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Thoughts On RealtyShares Closing Its Doors To New Investors

Started by Sam, November 07, 2018, 11:29:29 AM

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ramesh

Quote from: JD on June 25, 2019, 04:22:36 AM
With respect to RS being an outright scam, I don't think this is the case. I'm into around 15 deals that all closed in 2018. The equity ones are doing just fine and continuing to pay out. As some have mentioned, it's the debt ones that have mostly gone awry. And in fairness, a handful of those have continued to pay out as expected too.

I think it's the sponsors taking advantage of RS folding, which will hopefully be remedied now by the new management. We are potentially in big trouble with entities like FG so maybe we should pursue legal action on them if nothing further is recovered.

..

I agree with you.

With a number of investments whose fate is unclear, I am constantly looking for clues to determine if the issues we have seen with the FG investments are likely to surface in other investments.  The current and past management of RS have offered no firm-wide view of investment status, much less detailed analytics on defaults, recoveries and other relevant areas.  Additionally, many posts here --- my posts for sure -- have focused more on the basket cases than performing ones.  The uncertainty arising from the firm's failure of communication, and the focus on problematic investments in posts here, probably create a more negative view of RS's competence and integrity than is actually the case. We will know for sure in due course.

I will write a note to RS highlighting this dynamic in the hope that they will see the wisdom in communicating about the state of investments  at the firm more openly,.

JD

Quote from: ramesh on June 25, 2019, 07:13:02 AM
I will write a note to RS highlighting this dynamic in the hope that they will see the wisdom in communicating about the state of investments  at the firm more openly,.

That would be great - keep us posted as I think many of us would write similar letters depending on what you hear back (or don't).

cleon

Probably a perfect candidate for a 60 minutes expose, if anyone has the time and or energy to contact them.



https://www.cbsnews.com/news/contact-information-08-07-1998/

1UnknownSubject

I feel the same way as others (RS was based on creating a website versus realty fund to be sold to investors later). As soon as the equity or debt deals got wind of RS unable to obtain 2nd round funding, blood was in the water and they got bold. I am invested in FG Coastal Church's Chicken Melborne (which returned .16 of capital on the dollar), and the following two equity deals:

Cambridge Courtyards Apartments
RS298 • RSN2155.1-1
--They have not paid out since last year (1/4/19 was the payment for the quarter 07/01/2018 - 09/30/2018 ) and they said in the 1Q19 they were going to retain funds for repairs. No payments since, last update in March.  K1 just came last week.

University of Toledo Student Housing
RS368 • RSN3310.1-1
--They have continued to pay out, but I have yet to receive a K-1 from them.

I hope I and others get out of this with minimal damage.


JD

So here's the worst notification I've received; it came in yesterday:

4311 Communications Drive 2nd Lien
06/26/2019
IIRR Management Services, LLC (IRM) has taken over the Asset Management and Fund Admin functions of this investment. Our goal is to provide timely and accurate updates on each asset as best as possible.

It is clear that this investment failed to perform according to the original business plan. The main reason for the failure is the loss of all of the building's tenants. The sponsor has not been responsive to our communications and has not made any distributions since February 2019 and has no viable exit plan. Further, IRM recently received a report from our lawyers that the 1st loan is in default.

IRM reached out to the 1st lender and was informed that they had, in fact, initiated foreclosure proceedings and expect to sell the property at a public auction on August 6, 2019. The preliminary valuation estimate for this now vacant property is approximately $3 million. The 1st loan balance is approximately $6 million and if the foreclosure sale concludes at the estimated value, RealtyShares will take a total loss on its investment of $1 million. 

The 1st lender plans to sue the guarantor because they believe the borrower has breached several of the bad-boy provisions in the guaranty; for example, removing fixtures, failing pay for utilities leading to termination of service, failing to pay property taxes, and mismanaging the property from full occupancy to now vacant. The 1st lender offered to support our efforts to sue under the guaranty to the extent joining them in their suit. IRM is evaluating the merits and likelihood of collecting if we join the 1st lender in the guaranty lawsuit.

IRM is expecting to post additional updates approximately every 90 days. IRM will relay any new information we receive about the foreclosure process as soon as practicable.

Hindsight2020

That is horrid. Sorry. Do you have a link to the original investment offering page? I'd like to see how this was positioned to investors, and whether it corresponds to a pattern we've seen with Franchise Growth and BlueMountain (the sponsor on many Utah investments).

