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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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John_PVF

I received a K-1 from RS yesterday for an investment that wrapped up in 2019 and paid out a final distribution.  The K-1, however, still shows a positive balance in the capital account at the end of the year.  Not an accountant, but would have expected the final balance to show as zero if all funds were distributed.  My concern was that net income/gains (and thus taxes owed) were overstated, all else equal, for the final distribution to no return the capital account balance to zero.  Anyone have any insights whether this is typical or if I should raise with RS?  I had multiple K-1s last year get restated more than once, so am hesitant to just accept them without some validation.

folsomsri5f

Is their way to do a claim that RS did not do due diligence on their part. The bad part is the title was not even clear and lot of money was spent on it. They did not even provide details on how much was recovered and how much was spent on the fees etc.

Quote from: dolemite on May 09, 2019, 11:09:52 AM
I see some talk about RS releasing all servicing rights back to the sponsors.  Do the sponsors want this?  Wouldn't this mean that the sponsors would then be responsible for issuing K-1 forms to all the individual RS LLC holders (as opposed to just issuing 1 K-1 to the LLC itself)?  I'm not sure if all sponsors would want to deal with the additional paperwork and logistics of that.  I guess they get to keep the servicing fee, but it may not cover the additional expenses that they'll incur.  I don't blame some of these sponsors for just trying to unwind their deal with RS to get away from the sinking ship as quickly as they can.  That's what I would be trying to do if I were a sponsor with a RS deal.

I remember when all the FG deals starting popping up as I have a friend who was involved on the franchisee end of the Dog Haus and Captain D's deals.  I called him at the time, and he had never even heard of FG and was surprised that they were raising money for some of the locations that he was going to be part of.  I just spoke with him recently and he said that whatever they did was a total joke.  They had line items listed in their renovation reports showing inflated numbers and the rents that they were trying to charge were astronomical (and not viable which is why the locations are closing at a high rate and franchisees are behind on lease payments).  He gave me one example where they claimed to have spent $xx for roof repairs, but the roof was still leaking so he was pretty confident that they had not spent what they claimed.

Unfortunately, I was not lucky enough to avoid investing in the SFR Package II deal.  Total disaster of a deal with possible fraud committed by a now bankrupt Ingersoll Financial, LLC out of Florida.  RS is trying to enforce a personal guarantee by the owner of the company ( Keith Ingersoll ), but I'm pretty confident that he magically will have lost all of his assets.  A terrible sponsor and an incompetent crowdfunding platform is not a good combination.

folsomsri5f

Anyone participated in this lawsuit? I just found the below information. I will be reaching out to the attorney to see if i have any options. There was personal guarantee on this loan, not sure why they did not collect from his personal fortune.

Quote from: imcloughlin on January 21, 2020, 09:35:19 AM
I am an attorney who represents investors who have been defrauded. My firm recently filed a case against RealtyShares and affiliated entities and individuals, particularly arising out of the investments with Franchise Growth and the "Nationwide SFR Package": http://www.shulaw.com/About-Us/Active-Cases/shapiro-haber-urmy-llp-announces-filing-of-a-class-action-lawsuit-against-realtyshares-inc-rs-lending-inc-and-others/.  Please call or e-mail me if you have relevant information and would be interested in discussing further.

Thanks,

Ian J. McLoughlin
SHAPIRO HABER & URMY LLP
Seaport East
Two Seaport Lane
Boston, MA 02210
Tel: 617-439-3939, ext. 315 
Fax: 617-439-0134
imcloughlin@shulaw.com
www.shulaw.com
http://lawyermcloughlin.com/

stingray

@John_PVF: The situation you describe with your K-1 does sound like a problem.  I have seen similar problems before where they incorrectly classify principal payments from the sponsor as income, then propagate the error to investors.  Can you tell us a little more?  Was the entire amount of your principal investment returned?  What does your online account history say about how much principal and income you received?  Do your updates state that the sponsor repaid in full, or did the sponsor default?

My view: 1)  if, during or before 2019, you received one or more lump sum(s) that neatly correspond to your entire principal investment and 2) RS now labels the investment as closed (and not in default), then your capital account should be zero.

Of course, this can make a big difference for your taxes.  You should not be paying income tax on money that is return of principal.  If you post a little more information here, we can comment, or you can check with your accountant.

