Thoughts On RealtyShares Closing Its Doors To New Investors

[stingray]

@Dale Tucker:  Regarding your loss in NE High Yield Portfolio VII, you do not have to wait.  In fact, you can abandon it and receive a better tax benefit than if you wait.  That is because if done correctly, the loss on an abandoned partnership interest can be deductible against *ordinary* income--not merely a capital loss.  Here is the information, which you might wish to discuss with your accountant:

https://www.cpajournal.com/2016/10/01/partnership-abandonment/

Also, it may be better to recognize the loss before the end of the year so you can include it on your 2019 income tax return.

Good luck and sorry about that result.

[ramesh]

A question for folks here who have equity investments in RS: have you received any quarterly financial updates in the last two quarters since IRM took over?

[JD]

A question for folks here who have equity investments in RS: have you received any quarterly financial updates in the last two quarters since IRM took over?

Good question, Ramesh. Up until a few weeks ago, no. But now I have received 2 or 3 and the most recent one dates back to the beginning of the year so maybe they're starting to get their stuff together finally.

[stingray]

@Ramesh:  I have had the same experience as JD.  Very few updates over the past 6 months, but a few more recently.  It appears that they have a backlog.

[mspringer]

MSH,
I am still not showing any updates on the RS site nor a deposit to my bank account.

My dashboard updated this AM. It shows it as an Exited investment now...$2,255.41 returned on a $10K invest

$2,481 returned on $11k here.
I still expect to see some form of communications explaining what happened with the money that was NOT spent to build the actual structure!!!
This seems like a pretty easy forensics accounting job.

fwiw, according to Redfin, the property has appreciated $1.7MM since it last sold in 2015.  I would think that $1.7MM appreciate could be considered the cost to clear the land and approve new plans.  I'm not sure any other work or costs has been done?

[Hindsight2020]

Investors in the Vernazza Apartments preferred equity were notified today that the asset has been sold and our investment paid off in full, including accrued preferred interest and the remaining interest reserve. We are expected to receive full payment in the next 10-15 days.

This was probably my best investment on the platform, so I'm not surprised to see the sponsor meet all obligations. But it's good to share the news anytime one of our deals goes right. My only disappointment was that it paid off 9 months early.

[groovydude]

Here's a weird one and a bit out of the norm for RS deals - Palo Alto Residential Development. This was a debt deal to flip a high-end home, 8% interest + 5.5% accrued on a second loan. Construction took longer than expected (laughable), and the sponsor stopped paying interest months ago, claiming to be out of cash. IRM has agreed to let interest accrue as the house is now on the market. The original purchase price was $8M and the RS listing states a target price of $16.5M, and claims an appraisal of $19.5M (I never liked this sales point in the first place - how can one appraise plans???). IRM just reported that the project is now complete and has the house listed for $27.8M. Yes, $27.8M - almost double the original estimate. That's about $3,700 psf! (Zillow estimate for the value is Estimated sales range: $25.91M - $28.91M). If the house is near the same size the original sale was for around $1,100 psf. IRM is reporting that realtors have raised eyebrows at the listing price (no kidding?).

I'm not complaining, yet. It seems likely I'll have made a 13.5% return eventually. But what are we looking at here? A greedy-ass sponsor trying to make a killing while investors sweat it out? The sponsor stands to make over 400% gross return on equity at market price if construction costs were accurate. A contractor run amok? Or, yet another stark example of how the billionaire class has obscenely profited from our cockeyed economy?

I'd hate to be the original seller if the deal actually goes down at over $26M.

[JD]

Here's a weird one and a bit out of the norm for RS deals - Palo Alto Residential Development. This was a debt deal to flip a high-end home, 8% interest + 5.5% accrued on a second loan. Construction took longer than expected (laughable), and the sponsor stopped paying interest months ago, claiming to be out of cash. IRM has agreed to let interest accrue as the house is now on the market. The original purchase price was $8M and the RS listing states a target price of $16.5M, and claims an appraisal of $19.5M (I never liked this sales point in the first place - how can one appraise plans???). IRM just reported that the project is now complete and has the house listed for $27.8M. Yes, $27.8M - almost double the original estimate. That's about $3,700 psf! (Zillow estimate for the value is Estimated sales range: $25.91M - $28.91M). If the house is near the same size the original sale was for around $1,100 psf. IRM is reporting that realtors have raised eyebrows at the listing price (no kidding?).

