In our last blog, Evaluating the Sponsor, we mentioned that there will likely be syndicators who will be forced to leave the business. Unfortunately, it has started with the recent announcement of the $229MM multifamily foreclosure in Houston, TX, and there will likely be more to come.
While details are still coming out, we believe that the primary issues that contributed to their ultimate demise were:
- Putting on excessive leverage (upwards of 93% LTV) using a combination of bridge debt with floating rate and preferred equity at super high interest.
- Did not have a rate cap (insurance hedge against rising rates) or had bought the cap with a strike that was far higher than the rate at purchase, and could not service the escalating debt payments.
- Did not underwrite adequate increases in insurance and property tax expenses.
- The properties are in very rough neighborhoods and at least one of the properties made the news with various deaths from fires, shootings, and stabbings, etc. It appears that the operator had no Asset Management skills and could not deal with persistent tenant and delinquency issues.
- The lead sponsor is believed to have abandoned the properties and fled the country.
- Sponsor team did not have any liquidity or unwilling to backstop the deal and could not get investors to put in more money, which ultimately led to the foreclosures.
This is incredibly sad news and reflects very poorly on the syndication industry. We feel terrible for the limited partners involved who have lost their money working with bad actors.
We are making a resounding plea to all syndicators to not chase after bad deals just to make quick fees, and for the passive investors to perform substantial due diligence on the sponsors before parting with your money. As a reminder to all, we are fiduciaries entrusted with investors’ precious capital and protecting their hard earned money first and foremost is absolutely critical and vital to be successful in this business long term. We have a free tool on our website https://breakofdaycapital.com/investor-tools/ that helps investors evaluate the sponsor and the deal.
As always, should you have any questions on how Break Of Day Capital is focused on Asset Management and Risk Mitigation to protect your assets, please feel free to contact Joe at firstname.lastname@example.org.