needed cash reserves, the property will be required to be sold for $185,000 per apartment in order to break even. A 48% increase in value in order to just break even! And, that wasn't a deep value-add, opportunistic investment.
Unfortunately, this will continue to go unchecked for awhile and sponsors such as the hypothetical one above will continue to prey on unsophisticated investors because they know they can be tricked.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Account Closed, I hope to clarify one item you mention:
If you, as an LP, are looking into a company, you should be asking for Original Underwriting vs Actuals. I don't know the inner workings of your hypothetical sponsor, nor really almost any other sponsor, so I can't speak to how things are done in any specific way. But, it is typical corporate practice for any company to build a budget for each fiscal year, and then as they are working through that budget, there will likely be some reforecasting done based on actuals and any major events that will likely impact the original budget.
But more importantly, you need to make sure you are asking for the correct comparison. Whether it is intentional or just a lack of understanding in what is desired versus what is asked, if you ask an operator of the budget vs actuals, the operator may very well be delivering what was asked. But internally, budget is what they are running day to day from. Proforma, or original underwriting, or original projections, or "how are your actuals vs what you originally presented to investors". Each company could have a different term they use for those proformas, so asking in several ways may be the only way to get what you are looking for.
- Investor · Member since 2024 · 19 posts · 51 votes2y
Quote from @Evan Polaski:
@Account Closed, I hope to clarify one item you mention:
If you, as an LP, are looking into a company, you should be asking for Original Underwriting vs Actuals. I don't know the inner workings of your hypothetical sponsor, nor really almost any other sponsor, so I can't speak to how things are done in any specific way. But, it is typical corporate practice for any company to build a budget for each fiscal year, and then as they are working through that budget, there will likely be some reforecasting done based on actuals and any major events that will likely impact the original budget.
But more importantly, you need to make sure you are asking for the correct comparison. Whether it is intentional or just a lack of understanding in what is desired versus what is asked, if you ask an operator of the budget vs actuals, the operator may very well be delivering what was asked. But internally, budget is what they are running day to day from. Proforma, or original underwriting, or original projections, or "how are your actuals vs what you originally presented to investors". Each company could have a different term they use for those proformas, so asking in several ways may be the only way to get what you are looking for.
I ask all of my sponsors to provide actuals versus original budget. Providing actuals versus a budget that was drafted a few months earlier and possibly even reforecasted mid-year is entirely worthless. With this approach, a sponsor will never miss their budgets because they will simply adjust the budget to make the actuals look positive.
For example, in one of Rise48's updates, the reforecasted budget called for negative 5% cashflow over the past 12 months and actual 12 months resulted in negative 6%. Still a miss and terrible atrocious operations but what would be significantly more valuable for LPs would be to see that their original budget was for a positive 7.2% distributable cashflow. You're response may be that markets fluctuate and budgeting is difficult and that is true but that is literally the job of sponsors so they should be better forecasters than that if they're accepting equity from investors.
- Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes2y
@Account Closed, to be clear, I am agreeing with you. I just know how some people can be, as noted. Not specific to any sponsor, but there are some people who hear what people say and look to deliver to the intent of the question, and there are those that hear what people say and deliver exactly that.
My goal in my post was to hopefully educate a reader or two, that if you ask for budget v actuals, you may get just that, which, as you note, may not paint nearly as poor a picture as what the intent of the question may have been.
Now, back to our regularly scheduled programming of GPs to avoid. :)
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