Benefit Street

Came across this incredibly interesting story in this week's Commercial Mortgage Alert - apparently some guy altered a bunch of leases & rent rolls for his portfolio of Walgreens and was able to fraudulently overborrow from Benefit Street, who went on to securitize said paper.

I'm just going to leave the full story below, but curious to know if anyone has more insight here.

"Industry pros are abuzz about a fraudulent borrower who induced Benefit Street
Partners to write a large loan on 24 Walgreens stores in 10 states — with some also
raising questions about the lender’s due-diligence practices.

Benefit Street, a New York-based unit of Franklin Templeton Investments, originated
the $149.7 million mortgage on April 18. A large portion of the debt is now
held by Franklin BSP Realty Trust, a public mortgage REIT managed by Benefit
Street.

The triple-net-leased collateral properties are owned by Raheel “Ray” Bhai, the
chief executive of Addison, Texas-based investment firm IBF Properties, who is
being sued by Benefit Street for fraud.

Since the REIT disclosed the incident on an earnings call last week, rival bridge
lenders have marveled over the extent of the fraud. They also have wondered how
the lender, which securitized portions of the floating-rate debt via two commercial real estate CLOs, overlooked certain warning signs that seem clear in hindsight.

Competitors have focused in particular on the reported rents and lease terms for the collateral properties, which Benefit Street now claims were significantly overstated by the borrower. Noting that many of the properties are in rural areas, one industry veteran said Benefit Street and other commercial real estate professionals who worked on the deal should have suspected they were being overvalued.

“If you have someone coming in with abnormally long lease terms and abnormally high rents, you’re going to make that call” to the tenant, he added.
“The fraud part is hard to second-guess,” a rival bridge lender said. “I’ve been in the game a long time, and I know it’s really hard to avoid if you have a clever borrower. But I do think at this [loan] size, there should have been more scrutiny.”

During Franklin BSP’s second-quarter earnings call on July 29, commercial real estate investment chief Michael Comparato described the fraud as “an isolated criminal incident.” In addition to initiating foreclosure proceedings on the collateral properties and securing a “temporary freeze” of the borrower’s assets, Benefit Street is working with Walgreens to funnel rent payments directly to the lender, he said “We have a strong history of credit performance and believe we have a rigorous underwriting process that we are continually looking to enhance,” Comparato said on the call. “This has been a difficult, unusual and criminal situation and we are keenly focused on maximizing any recoveries.”

Noting the extent of the fraud, one CRE CLO investor quipped, “You can make a movie about this case.” The investor also called it “a great learning opportunity” for the commercial mortgage industry, adding: “It’s fraud, so that’s not great. But it does happen, and they were able to catch it, so maybe they were doing something right.”

Franklin BSP has taken a $28.4 million write-down on the fraudulent loan, chief executive Richard Byrne said during last week’s earnings call. “This was an act of fraud that we discovered after determining that the borrower made material misrepresentations in connection with a second pending loan” on different properties, he said “At that point, it was determined that the borrower had provided the company with approximately 100 falsified and forged documents in connection with the underwriting” of the loan on the Walgreens portfolio, Byrne added. “This served to materially overstate the actual rents and duration of lease terms for the Walgreen stores. When confronted, the borrower subsequently confessed verbally and in writing to the fraudulent acts.”

Bhai could not be reached for comment.

Byrne cited a loan balance of $113.2 million, which matched the amount provided in the corresponding portion of Franklin BSP’s latest 8-K filing with the SEC. But the total loan amount was actually $149.7 million, according to a lawsuit Benefit Street filed against Bhai and alleged co-conspirators on July 26 in the 160th Civil District Court of Dallas County.

A total loan size of $149.7 million also was the amount cited in offering documents for a CRE CLO that Benefit Street priced on June 10. The lender securitized $80 million of the debt via that deal (BSPRT 2022-FL9) and funneled another $11.5 million into the collateral pool for one of its previous CLOs (BSPRT 2021-FL6). After the fraud came to light, the lender moved to protect bond buyers by repurchasing that debt from the CLO trusts at par value.

“If they didn’t buy it out, their [CLO issuance] program would have been dead,” said an investor in one of the transactions. “The next time they are out in the market [with a new CLO] they are going to have to explain how this happened.”

“Fraud can happen to anyone, but this is their second big disaster,” a competing bridge lender said, referring to Benefit Street’s long-running battle over a $68 million floater it originated on the Williamsburg Hotel in Brooklyn.

The 147-room hotel is owned by an entity that filed for Chapter 11 bankruptcy in February 2021. Benefit Street wrote the loan in 2017 for a partnership controlled by Heritage Equity Partners chief executive Toby Moskovits and president Michael Lichtenstein. The borrower stopped making payments in December 2018, and the extendable bridge loan defaulted at initial maturity the following June. Including accrued interest and fees, the balance is now around $95 million.

The borrower lost control of the property about two months ago — when a U.S. Bankruptcy Court judge in White Plains, N.Y., noted numerous diversions of hotel cashflows to other investments controlled by Moskovits and Lichtenstein. “At times, some of those actions also appear to me to rise to the level of fraud,” Judge Robert Drain said. His May 26 decision paved the way for the U.S. Trustee to tap Stephen Gray, of Boston-based Gray & Co., as the hotel’s operating trustee.

Gray’s appointment marked a major victory for Benefit Street, which in 2018 securitized a $57.1 million portion of the Williamsburg Hotel note in one of its CLOs (BSPRT 2018-FL3). It pulled that debt out of the deal the following year.

“The property performance has been outstanding, and the Chapter 11 trustee has selected … brokers and advisors to liquidate the assets through a sale process to be approved by the bankruptcy court,” Comparato said during last week’s earnings call. “We would hope to see positive resolution to this loan within the coming quarters.”