Nightingale & CrowdStreet Fraud

Curious to hear everyone's thoughts on Nightingale's fraud, among others, that have occurred through sourcing equity on syndication providers like Crowdstreet.

Me personally, I don't trust these third-party capital raising providers that target mom and pop retail investors. As soon as I was able to put money in RE deals through coinvest at work, I liquidated all my Fundrise positions. The fees with these type of guys add up over time, and I notice a trend where these operators put money into average at best deals to generate fees to cover overhead year after year. I definitely see these type of services proliferated by unsophisticated operators who can't raise capital through institutional LPs or more traditional routes. Cheers.

https://www.wsj.com/articles/missing-millions-and…

 

Several years back, they last minute balloon defaulted on a 240mm loan for failing to right size at maturity in order to exercise an extension option. I don’t believe they told their overseas JV partner ahead of time either, so there was confusion from that side when default notices went out.

They ended up paying over $1mm in default interest to Lender to refi out a few months later. Just seemed disorganized and messy, can’t say I’m surprised.

 

There are a whole host of issues and conflicts of interest with this funding portal / crowdfunding business model. Even from companies like Fundrise who have scale, there are just a ton of things that they get away with that a fund manager with real LPs would never get away with. Ie, up and deciding on a complete whim that they're going to invest a substantial percentage of investor capital into a totally new and untested investment strategy that the firm has never even tried before. It always seems curious to me that the crowdfunding platforms have a tendency to do this whenever their bread and butter strategy dries up. It's almost as if they chose their strategy based upon what allows them to deploy capital and take fees instead of a well thought out, pre-agreed upon strategy with LPs...

And I'll go ahead and say it. Tons of these deals just shouldn't be getting done, but all of these syndicators have to cover their overhead and insane marketing costs with deal fees. So they're going to A) Fee deals to death and B) Do deals at any cost. The whole incentive structure is actually horrid. Now again, with real LPs, you work through these things. You come to a clear investment strategy, investor rights, performance metrics, default conditions, etc. These syndicators get away with murder and do things that their investors shouldn't be cool with but simply don't know any better. 

 

I started a similar thread about Nightingale last week.

Many Crowdfunding websites have somehow invested with Sponsors that carried out fraud. Crowdstreet was supposed to be the highest quality of all they have raised capital with some of the most prominent sponsors in the market including Greystar, Harbor Group, and others. Nightingale did have an excellent reputation and has done JV's with some of the largest institutional LP's in the market. However there were major red flags brought up during this fundraising process - https://www.wsj.com/articles/atlantas-record-62-million-crowdfunding-de…

Ultimately I do think given the massive fees CS was to make over this raise they looked past some of these red flags.  

 

Even if most of these syndicators or crowdsourcing funds aren't outright fraudulent, they're all obviously scams looking to fleece unsophisticated investors.

I have a hard time having pity for anyone here.  Don't invest in products you don't understand well enough to do actual due diligence on.  I can't applaud a con artist for taking money from a mark, but neither do I have sympathy for someone who walks into a room and says "I'll give $10,000 to the person who shows me the prettiest pitch deck"

 
WestCRE

Can you substantiate how these crowdfunding platforms are "obviously scams". It sounds like you don't understand the business at all.

Every pitch I've ever seen on one of them had ludicrously low opex numbers, a lot of bloviating talk about how high the returns were, and a palpable feel that the sponsors didn't have a clue what they were doing.

It should go without saying, but most reputable sponsors don't need to crowdfund from unsophisticated small time "investors".  The deals, and by extension the platforms that host them, are designed to do little more than mulct unsuspecting rubes out of their money.  Which is why it's no surprise at all when ~gasp~ the people running these thinly disguised scams turn out to be literal thieves.

 

I'm no longer in a capital allocator role, but when I was, multiple times I would be shown a deal by a crappy equity broker and would pass, and then would see it show up later on one of the crowdfunding platforms. At the end of the day, these platforms are just intermediaries between retail capital and sponsors. They are not taking capital risk and in many cases aren't compensated based on the performance of their deals. If they can raise money for it, it gets listed. 

 
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CRESF

I'm no longer in a capital allocator role, but when I was, multiple times I would be shown a deal by a crappy equity broker and would pass, and then would see it show up later on one of the crowdfunding platforms. At the end of the day, these platforms are just intermediaries between retail capital and sponsors. They are not taking capital risk and in many cases aren't compensated based on the performance of their deals. If they can raise money for it, it gets listed. 

Yeah, and that is pretty skeevy, to me.  In general, but specifically in real estate, compensation is supposed to be tied to risk.  When I see an actor who takes zero risk, I'm willing to bet right off the bat that if they aren't misleading their investors or counterparties, they soon will be.  It's too strong a moral hazard.  Maybe you start with the best intentions, but soon the day comes where a 5% reduction in opex assumptions means you'll win a deal... and after all, that's not impossible!  So you do it.  And that becomes the new normal.  And every further compromise seems minor on its own, until you end up with shit deals that you pass on to unsuspecting investors without the financial acumen to discern the true risk they're taking, and not caring about it because the only thing that matters is to keep the fee wheel churning.