As soon as you have analyzed the situation with confidence, you or your accountant can contact IIRM.  If there is a problem, I think they will be willing to fix it.  If they don't correct it, you can file a letter with your tax return explaining why the K-1 is incorrect, and you can file based on the correct figures.

Good luck

John_PVF

Quote from: stingray on June 14, 2020, 04:53:52 AM
@John_PVF: The situation you describe with your K-1 does sound like a problem.  I have seen similar problems before where they incorrectly classify principal payments from the sponsor as income, then propagate the error to investors.  Can you tell us a little more?  Was the entire amount of your principal investment returned?  What does your online account history say about how much principal and income you received?  Do your updates state that the sponsor repaid in full, or did the sponsor default?

My view: 1)  if, during or before 2019, you received one or more lump sum(s) that neatly correspond to your entire principal investment and 2) RS now labels the investment as closed (and not in default), then your capital account should be zero.

Of course, this can make a big difference for your taxes.  You should not be paying income tax on money that is return of principal.  If you post a little more information here, we can comment, or you can check with your accountant.

As soon as you have analyzed the situation with confidence, you or your accountant can contact IIRM.  If there is a problem, I think they will be willing to fix it.  If they don't correct it, you can file a letter with your tax return explaining why the K-1 is incorrect, and you can file based on the correct figures.

Good luck

This is for the Plaza Apartments.  It was an equity deal that was successfully exited and returned more than what I originally contributed.  Looking on the dashboard they show $0 as returned capital and all distributions as "realized earnings."  It doesn't show up this way on my K-1, but the gain showing on the K-1 is much bigger than the gain implied by the distribution.  Coincidentally, the "extra" amount is pretty close to the ending balance still showing in my capital account.

I'm going to email them to at least have them verify.  If I still have capital in this deal as they seem to indicate, but no way to recover it since this deal is closed, they I'm gonna write that capital off as a loss.

stingray

@John_PVF:  Please pardon me if you are already aware of this:  If a portion of your returned capital is mischaracterized as income, the problem will not be completely solved by writing off the amount shown as remaining in your capital account when the investment is closed.  That is because the income will be taxed at ordinary income rates, but the amount you write off will only be a capital loss.  Even if you are able to offset the entire capital loss, you would be penalized at a rate that is roughly the difference between your ordinary income tax bracket and the long-term capital gains rate of 20%.  There are three ways out of this mess.  1) Get IIRM to fix the K-1.  2) File with the correct numbers and explain the discrepancy vs. the K-1 on your return.  3) As I mentioned in previous posts, if no liabilities have been allocated to you as a partner (quite likely in this case), you can abandon your partnership interest under Section 165(a).  This would place you in the correct position, as if the K-1 were correct.

berkel

Quote from: babets on May 26, 2020, 11:20:01 AM
Quote from: Beat_The_Fraud on May 26, 2020, 08:47:41 AM
A new update posted by IRM on 5/26/2020

To all Franchise Growth investors,


The extension to the forbearance agreement has been fully executed, and the non-refundable deposit has been received on May 22nd, making the following dates effective:

Original forbearance agreement amended and executed, January 30th, 2020

COVID19 declared a federal emergency by the President of the United States on March 13th, 2020

The amended termination date will now be July 29th, 2020 at 17:00 Dallas, Texas time.

A non-refundable deposit of $65,000 has been received. (This is in addition to the original $100,000 that were deposited in January)

The Lender (Franchise Growth) has been given an optional extension of 30 days, subject to notice being provided at least 5 days before Termination, and an additional $35,000 non-refundable deposit being posted.



for regular people like me (lol)  what does it mean?
I am in 3 FG investments:

2 returned approx 50% of the total capital
1 returned 0 of the capital

thanks for those who can give a little more clarity...


No one??

Hi,

Just a layman here, but I also have one FG investment (American Family Care Largo FL Tranche 1).  I also got about 50% returned as well so far.  The forbearance extension pushes the termination date to July 29, so they have more time to reconcile this mess with everyone.  Otherwise, IRM could try to foreclose and go that route, but with COVID and other factors, who knows how much we would get.

I guess best case we get all of our money back, worst case, we end up where we are now.  Not sure likely either event is, but we'll see.

Hoping for the best.  Good luck!

~$Retirement Nerd

JD

I've been somewhat critical of IRM on here recently as distributions have slowed to a drip and many deals are getting downgraded.