I'm not complaining, yet. It seems likely I'll have made a 13.5% return eventually. But what are we looking at here? A greedy-ass sponsor trying to make a killing while investors sweat it out? The sponsor stands to make over 400% gross return on equity at market price if construction costs were accurate. A contractor run amok? Or, yet another stark example of how the billionaire class has obscenely profited from our cockeyed economy?

I'd hate to be the original seller if the deal actually goes down at over $26M.

Wow, that is just bizarre!!! Keep us posted on what happens, I'm really interested to hear.

It feels to me like you should be making more than 13.5% though

[Sam]

Investors in the Vernazza Apartments preferred equity were notified today that the asset has been sold and our investment paid off in full, including accrued preferred interest and the remaining interest reserve. We are expected to receive full payment in the next 10-15 days.

This was probably my best investment on the platform, so I'm not surprised to see the sponsor meet all obligations. But it's good to share the news anytime one of our deals goes right. My only disappointment was that it paid off 9 months early.

Nice! Do you know what the IRR and absolute return will be? I did not get a notification. Hope we're talking about the same deal.

The DME fund invested in this project, and I wrote about my fears of investing in this project: https://www.financialsamurai.com/potential-real-estate-crowdfunding-loss/


VERNAZZA APARTMENTS
LOCATION   Las Vegas, NV   
PRODUCT TYPE   Preferred Equity
ASSET TYPE   Multifamily
SPONSOR   The Nathan Family Office and Madison Residential
FUND ALLOCATION   $600,000
Deal Page   Click Here: https://www.realtyshares.com/login?next=%2Finvestments%2Fvernazza-apartments
https://www.financialsamurai.com/realtyshares-dme-fund-information-investments-sponsors-updates/

[Hindsight2020]

Investors in the Vernazza Apartments preferred equity were notified today that the asset has been sold and our investment paid off in full, including accrued preferred interest and the remaining interest reserve. We are expected to receive full payment in the next 10-15 days.

This was probably my best investment on the platform, so I'm not surprised to see the sponsor meet all obligations. But it's good to share the news anytime one of our deals goes right. My only disappointment was that it paid off 9 months early.

Nice! Do you know what the IRR and absolute return will be? I did not get a notification. Hope we're talking about the same deal.


The DME fund invested in this project, and I wrote about my fears of investing in this project: https://www.financialsamurai.com/potential-real-estate-crowdfunding-loss/


VERNAZZA APARTMENTS
LOCATION   Las Vegas, NV   
PRODUCT TYPE   Preferred Equity
ASSET TYPE   Multifamily
SPONSOR   The Nathan Family Office and Madison Residential
FUND ALLOCATION   $600,000
Deal Page   Click Here: https://www.realtyshares.com/login?next=%2Finvestments%2Fvernazza-apartments
https://www.financialsamurai.com/realtyshares-dme-fund-information-investments-sponsors-updates/

It must be the same deal. Here's the original listing. https://www.realtyshares.com/investments/vernazza-apartments

It had a current preferred return of 9% and an accrued of 4% per year. Based on my math, the accrued distribution to be paid is about 8.7% of the initial investment, and the current interest payment/return of interest reserve to be paid is about 3.5%.

This investment had the biggest initial cash sponsor equity cushion I've seen in a RS deal. They purchased the asset for $18.2 million and after executing the business plan, sold it just over 2 years later for $28.5 million.

[MikeATL]

A question for folks here who have equity investments in RS: have you received any quarterly financial updates in the last two quarters since IRM took over?

I think all my projects have received updates in the last 6 months.  I have a few investments performing well, so I receive updates and distributions on those.  For the ones that are a disaster (mostly Franchise Growth) there's less updates, but I'm not sure there's anything new to report.