If you don't have exposure to the negative repercussions of decisions you make, then you (as a generic company/person) are inherently untrustworthy and will almost inevitably act against the best interests of the people you claim to represent.

 

I don’t see how you’re anecdotal experience support the accusation. If crowdfunding was all a rampant scam there would be a concentration of losses and lawsuits from crowdfunded deals, there is not.

“Reputable sponsors don’t need crowdfunding”. This is just nonsense, small sponsors seek diverse sources of capital, does that mean they are they’re not. Of course not. And good sponsors will keep a stable of equity providers and seek to retain several capital partners. They doesn’t mean they “need” any of them, it’s just good business.

You’ve got one example of a Sponsor committing fraud, not a crowdfunding company.

Again, sounds to me like you don’t understand what you’re talking about

 

Many large, legitimate and corporate shops have raised money on crowdfunding platforms. Fisher Brothers have raised money on CS recently for a massive Wynwood multi development project. Dermot was recently raising equity on crowdstreet so has Tavros, GAIA, O'Conner and more. Probably just need one remaining slug of equity so maybe due to lower debt proceeds than u/w.

Most institutional players are out, some of the best sponsors are turning to unconventional tactics to get deals done.

 

Why’s everyone so focused on commenting around the Crowdstreet angle of this whole mess? Not one post here so far is on Nightingale - very odd for people to just completely ignore the fact a billion+ dollar company is walking around in broad daylight after no-BS, completely outright STOLE investors money and “nobody can get a hold of them”.

Just seems WILD to not have one person talk about what this guys doing, why investors aren’t suing him outright, and what the hell is going on. Is there something in these docs that allows them to get away with this that I’m missing? There has to be. There would never in a million years be this must focus on just CrowdStreet…

 

Because they're obviously in the wrong and they will get jail time.  I can almost guarantee you the authorities are building a case in the background, but it takes time.  CS's involvement and liability is much more grey, so for now everyone is just reading some highlights and making conjectures.  For example, the clause in the LPA about using rabbinical court means no one bothered with reading the actual agreement - CS, LPs, etc.

 

Esque_:

Because they're obviously in the wrong and they will get jail time.  I can almost guarantee you the authorities are building a case in the background, but it takes time.  CS's involvement and liability is much more grey, so for now everyone is just reading some highlights and making conjectures.  For example, the clause in the LPA about using rabbinical court means no one bothered with reading the actual agreement - CS, LPs, etc.

That’s what I’m after - is there some clause in the agreement that would have allowed for Nightingale to somehow getaway with this?

I’m much more interested in figuring out why in the world they thought or do think they can get out of this or what the thought process was behind why seemingly smart guys would basically outright knowingly subject themselves to losing their entire firm, having FBI on their radar and immediately start the clock till jail time. There logically can’t be any upside to this unless the dude is what, either thinking legally he has an out or is about to flee to a non-extradition country? Lmao

 

Given this case and all of the fallout we're going to see from some of the more aggressive syndicators, I'd be shocked if the crowdfunding world isn't much more heavily regulated after this cycle.  In addition to the people losing 100% of their investments, we're starting to see horror stories from the people who live in these properties that inexperienced sponsors are leaving in shambles.  Its an all around mess for everyone who didn't get to line their pockets at the closing table.  

 

This has been top of mind recently and I agree with all of the above.  There's (rightfully) going to be some pissed off investors that go to their representatives for a pound of flesh.  The end result I expect is more regulation for non-listed securities.  The need to protect tenants will also be something that needs to be addressed.  The condition of these properties as maintenance and capital expenses are diverted to debt payments for years is frustrating.  Would not  want to live in a property like that but unfortunately in many of these cases the tenants have little alternatives because of the price point.

 

I mean, they already are very heavily regulated. It is an absolute nightmare putting a syndication together with the amount of upfront compliance and paperwork. At the end of the day, these are accredited investors. I don't really see the difference between a doctor investing $200K in a bad real estate investment (this does not include outright fraud, obviously) and $200K in a stock Jim Kramer tells him to pick. 

 

The paperwork is pretty simple.  We have our attorney file the reg D.  I just have to provide simple info to them.  Even if you require proof of accreditation, it is not that complex.

A doctor investing $200k probably has no idea what they are investing in.  They likely don't understand the debt risk with variable rate debt.

Should the doctor do his due diligence?  Absolutely!  However, we all know the bulk of them weren't doing due diligence and the people gathering retail investors to do their deals knew those investors weren't savvy.  

If they were Savvy, they would have avoided Crowd Street and similar companies because they were feeing deals like crazy.  

Crowd Street took large fees on deals and they should have been verifying that the investment was used properly.  Crowd Street got paid and didn't do the work.  

 

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