Another one bites the dust…Ashcroft Capital
https://mailhub.ashcroftcapital.com/content-rende…
Capital call imminent
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I think I got dumber for watching that video. I love how they say rate locks are more expensive for some reason and it was unexpected. Ashcroft seems like a terrible operation if they keep paying inflated rate lock fees. These guys milked all the investors in the last 10 years and are now trying to maintain their status quo. See the recent "multifamily syndicators are scum" thread
They were saying rate caps were more expensive, not rate locks
They should probably coordinate their talking points next time.
Person A: Operations are solid
Person B: Properties in Atlanta have been impacted by bad debt and slow leasing. As a result, are underperforming expectations.
Person A: We don't anticipate a capital call
Person B: Properties will likely require additional capital for upcoming deferred maintenance
Ahh yes, the typical good sponsor bad sponsor play. 50% of the time it works all of the time.
Aren't the class A shares already quasi preferred equity? In the Ashcroft fund 3, class A is a 9% coupon with no upside. Good luck getting approval from two class investors to place additional preferred equity on top of the existing preferred equity class. If I was a class A investor and assuming it has priority positioning over class B, I'd be forcing a sale.
If I was in Class A I would be forcing class dilution and taking over the GP's equity stake. The only way to save this is to run those fuckers out of town becuase they are 100% still fee milking this. The Class B shareholders are going to be pissed but if I was them I would rather have people with skills running the ship.
Fuck does anyone have shareholder lists for these groups? I smell an opportunity for an activist play. Buyout the scared investors and gut these idiots.
100% correct. Unfortunately, these investors are unlikely to be this savvy and probably don't have any idea how much equity has been lost.
Lol this isn’t an institutional deal. Class A is made up of many people. There is no way, even if they have the right, that they can band together to ‘kick out the GP.’
That was the dumbest call ever
Literally anyone who invested in that fund kiss your equity goodbye
“We have options like taking on Pref Equity”
said that in a cheery way too
Obviously they're in a bad spot, but since I'm more junior just want to confirm for the future - regarding rate increases they should've had more cushion to deal with these issues, rate cap increases happened but again should've been aware of that and asked for more money up front? As an investor I'm sure you can say you should've known as the RE operator, but you also invested in the deal.
What are rebuttals you as an investor can say in the situation to the issues they're facing as a they should've been prepared? Or at this point is it more about knowing not to put anymore money in and where you can push for a sale and never invest with them again?
I guess it's also they've seen the run up the last 10 years, they know these deals could fuck over investors but didn't care since they were getting fees? Now when they're in trouble they want the investors to put in more money to maybe bail them out?
Yes and no. Reg D filings need more regulation from the SEC. Most of the investors were promised something ridiculous and they fell for it. Yes they're partially to blame but most of these investors are not knowledgeable. The syndicators have built their business on retail investors being clueless. When you can have an 18 year old spend a $1k in filing fees and then raise money for real estate projects with no experience, there has to be better oversight. The SEC has took their foot off the pedal here and i think the rate increases will decimate most of these multifamily syndicators.
Why? I said this on another thread, but why do we as a society have an obligation to protect greedy fools from the consequences of their actions? If someone is deliberately lying or running a fraud that only a federal investigator is well placed enough to detect or stop? By all means, lets crack down on that. Just because someone promises pie in the sky returns doesn't make them a fraudster, it just means the people investing with them are stupid and greedy, and neither of those are or should be protected classes.
The government should not be our savior. I think this is a very weak position to take. In a democratic society built on capitalism, these things happen. Not all times are good times and we (those who lost $) can learn from this
I edited some statements because I’m trying to be nicer.
I mean if it's true about the rate cap they bought initially, that's early 2021 late 2020 pricing (assuming a $50/60MM ish deal, right?). I'm a young AM guy so naturally pessimistic but who the hell was thinking in 2020/2021 that rate caps were going to explode to the degree they did? Not defending them but legitimately curious as well what they should have done, keeping in mind that hindsight is 20/20 blah blah blah
They can't be faulted for not foreseeing an increase in rate cap costs. No one did and if someone says otherwise, they're dumb for investing in real estate and not trading fixed income. HOWEVER, they are 100% at fault for not realizing that we were very late cycle and that 80% LTV debt fund execution + preferred equity on 1970s vintage assets is extremely risky.