JD

Quote from: Hindsight2020 on June 27, 2019, 05:58:37 AM
That is horrid. Sorry. Do you have a link to the original investment offering page? I'd like to see how this was positioned to investors, and whether it corresponds to a pattern we've seen with Franchise Growth and BlueMountain (the sponsor on many Utah investments).

Here it is: https://www.realtyshares.com/investments/4311-communications-drive-2nd-lien

A telling quote from it:
"The Borrower is also renting a majority of the space in the Property, so that the debt service will be primarily funded by the Borrower, not third-party tenants."

No wonder it's vacant.

Paid out all of 6% of my investment before defaulting.

Lmk what you think, thanks!

FloridaMan

That is very bad.

Two thoughts. This is not a deal I'm in and only represents conclusions based on the original list, documents, and updates.

1. Looks to me like outright fraud. This was a cash out refinance deal. The sponsor refi-d a first mortgage and then took 2,000,000 cash out to buy 'bitcoin machines'. The fact that the borrower didn't pay utilities and stripped the building of stuff is further evidence.

2. Buying this at foreclosure now looks like a great value add play. This property had a stabilized appraised value of $12MM (which is posted in the initial listing and seems to be legit 3rd party professionally done). Replacement cost in the same $12MM ballpark. If the first lender is anticipating selling for $3MM at foreclosure, how hard would it be to raise $5MM, buy out the first loan, use $2MM for repair and lease up expenses, then turn around and sell or refinance for $12MM?? Leave original investors with a B-piece of equity that pays off conditional on return hurdles being met on the new equity?

This is the type of spot that RREAF — with its capabilities to raise and manage property — should try thinking creatively. 





Quote from: JD on June 27, 2019, 06:54:53 AM
Quote from: Hindsight2020 link=
topic=221.msg3510#msg3510 date=1561640317

That is horrid. Sorry. Do you have a link to the original investment offering page? I'd like to see how this was positioned to investors, and whether it corresponds to a pattern we've seen with Franchise Growth and BlueMountain (the sponsor on many Utah investments).

Here it is: https://www.realtyshares.com/investments/4311-communications-drive-2nd-lien

A telling quote from it:
"The Borrower is also renting a majority of the space in the Property, so that the debt service will be primarily funded by the Borrower, not third-party tenants."

No wonder it's vacant.

Paid out all of 6% of my investment before defaulting.

Lmk what you think, thanks!

JD

Quote from: FloridaMan on June 27, 2019, 07:48:30 AM
That is very bad.

Two thoughts. This is not a deal I'm in and only represents conclusions based on the original list, documents, and updates.

1. Looks to me like outright fraud. This was a cash out refinance deal. The sponsor refi-d a first mortgage and then took 2,000,000 cash out to buy 'bitcoin machines'. The fact that the borrower didn't pay utilities and stripped the building of stuff is further evidence.

2. Buying this at foreclosure now looks like a great value add play. This property had a stabilized appraised value of $12MM (which is posted in the initial listing and seems to be legit 3rd party professionally done). Replacement cost in the same $12MM ballpark. If the first lender is anticipating selling for $3MM at foreclosure, how hard would it be to raise $5MM, buy out the first loan, use $2MM for repair and lease up expenses, then turn around and sell or refinance for $12MM?? Leave original investors with a B-piece of equity that pays off conditional on return hurdles being met on the new equity?

This is the type of spot that RREAF — with its capabilities to raise and manage property — should try thinking creatively. 





Quote from: JD on June 27, 2019, 06:54:53 AM
Quote from: Hindsight2020 link=
topic=221.msg3510#msg3510 date=1561640317

That is horrid. Sorry. Do you have a link to the original investment offering page? I'd like to see how this was positioned to investors, and whether it corresponds to a pattern we've seen with Franchise Growth and BlueMountain (the sponsor on many Utah investments).

Here it is: https://www.realtyshares.com/investments/4311-communications-drive-2nd-lien

A telling quote from it:
"The Borrower is also renting a majority of the space in the Property, so that the debt service will be primarily funded by the Borrower, not third-party tenants."

No wonder it's vacant.

Paid out all of 6% of my investment before defaulting.

Lmk what you think, thanks!

Seriously, you should be handling this instead of IIRR.

I'm really glad I only put the minimum into it; I was pretty wary of it when I invested but at the time had total faith in RS... Oops.

I'm going to pass your comments on as I was drafting a message to IIRR already. Will see if they take it under consideration.

Thanks much, really useful thoughts.

FloridaMan

Glad it was helpful.