[Sam]

Investors in the Vernazza Apartments preferred equity were notified today that the asset has been sold and our investment paid off in full, including accrued preferred interest and the remaining interest reserve. We are expected to receive full payment in the next 10-15 days.

This was probably my best investment on the platform, so I'm not surprised to see the sponsor meet all obligations. But it's good to share the news anytime one of our deals goes right. My only disappointment was that it paid off 9 months early.

Nice! Do you know what the IRR and absolute return will be? I did not get a notification. Hope we're talking about the same deal.


The DME fund invested in this project, and I wrote about my fears of investing in this project: https://www.financialsamurai.com/potential-real-estate-crowdfunding-loss/


VERNAZZA APARTMENTS
LOCATION   Las Vegas, NV   
PRODUCT TYPE   Preferred Equity
ASSET TYPE   Multifamily
SPONSOR   The Nathan Family Office and Madison Residential
FUND ALLOCATION   $600,000
Deal Page   Click Here: https://www.realtyshares.com/login?next=%2Finvestments%2Fvernazza-apartments
https://www.financialsamurai.com/realtyshares-dme-fund-information-investments-sponsors-updates/

It must be the same deal. Here's the original listing. https://www.realtyshares.com/investments/vernazza-apartments

It had a current preferred return of 9% and an accrued of 4% per year. Based on my math, the accrued distribution to be paid is about 8.7% of the initial investment, and the current interest payment/return of interest reserve to be paid is about 3.5%.

This investment had the biggest initial cash sponsor equity cushion I've seen in a RS deal. They purchased the asset for $18.2 million and after executing the business plan, sold it just over 2 years later for $28.5 million.

Thanks for the color. I reached out to IRM and they said the reason why I didn't get it update is because I am an investor in the fund. So I will just get quarterly updates regarding the fund and then the specific investments.

Got a love sponsors who have good skin in the game. That is so huge. 30% more would be nice.

[mspringer]

MSH,
I am still not showing any updates on the RS site nor a deposit to my bank account.

My dashboard updated this AM. It shows it as an Exited investment now...$2,255.41 returned on a $10K invest

I do see mine posted now as well.  I will reach out again to IRM as I feel there is a lot to be desired on the extent of investigation they've done on this investment. 

[daletucker50]

New England Home Fund II is officially a bust.  IIRR has closed the account. No chance of getting anything back.   

[DigitalNomad]

New England Home Fund II is officially a bust.  IIRR has closed the account. No chance of getting anything back.   

Same with New England High Yield Portfolio VII. Just got the notification.

[JD]

More awesome news from IRM, this time about Chicago Retail Lockport. Looking to be around an 85% loss.

This officially puts me in the red with my RS investments and there's another Chicago Retail I'm in that will likely have a similar outcome.

"Chicago Retail Portfolio Lockport 2nd Lien Tranche 1 11/19/2019
11/19/2019
As previously reported, IIRR Management Services, LLC (IRM) has recently 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.

This asset is not performing according to the original business plan. IRM has concluded the main reason for this is the failure of the borrower to properly execute the original business plan which was to sell the property immediately after the loans closed. The 1st mortgage lender and the RealtyShares secondary financing provided refinancing for two cross-collateralized failed CMBS loans. Pangea Capital provided first mortgages for those properties, while RealtyShares provided second mortgages. In addition to the $5.6 million in new financing provided by Pangea and RealtyShares, the borrower also raised an additional $200,000 in new equity financing. Approximately $700,000 were paid in fees and transaction costs including interest and tenant improvement reserves.

IRM concluded that due to the high-interest rate paid to the first and second mortgage lenders, the property did not provide enough cash flow to pay debt service. The appraisal for the property optimistically assumed that a buyer would be able to lease-up the 13% of space that was vacant. The sponsor delayed placing the property on the market while it tried to lease the property to full occupancy. Ultimately, the sponsor was not able to lease this space, and the occupancy fell to 83%.

IRM held several discussions with brokers in the local market and found that they believe the average market occupancy is somewhere in the 85% range. As the current stabilized occupancy level is less than the stabilized occupancy in the appraisal, the value of the property is, therefore, less than the appraised value. IRM believes the borrower held on to the property, perhaps thinking it could lease the balance of the vacant space. As more time elapsed, interest payments and property tax payments were missed and the loan finally went into default. This property has therefore been classified as a Tier 3 asset.