Surprised about this one.....Joe Fairless always talked a big game.
We should have a Syndicator Death Watch thread.
This man did not just say that a hard landing recession would lead to a recovery in the capital markets & higher valuations. I'm out.
This was biggest red flag in my eyes too..
He's admitting how screwed they are unless rates plummet.
Yes, of course. But so many of these sponsors came into the industry post GFC and seem to want to ignore what capital markets & asset values truly did during these times of economic crisis. Sure, short rates may fall but their asset's underlying fundamentals (& possibly credit spreads) will be fucked. These dudes are rate traders w/ no counter cycle experience.
In early 2020, I went to a syndicators conference in Colorado. Most of the big names were there including the Ashcroft team. The amount of inexperience among the operators was very apparent especially given the nature of the topics of discussion. The entire event felt like an MLM show (echoing the idea that everyone can be successful in multi as long as they do XYZ; strong emphasis on marketing). One of the key takeaways was that everyone was chasing asset value appreciation and pitching "passive cash flow". Most of the attendees were mainly concerned about getting the most amount of leverage available and were confused about why anyone would want to borrow Life Company financing. Even back then, right before Covid, many operators were looking for floating rate financing to take advantage of the yield curve.
I would say that the idea that a light-moderate recession could be good for Multi is plausible. Here are some thoughts:
1) If a recession were to occur, it would occur because of the rapid climb in rates. In theory fundamentals are solid, hence why GDP growth is still going strong despite the drastic increase in rates.
2) CRE (multi especially so) is largely a leveraged finance play. It is acutely affected by interest rates, much more than most other industries.
3) If we were hit by a recession, presumably rent growth would slow (it's already pretty much at 0), vacancy rates may increase (which is plausible given lack of new supply coming online 1+ years from now and people still need a place to live), capital markets would dry up a bit (but life cos and agencies will still be lending). However, Debt Service constraints would diminish quite a bit which would lead to much better economics for multifamily properties assuming vacancy and rental rates aren't severely impacted (which even in 2008, they were not) and assuming that spreads don't blow out significantly
These guys are toast. Why not be honest with the investors and stop throwing good money after bad?
Losing the deals because you didn't understand the market is one thing but throwing away more good money is terrible.
The government should have 0 obligation to police private investments like this RE: above post.
Excessive regulations have already cut off high quality growth companies from public markets. Look at the huge and sad drop in the amount of companies going public decade after decade.
Now they want to put a collar on private markets because some greedy idiot gave his money to an obviously inexperienced "investor".
The cynic in me is that there aren't enough quality private companies to actually make it in public markets because public markets see straight through bull shit and demand profit at a certain point. Most private companies that have grown to unicorn status are just a pray growth continues forever and maybe we'll figure out how to be profitable at some point.
Bingo! You fucking nailed it!
I have worked with many private real estate operating companies who plan on going public. But once they begin to comprehend the compliances and legal standards of being a REIT, they do a 180-degree turn and run for the hills.
This isn't even a cynical take. It's the truth. Most of the "tech" companies that have defined entrepreneurship for the last two decades are, essentially, scams. WeWork is a perfect example, for many reasons. It's just a vibe, a fun idea that people threw endless piles of cash at in the hopes it would be the next Facebook, and even when it was obvious it wasn't, people kept burning money because they hoped to pass the buck to naive retail investors and get their money out before the whole house of cards came down.
How many "disruptors" can you name that are actually profitable? Or have a path to it? Almost none of them. Which is why none of them go public, because once you have to stand up and say "we don't make money and never will" it's impossible to keep the fiction alive that any of this shit is a good idea.
Companies that actually perform a service or produce a good and make a profit doing it will still go public. Unfortunately for efficient allocation of capital, pretty much everything to come out of Silicon Valley in the last 15 years isn't and never will be profitable. Even the "success" stories, like Uber, aren't and will never be particularly profitable (and yes I know Uber just posted its first profitable year, but that sort of underlines my point).
They talk about rate caps but they don't talk about cap rates. They also don't mention that the deals are under water and that the naked dscr is probably 0.6x DSCR.