On a little more reflection; something else in the story isn't adding up. Which is — if stabilized value is really 12MM, why does the holder of the first lien think they are going to sell for only 3? The market for data center space in Atlanta didn't fall by 75% in one year. Do they know something that we don't know - I.e., did the sponsor somehow extract $9MM of value for themselves?

There's a discount for a property being vacant and for a distressed situation. But that discount being 75% seems too big.

I would pose the question to IIRR, what is the basis on which the first lien lender thinks this will sell for $3MM? How does that square with the stabilized appraised value at origination?


JD

Quote from: FloridaMan on June 27, 2019, 10:17:54 AM
Glad it was helpful.

On a little more reflection; something else in the story isn't adding up. Which is — if stabilized value is really 12MM, why does the holder of the first lien think they are going to sell for only 3? The market for data center space in Atlanta didn't fall by 75% in one year. Do they know something that we don't know - I.e., did the sponsor somehow extract $9MM of value for themselves?

There's a discount for a property being vacant and for a distressed situation. But that discount being 75% seems too big.

I would pose the question to IIRR, what is the basis on which the first lien lender thinks this will sell for $3MM? How does that square with the stabilized appraised value at origination?

Yeah, no kidding - the numbers are very suspect. It leads back to your original observation that it's likely straight fraud.

I already sent my first email to IIRR and will give them a few days to respond before following up with that point. In some ways you've covered it by noting the tremendous value one has in buying back at 3M but it's definitely worth nailing the point home.

I've got one good piece of news to add - I got a notification for Brittney Place today, an equity investment. It states that IIRR has taken over and everything is going well. The sponsor is very communicative and distributions are on track, performing above expectations and should continue.

It was nice to finally get a bit of good news in the form of a RS notification and gives a bit of hope wrt the new management and perhaps better communication going forward.

JD

Quote from: Hindsight2020 on June 27, 2019, 05:53:29 PM
Quote from: JD on June 27, 2019, 12:14:20 PM
Quote from: FloridaMan on June 27, 2019, 10:17:54 AM
Glad it was helpful.

On a little more reflection; something else in the story isn't adding up. Which is — if stabilized value is really 12MM, why does the holder of the first lien think they are going to sell for only 3? The market for data center space in Atlanta didn't fall by 75% in one year. Do they know something that we don't know - I.e., did the sponsor somehow extract $9MM of value for themselves?

There's a discount for a property being vacant and for a distressed situation. But that discount being 75% seems too big.

I would pose the question to IIRR, what is the basis on which the first lien lender thinks this will sell for $3MM? How does that square with the stabilized appraised value at origination?

Yeah, no kidding - the numbers are very suspect. It leads back to your original observation that it's likely straight fraud.

I already sent my first email to IIRR and will give them a few days to respond before following up with that point. In some ways you've covered it by noting the tremendous value one has in buying back at 3M but it's definitely worth nailing the point home.

I've got one good piece of news to add - I got a notification for Brittney Place today, an equity investment. It states that IIRR has taken over and everything is going well. The sponsor is very communicative and distributions are on track, performing above expectations and should continue.

It was nice to finally get a bit of good news in the form of a RS notification and gives a bit of hope wrt the new management and perhaps better communication going forward.

I looked at the original listing. The $12MM appraisal was provided by a real estate firm called Newmark Knight Lewis, which is a public company (Ticker: NMRK) with a $3.6BN enterprise value. Might be worth looking into any connection between this company and the sponsor. In the appraisal the largest tenant (more than half the building) had a lease through 2026 (Synergy Internet). I couldn't tell from the data, but this might be the sponsor's company. The appraisal said rents were above market average. That would certainly be one way to jack up an appraisal--have one of your companies sign an above market rent deal. Then do the refi, take out the money, then walk. Finally, the appraiser provided a go dark valuation (if it was entirely vacant and for sale) of $7.1 million using what it cited as market rent. The $3 million really does sound suspicious, depending on the amount of damage caused by removed fixtures, etc.

Nice, that is huge too. I'm going to draft up a somewhat revised letter to IIRR including this and the previous comments. We'll see if they decide to dig any deeper and maybe work with the first lender using this information.

Thanks for the help. You guys are clearly quite experienced in real estate deals; it's all still a bit new to me so much appreciated!

ramesh

JD,  sorry about the Communications Drive investment.  Utterly incompetent underwriting and due diligence.  Further, really makes you wonder about the competence of the VCs that backed this pig of a company (ie RS).

