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Large syndication foreclosures: what can we learn?

By Blog in Foreclosure —

First of all, welcome to the new members who have signed up here at Syndirater! We are so excited to have a small-but-growing community of limited partners who are interested in bringing more transparency to the multifamily syndication space. We are so glad you are here.

This week we are studying up on what happened in Houston, Texas, where a foreclosure brought an abrupt end to a large multifamily syndication deal. The Wall Street Journal covered the story:

An apartment-building investor lost four Houston complexes to foreclosure last week, the latest sign that surging interest rates are beginning to upend the multitrillion-dollar rental-housing market.
Applesway Investment Group borrowed nearly $230 million to buy the buildings with more than 3,200 units as part of a Texas buying spree during the pandemic. Arbor Realty Trust, a publicly traded mortgage company, foreclosed on the properties after Applesway defaulted on the loans, according to public documents filed in Harris County, Texas.
New York-based investment firm Fundamental Partners bought the Houston properties, public records show, for an undisclosed amount.

Here are our some of our takeaways based on the stories we've read:

  • An operator with too little experience may take on outsized risk.
  • Easy money (easy to borrow, easy to raise from investors) also can lead to some outsized risk-taking. We don't want to be part of that--don't be the "easy money" on the LP side!
  • Pay attention to that loan-to-value ratio. Looks like it may have been 80% or higher in these deals.
  • Don't overpay for deals. Things were pretty frothy when these deals came together.
  • It's harder than it looks to do value-add for some properties--especially those where the idea is to jump asset classes (e.g., from a D/C to a B).
  • If you do have an ambitious value-add business plan, you need extra liquidity (at the firm level or the deal level) to buy the time it may require to execute on the plan.
  • Make sure that the debt has a cap! It looks like the interest rate may have shot from 3.4% to the 8.0% on one of the four properties involved, according to the WSJ's story.
  • Be way of slick YouTube sales pitches for deals that will "double your money!" (OK that one seems a little too obvious...)

There are no doubt more lessons from this deal. We got value from this Forum thread over at Bigger Pockets about this deal's failure. It seems like the lessons from this one were pretty obvious... and yet, if the news accounts are correct, as much as $30 million in investor equity has been wiped out completely and even the bank involved may have lost tens of millions. So even when there are some possible red or yellow flags, in a hot market even smart people may go barrelling past those flags in a rush to get to the finish line sooner.

To be clear, this high-profile failure is not the only one, recently. When the Fed raises rates as fast as they did, some things were bound to become highly stressed--and others were bound to break.

We have no special insight into this deal--and thankfully, we were not invested in it or anything that looks much like it--but it seems essential to learn from the failures that we can observe. Of course, there are many more deals that go sideways or south than make the Wall Street Journal. That's why we are dedicated to keeping track as well as we can of deals and syndicators so that we and other LPs can do our due diligence before investing in the next deal--steadily, carefully, building a data set that may prove useful to others over time.