What's naked DSCR? Saw the article below across the fund they're at 1.28x DSCR right now.
Naked meaning if there is no rate cap. Assuming your spread over SOFR is 300 bps, and your rate cap is 2%, you're paying a 5% rate. When the rate cap expires, with SOFR at 5.3%, your cost of debt is 8.3%.
If you're at a 1.28x on a 5% rate, at an 8.3% rate you'll be at 0.77X. (5 x 1.28 / 8.3) is the simple math behind that.
Not sure if anyone saw TRD update - https://therealdeal.com/national/2023/11/02/multifamily-firm-ashcroft-p…
Oh wow. Momma I made it on the TRD
who's on your profile pic?
Does anyone feel that this "Joe" character is an AI bot?
Curious if things have changed for Ashcroft and other firms like them? Can they recover, I saw they got $50mm in funding recently and bought two new deals in the last 4 months. Isn't this a bad time to buy? Thoughts on the overall firm pedigree and if they will survive? Always see that bingo book and noticed firms like Carroll which I thought had a great rep.
Other comments aside, what makes you say isn’t this a bad time to buy?
When is Rise 48 going under?
They have a big social media push but oat of their deals must be dead by now.
They sent this to their LPs. Pretty brutal and just sounds like kicking the can and hoping for a market bailout
As communicated in previous updates, we have dedicated months to discussions with lenders and potential partners to refinance, restructure, and stabilize the debt of the AVAF1 portfolio. Our goal is to address three major factors:
How do we achieve this?
Fortunately, after months of negotiating, we’ve secured a path to address all three factors, that will require a successful capital call of 19.7% and partnering with a strategic capital partner.
This is Ashcroft’s first capital call, and while it’s regrettable to take this step, our primary focus remains safeguarding your investment. Therefore, all LPs must participate, including ourselves, with our collective co-investments of $3m. As a gesture of our ongoing commitment, we will extend a $1M note payable at 0% interest upon the successful conclusion of the capital call (details below).
AVAF1 is comprised of assets that are poised for a strong rebound in value as markets improve. This is due to the institutional quality of assets and the high-growth markets in which they were acquired. Moreover, demand and absorption rates are currently at 25-year highs and are continuing to trend in that direction with a 70% reduction in new construction permits and drop off in deliveries in early 2025.
Our strategic partner will help us refinance the 3 largest loans in the portfolio into fixed rate debt, which will lower the blended cost of the floating rate debt. This also significantly reduces the total floating rate debt from $400M down to $265M. We will maintain flexibility on the other 5 properties to sell or refinance as markets improve. In the meantime, the fund will need to cover rate caps costs and restart renovations.
Why is a capital call necessary?
As your partners we believe that when we say we have aligned interests, our decisions and actions should reflect that. Here are some actions we have and/or are taking:
How is this solution structured?
I. Capital call of 19.7% of your initial investment.
II. A refinance into fixed debt on our 3 largest loans while simultaneously lowering the interest rate.
III. Strategic partner will provide approximately $48mm in preferred equity to buy down current loans and refinance over $165M into fixed rate debt which removes 41% of current floating rate debt exposure.
IV. Your 19.7% capital call contributions will accrue at the current coupon rate of 10% for Class A or 7% for Class B.
V. When you fully participate in this capital call (19.7%), we intend on providing you with the opportunity to profit from GP positions in a future offering* outside of the AVAF1.
*The specific offering will be chosen at the discretion of the GP, should such an opportunity arise.
Due to the above, we have created a solution that is best suited to preserve capital and offer the opportunity to still deliver a strong return once the market valuations stabilize.
We anticipate returning your called capital within 24 months of investment
Please note, we evaluated several options before arriving at this solution, bolstering our confidence in the chosen path forward as we explored each alternative. For context, here are three among several others:
Larger capital call without a preferred partner: This would have required a 32% capital call from you, insufficient to refinance any properties. Sell One or Two Now to Avoid Capital Call: While this might mitigate ongoing costs of rate caps, it would leave us vulnerable to failing lender requirements for necessary extension tests in mid-2024. Selling All Properties Now: This would incur significant capital losses. Class B would face a total loss, while Class A would recover only approx. 71% of the original investment.