Distributions, interest payments from this investment have not been distributed in accordance with the original business plan.

Since the last update, IRM has continued to pursue foreclosure action. The first mortgage holder, Pangea Capital was approached and has been very cooperative with IRM efforts. Information has been exchanged regarding loan balances, default interest, and value. A thorough and professional analysis of the property has been undertaken. IRM estimates the current balance of the debt at $4.7 million. Default interest on the first loan accrues at $76,000 per month. IRM has valued the property at $5.85 million, and this value is supported by the broker's opinions. Subtracting a 7.5% cost of selling the property, the net proceeds available from sale would be $5.4 million.

The lawyer for the borrower's investors has proven to be litigious. Pangea Capital's representative believes that a lawyer who knows the system in Illinois can substantially delay the foreclosure process. Legal fees mount for all investors, as the borrower's lawyer asks for what IRM believes are deposition requests meant to delay the foreclosure action. While that could be very frustrating, it is a legal right of the borrower and IRM now believes in its professional opinion that the value of the RealtyShares second mortgage will be reduced to zero if held through the foreclosure process.

IRM attempted to maximize investor value by shifting the legal cost risk to a success-basis counsel, but have found that the lawyers will not agree to take this on a contingency basis. The external legal team have completed their own analysis of the merits and have declined to take the case. IRM has identified two parties interested in buying both this note and the note held on the other property invested by RealtyShares investors. At a best a final offer the highest bid was to an outside investor.

The third-party investor will pay $110,000 for both notes and is expected to close on December 2nd. This represents a substantial loss on this investment. IRM believes that the sale of the note is the best possible outcome given the difficult circumstances, and will continue to act in the best interests of our investors."

[Hindsight2020]

Sorry to hear about the fate of Chicago Retail Lockport. These last 12 months navigating the RS mess have been really challenging--it definitely FEELS like it's been much longer than a year. Which reminds me, has anyone involved in the Vernazza Apartments deal received their payoff yet? I know IRM says 10-15 business days (it's been 10 or 11), but two weeks also feels like a long time when you're waiting to see it in your bank account.

Once that's paid I'll be down to 8 deals (out of 17 originally)--three Tier 1, one delayed but progressing SFR, and 4 in various states of default. I hope 2020 brings almost all of them to conclusion so I can be done with this part of the process. 

[ramesh]

JD, Sorry to hear about the outcome of the Chicago Retail Deal.  Realty Shares' underwriting  seems to have picked  a disproportionate share of hucksters, bad credits and incompetents for its sponsors.

After nearly a year, I received the financial report for Woodcreek Farms. I'd given this deal up for dead since their late 2018 report indicated that their modeling of the business was way off. Based on their current report, sounds like the operators have been able turn around the business somewhat.  At current liquidation estimates the investment is still under water.  If anyone else is invested in this, I'd be interested in hearing your views.

[JD]

JD, Sorry to hear about the outcome of the Chicago Retail Deal.  Realty Shares' underwriting  seems to have picked  a disproportionate share of hucksters, bad credits and incompetents for its sponsors.

After nearly a year, I received the financial report for Woodcreek Farms. I'd given this deal up for dead since their late 2018 report indicated that their modeling of the business was way off. Based on their current report, sounds like the operators have been able turn around the business somewhat.  At current liquidation estimates the investment is still under water.  If anyone else is invested in this, I'd be interested in hearing your views.

So true, Ramesh.

Is the Woodcreek deal an RS one? If so, did the sponsor turn it around themselves or was there any help from IRM?

[ramesh]

 JD,  yes, Woodcreek is an RS equity deal.  No help from IRM in the turnaround as far as I know.

The sponsor claimed in the offering document that the seller had inherited the property and was an inexperienced operator, and that was why they were able to pick it up at a bargain.  But, once they took over the property they realized they were saddled with a low credit quality tenant base. It's taken them nearly 18 months to clean up the mess.  I hope this is the entire story, and that there are no more ugly surprises here; fingers crossed.