Anyways, going by the points made above about the suspicious $3M figure, I worry about the sincerity of IRM in watching out for investor interests.  Is it possible that IRM is just punting the ball on the pretext that RS made this poorly vetted investment, and this is not their problem? If so, this bodes ill for all of our investments that run into problems.

JD

Quote from: ramesh on June 28, 2019, 05:17:45 AM
JD,  sorry about the Communications Drive investment.  Utterly incompetent underwriting and due diligence.  Further, really makes you wonder about the competence of the VCs that backed this pig of a company (ie RS).

Anyways, going by the points made above about the suspicious $3M figure, I worry about the sincerity of IRM in watching out for investor interests.  Is it possible that IRM is just punting the ball on the pretext that RS made this poorly vetted investment, and this is not their problem? If so, this bodes ill for all of our investments that run into problems.

Thanks Ramesh. I agree completely and have to accept some responsibility myself for not being suspicious when I initially looked at it. In hindsight, it looks questionable enough that I probably should have avoided it instead of putting my faith into RS due diligence. If they put their own raised capital into all of these horrible debt deals we're seeing, it's no wonder they couldn't raise any more money.

I drafted an email to Eric at IRM pleading much of what was suggested here regarding the deal. I'll let you all know what he says.

ramesh

Quote from: JD on June 25, 2019, 08:43:41 AM
Quote from: ramesh on June 25, 2019, 07:13:02 AM
I will write a note to RS highlighting this dynamic in the hope that they will see the wisdom in communicating about the state of investments  at the firm more openly,.

That would be great - keep us posted as I think many of us would write similar letters depending on what you hear back (or don't).

I wrote to Eric Sullivan  last week.  No acknowledgment, much less a response.

Nosferatu_FL

Quote from: ramesh on July 01, 2019, 06:11:01 AM
Quote from: JD on June 25, 2019, 08:43:41 AM
Quote from: ramesh on June 25, 2019, 07:13:02 AM
I will write a note to RS highlighting this dynamic in the hope that they will see the wisdom in communicating about the state of investments  at the firm more openly,.

That would be great - keep us posted as I think many of us would write similar letters depending on what you hear back (or don't).

I wrote to Eric Sullivan  last week.  No acknowledgment, much less a response.

I agree
The new management Firm has been all talk and reassurances so far, but very little on actions.
Apparently the deal they did with RS is where they take on doing the work and getting the management fees but no liability.

Nosferatu_FL

Quote from: mspringer on June 20, 2019, 04:59:18 AM
16620 Linda Terrace

It looks like myself, crossfire, para655, and cheezus so far.

The original listing reads as though the sponsor has a $1.9MM loan he wants to refinance.  With that he is raising additional money to raze the current structure, build and sell new construction.  The senior loan is $4+MM, our second lien (RS') is ~$1.5MM, and then the sponsor/3rd party is putting in around $1MM.  The intention was to sell a CONSTRUCTED house for $7MM.

From what I can tell, and there have been 0 construction updates since last June, they refinanced the original loan, razed the existing structure, and now have a base of land, and approved plans to build.  But rather than building the structure, they are selling this listing as a lot with approved plans for the buyer to build.  It would then make sense why the asking price is $4MM rather than $7MM as there is NO HOUSE on the lot.

What I don't know is what happens with that money that has not been used between the original loan refinance + leveling costs and the total of the loan sources (~$6.5MM)?  My hope is the new people at RealtyShares just did not fully understand the status (since there has been zero communication and I am piecing this together by looking at random google sites) and it is not a matter of the sponsor trying to "sell" this off as they did all the work they intended and are taking a loss but will fully recoup their senior loan.

I'm also in Linda Terrace so you can def count me in.

Nosferatu_FL

Anyone got involved in the Best Western Toledo investment?
This was the link:
https://www.realtyshares.com/investments/best-western-toledo

This was updated as a complete loss.

I had a big investment into this and when I started researching the Principal CEO and Sponsor, I found they had a less than stellar reputation and is involved in multiple cases of litigation for fraud and negligence.

I'm looking to take legal action against the Sponsor.  Let me know if anyone else had this investment and interested in pursuing.

mspringer

Quote from: Nosferatu_FL on July 02, 2019, 02:46:59 AM
Quote from: mspringer on June 20, 2019, 04:59:18 AM
16620 Linda Terrace

It looks like myself, crossfire, para655, and cheezus so far.

The original listing reads as though the sponsor has a $1.9MM loan he wants to refinance.  With that he is raising additional money to raze the current structure, build and sell new construction.  The senior loan is $4+MM, our second lien (RS') is ~$1.5MM, and then the sponsor/3rd party is putting in around $1MM.  The intention was to sell a CONSTRUCTED house for $7MM.