"Give us 19.7% more money so that it can sit behind preferred equity at 12.75% which has priority over your initial investment and the 19.7% that you just provided." No thank you.
Where will Class A, Class B, and new equity sit? Here's the difficulty of these A and B structures - it's impossible for Ashcroft to act in the best interest of both classes. They've openly just admitted that Class B is wiped out and Class A is 71% of initial investment. If new capital (lets call is class C) sits ahead of Class A, Class A is wiping out their remaining 71%. If the Class C (new capital) does not sit ahead of Class A, the new capital is instantly gone once it's contributed.
Preferred equity, new capital, class A, class B - Any way you want to spin it, Class B is wiped out.
So in general for a capital call this new equity always has a lower priority in the same bucket than the initial investment (since going in as LP equity and not as a different structure like more pref or a mezz structure)? Have never dealt with a capital call before.
Also sent one out for individual syndications as well: https://www.biggerpockets.com/forums/960/topics/1185204-ashcroft-capita…
I haven't really dealt with capital calls and term modifications like this, but for the investors isn't not participating the obvious choice?
Sure. But you have to remember that these guys are basically out here scamming grandma out of her savings, not dealing with institutional partners or people with real estate knowledge/experience. So they're going to bully a bunch of naive rubes into participating, and their marks may not even know that not participating is a choice.
"Maintaining Lender Requirements & Loan Covenants: We (Joe & Frank) will consistently support you and our other investors through both favorable and challenging times. We’ve already extended a $11M interest-free short-term loan to cover various unexpected expenses, including the replacement rate caps over the past 12 months. While this was meant as a temporary solution, it must be repaid promptly to maintain compliance with loan agreements and ensure adequate liquidity across our Ashcroft portfolio."
Could this loan technically be pushed out and Joe/Frank put in more equity to maintain compliance? Seems they're saying we're here for you but oh wait we need our $11mm loan back asap so they get out of bad deals and the kicker is their loan is higher priority than the LPs who are putting in more $.
100%
I thought that sounded fishy. Thanks for confirming.
I like how they offer to get rid of their terrible IRR based waterfall like it's a concession to the LPs when they have no chance of hitting them.
So Frank and Joe had $11M of cash liquidity between the two of them? That's the real head scratcher. Unless I am naive and these scummy syndicators have all made 8 figures during their acquisition spree pre-2022?
A few questions underlined below on their points:
"As your partners we believe that when we say we have aligned interests, our decisions and actions should reflect that. Here are some actions we have and/or are taking:
Frank & Joe turn to Neil & Bob.
Forget the syndicator bingo, WWE should schedule a Survivor Series style elimination match with all these jabronis.
Sean and Ryan from Tides
Neil & Bob from Ashcroft
Zach & Zach's wife from Rise48
Ellie & her Pomeranian from Blue Lake (by the way, we should start a separate thread of this train wreck)
Who else?
Blue Lake has always been an anomaly to me. Do tell! How have they been able to go from owning nothing to acquiring $75MM+ projects?
Like a lot of the "weekend warrior" syndicators out there that are heavy on marketing and light on experience, they use a number of Co-GP "feeder funds" (note that I'm using that term generously, as they're just other syndicators) to tackle the raise with them. It wouldn't be uncommon to have a handful of these in any given equity raise.
Yes. Curious. Whats up w Blue Lake?
Rumor has it: her husband comes from major family money. I have heard any "class A" position or whatever the highest tier Blue Lake offers is taken by the in-laws.
I don't understand why they need a rate cap. These properties are stabilized. Why not just take fixed rate term debt? Wouldn't that be cheaper? Or they can't make DSCR at 6-7%, or whatever they rate they would get for a 3 year term?
They are likely sub 1.0 dscr at today’s fixed rate equivalent. When loan to values are likely 100% at todays prices, they would like require a significant cash infusion to refi into fixed rate debt.
That's what I figured. I don't get why didn't they take term debt when interest rates were half of what they are now? Did they just want more leverage and and even lower floating rate?
And, as the email alludes: they went in on bridge debt, so even outside of DSCR, the current LTV would likely result in need to buy down the loan before any fixed rate could be swapped out.
So who's participating in the capital call?
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