Arbor just foreclosed on $230mm of multifamily in Houston
I think many of us saw these types of deals over the last two years and were scratching our heads, I guess some of these chickens are coming home to roost. It sounds like this one specifically is being driven by an inept Sponsor, but I know there are plenty of other borrowers like this that tried to execute on the same type of business plan so I would guess this is not going to be the last (Nitya next?).
A little surprising that there were no bidders at or above the debt level - I figured that multi was probably still money good for these lenders but that may not extend to these Class C, operationally challenged assets.
At least some of these were also CLO loans - would require meaningful capital on Arbor's end to pull these out. If they have more of these landmines they may have some real capitalization issues coming soon.
This is a fall out of short term floating acquisition debt with high leverage capital stacks. These guys were expecting to get in, stabilize in 18 months, boost value by 15 - 20% through forced appreciation construction and NOI increases from increasing rents. Many of these syndicators were buying on the expectation of 5 - 7% rent increases though out their hold periods. Guess what, you pay too much you get fucked in the ass. The biggest issue I personally see coming out of this will be the scrutiny on the fee structures of these syndicators. Many were hosing their investors with fees, putting little to no actual cash in themselves, and some like that dbag who likes to make tiktok videos on his plane seem to be outright defrauding investors by essentially wholselling deals to themselves at huge markups and basing the return targets on the lower numbers.
If I am a syndicator that finds a deal and I put it under contract at $10M. Then I turn around and raise money from investors and the bank and I tell them the purchase price is at $11M, I have done a wholesale transaction to myself pocketing $1M in the process. This isn't exactly ethical, but also isn't exactly illegal if I am not charging a bunch of other acquisition fees on top of that. The wholesale fee can be seen as a replacement for those other fees charged. The issue is, many of these syndicators rely on unsophisticated people who don't know any better then they hit them with a mark up on the sale AND transaction based fees.
If I run numbers on the above example at $10M and say it will earn 15% IRR, then I mark up the price $1M on the transaction that will push that 15% IRR down. Some really deceptive sponsors will market that 15% on the $10M underwriting and then bury the assumptions down in some fine print. When they then underperform it is because they "can't predict returns", but some will then advertise their next fund on the 15% performance on the $10M number.
Syndicators as a whole a slimy, shady, under informed, and have had a good run because anyone with a pulse could have made money in the past 12 years.
There will be more.
First thing I do on potential acquisitions these days is checking what kind of debt it currently has on it. A few of these started popping up last fall when the 10-year was heating up and high-octane floaters were getting expensive, but a decent number of the sponsors had some time on their rate caps and could temporarily weather the storm (despite already being cash flow negative in some cases).
That isn't the case today. Many sponsors in the Class B/C space only bought two year rate caps, as that is all the bridge lenders were requiring at that time. There will be a wave of cap expirations and maturities this year and next given the enormous volume of bridge-funded deals done from late 2020 to early 2022. Many of these deals are looking at $1-3M+ for a replacement cap, all while rents are flats, expenses have gone through the roof (looking at you insurance and payroll), and the property may or may not be cash flow positive - even with a cap in place. Owners who bought at the peak in re-assessment jurisdictions are also stuck with high RE tax burdens via the stupid pricing they paid and optimistic UW re-assessment ratios (heard some people in TX were UW 65-70% in 2021...when historical precedent is 85-95%).
Re-margining or replacing any of these loans will require substantial equity in. Many syndicators (particularly those with retail investors) have zero ability to go get more capital at the moment.
This hasn't really been the case on Class A stuff, but there are some floating around out there (bad pun, I know). There's a 400+ unit deal in Denver where sponsor refi'd out all their equity with a ~75% LTV floater at the peak...and did not buy a rate cap. Went from $200-300k/month positive cash flow to feeding it $500-600k/month. Offers came in below par value of the debt. Two groups still in the mix with strike price now at par, but wholly dependent on current lender re-casting a loan with a sub-5% fixed rate for 5 more years.
Btw, all the ratings agencies' origination reports are actually goldmines for info on the debt, business plan, sponsor, etc. Even if it doesn't explicitly state the spread, you can usually back into it using the rated DSCR's and the reported NOI's. These reports are definitely eye-opening though to just how much risk there was in the system at the time. Even with huge NOI increases projected, coverage was still relatively thin on the base case model in many cases.
Buckle up boys and girls
Great insight - could you please elaborate on where/how you get the rating agencies reports? Would love to get my hands on some of these for properties I've been eyeing for awhile
Sometimes you can get lucky just by Googling property name + location + name of bridge lender + vintage year. Even if that doesn't give you the exact PDF report you can often find the CLO/CMBS issuance number. Sometimes this number or some other legal identifier can be found within the debt notes on Yardi Matrix or on CoStar public record page.
From there you can go on the websites for DBRS Morningstar, Moody's, etc and search by issuer (name of bridge lender), issuance identification number, etc. Takes awhile to piece together sometimes, as most of these bridge lenders have put out numerous issuances in the last few years.
The really interesting stuff is when the ratings agencies put out their periodic update reports, but seems like those are on a 2-3 year lag from issuance. Really the only rating update documents I've found have been for 2019-2020 issuances.
Edit - by the way, works with some agency pass-thru's too. This is a random one I pulled as an example.