From what I can tell, and there have been 0 construction updates since last June, they refinanced the original loan, razed the existing structure, and now have a base of land, and approved plans to build.  But rather than building the structure, they are selling this listing as a lot with approved plans for the buyer to build.  It would then make sense why the asking price is $4MM rather than $7MM as there is NO HOUSE on the lot.

What I don't know is what happens with that money that has not been used between the original loan refinance + leveling costs and the total of the loan sources (~$6.5MM)?  My hope is the new people at RealtyShares just did not fully understand the status (since there has been zero communication and I am piecing this together by looking at random google sites) and it is not a matter of the sponsor trying to "sell" this off as they did all the work they intended and are taking a loss but will fully recoup their senior loan.

I'm also in Linda Terrace so you can def count me in.

Nosferatu_FL,
Based on research by myself and a few others, it appears the lot "as is" is for sale for $4MM.  If it sold for this I am not sure how the distribution would work but because the expense of building the actual house would not have occurred, I do NOT think we would be at a total loss as the latest communication stated.  But I have no visibility of how much has been released and spent to date.
That said, it appears the sponsor is going to (or maybe already has) begin building the structure on the property.  Once completed, he estimates it will sale for ~$8MM.  If that occurs, which is what the scope is for the initial note, then I believe we will be made whole.  Given this is a debt deal and not an equity, we won't make more because it sales for more but we should get our initial investment back.

What I do not know:
If any of this is true as this info was gathered by us and NOT by RealtyShares.
Why we have not received the last few months of interest payments?  Previously this was a very consistent payer.
This note has already been extended once.  It sounds like timing now to build the structure could be an additional 24 months.  So will there be an extension, refinance that pays us out, or something else?

Nosferatu_FL

Quote from: mspringer on July 02, 2019, 05:36:59 AM
Quote from: Nosferatu_FL on July 02, 2019, 02:46:59 AM
Quote from: mspringer on June 20, 2019, 04:59:18 AM
16620 Linda Terrace

It looks like myself, crossfire, para655, and cheezus so far.

The original listing reads as though the sponsor has a $1.9MM loan he wants to refinance.  With that he is raising additional money to raze the current structure, build and sell new construction.  The senior loan is $4+MM, our second lien (RS') is ~$1.5MM, and then the sponsor/3rd party is putting in around $1MM.  The intention was to sell a CONSTRUCTED house for $7MM.

From what I can tell, and there have been 0 construction updates since last June, they refinanced the original loan, razed the existing structure, and now have a base of land, and approved plans to build.  But rather than building the structure, they are selling this listing as a lot with approved plans for the buyer to build.  It would then make sense why the asking price is $4MM rather than $7MM as there is NO HOUSE on the lot.

What I don't know is what happens with that money that has not been used between the original loan refinance + leveling costs and the total of the loan sources (~$6.5MM)?  My hope is the new people at RealtyShares just did not fully understand the status (since there has been zero communication and I am piecing this together by looking at random google sites) and it is not a matter of the sponsor trying to "sell" this off as they did all the work they intended and are taking a loss but will fully recoup their senior loan.

I'm also in Linda Terrace so you can def count me in.

Nosferatu_FL,
Based on research by myself and a few others, it appears the lot "as is" is for sale for $4MM.  If it sold for this I am not sure how the distribution would work but because the expense of building the actual house would not have occurred, I do NOT think we would be at a total loss as the latest communication stated.  But I have no visibility of how much has been released and spent to date.
That said, it appears the sponsor is going to (or maybe already has) begin building the structure on the property.  Once completed, he estimates it will sale for ~$8MM.  If that occurs, which is what the scope is for the initial note, then I believe we will be made whole.  Given this is a debt deal and not an equity, we won't make more because it sales for more but we should get our initial investment back.

What I do not know:
If any of this is true as this info was gathered by us and NOT by RealtyShares.
Why we have not received the last few months of interest payments?  Previously this was a very consistent payer.
This note has already been extended once.  It sounds like timing now to build the structure could be an additional 24 months.  So will there be an extension, refinance that pays us out, or something else?

springier
Thanks for update.  Would be nice just to get the $$ back at this point!
I tried to reach out directly to the sponsor before but never got a call back.
I left a VM today:

BBS Real estate
11990 San Vicente Blvd., Ste. 100
Los Angeles, CA 90049
424-203-1800

I believe they told me Scott their CEO was the principal in that investment.
Will update if i hear back from them.