However, IRM seems close to closing some buyouts on several properties I'm invested in which would return a pretty reasonable amount of my principal back. If they can pull it off, it will be an impressive step in the right direction IMO.

Deals are set to close by July 4th weekend so I'll keep posted here.

JD

Quote from: stingray on April 14, 2020, 05:24:31 AM
@JD, if a partnership fails to issue you a K-1, you should use whatever information you have to estimate what the K-1 would have shown.  You should ask your accountant exactly how to file, but I believe you can use IRS Form 8082.  The instructions for that form state "Also use the form to notify the IRS if you did not receive Schedule K-1 ..."

As a practical matter, if you did not receive any payments in the applicable tax year and the partnership has failed with no reasonable expectation of a return of capital, I would report zero partnership income and would report the capital account as zero.

A point that I have made before on this board that you really should consider:  under certain conditions, you can affirmatively abandon your partnership interest.  Why would you want to do this?  Because you may be able to claim an ORDINARY LOSS that offsets ordinary income, rather than a long-term capital loss.  The tax savings can be substantial.

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

Again, your accountant can help you with this matter.

Good luck, and sorry for your troubles.

Hey Stingray,

Thanks again for your advice here. I'm looking into this some more now.

Do you know off-hand if your suggestions would apply to a debt deal that never returned principal or if it's only applicable to equity deals that went under?

stingray

Hi JD,
If you are investing as an individual and not as a business, debt deals that default are the absolute worst from a tax standpoint.  All the interest you've received is taxable as ordinary income in the year you receive it.  If the debt defaults, it only becomes tax-deductible when the remaining balance becomes completely worthless, at which point it is a (long-term) capital loss that must be claimed in the tax year when the debt becomes worthless.  Thus, the interest you make is taxed upfront at your highest (marginal) tax rate and the capital loss only reduces your income tax at the end of your investment, at the lower long-term capital gains rate (with minor exceptions not covered here), and to the extent you have capital gains to offset it.  Uncle Sam takes the the difference.
This is why crowdfunding debt with high default rates is just a terrible deal, and why I don't do it anymore.
Your accountant can tell you more.
Good luck.

JD

Quote from: stingray on July 08, 2020, 11:48:34 AM
Hi JD,
If you are investing as an individual and not as a business, debt deals that default are the absolute worst from a tax standpoint.  All the interest you've received is taxable as ordinary income in the year you receive it.  If the debt defaults, it only becomes tax-deductible when the remaining balance becomes completely worthless, at which point it is a (long-term) capital loss that must be claimed in the tax year when the debt becomes worthless.  Thus, the interest you make is taxed upfront at your highest (marginal) tax rate and the capital loss only reduces your income tax at the end of your investment, at the lower long-term capital gains rate (with minor exceptions not covered here), and to the extent you have capital gains to offset it.  Uncle Sam takes the the difference.
This is why crowdfunding debt with high default rates is just a terrible deal, and why I don't do it anymore.
Your accountant can tell you more.
Good luck.

Yikes, that is bad. And of course it's the majority of the defaults I'm looking at so far.

The good side is it should be easier to file on my taxes than making up a K-1. I'll start looking into how to do that now.

Thanks again, your advice is invaluable!

JD

Quote from: JD on June 24, 2020, 05:50:15 AM
I've been somewhat critical of IRM on here recently as distributions have slowed to a drip and many deals are getting downgraded.

However, IRM seems close to closing some buyouts on several properties I'm invested in which would return a pretty reasonable amount of my principal back. If they can pull it off, it will be an impressive step in the right direction IMO.

Deals are set to close by July 4th weekend so I'll keep posted here.

As per my post here about this a few weeks ago, principal repayments were received for 4 properties whose sales must have completed as per their latest updates.

I'm waiting on the actual updates from IRM for the details but it looks like around 95% return of principal in general which, when considering some distributions were made, I think I'm looking at around a net break-even, maybe slightly higher.

Hindsight2020

Quote from: JD on July 14, 2020, 07:06:01 AM
Quote from: JD on June 24, 2020, 05:50:15 AM
I've been somewhat critical of IRM on here recently as distributions have slowed to a drip and many deals are getting downgraded.

However, IRM seems close to closing some buyouts on several properties I'm invested in which would return a pretty reasonable amount of my principal back. If they can pull it off, it will be an impressive step in the right direction IMO.

Deals are set to close by July 4th weekend so I'll keep posted here.

As per my post here about this a few weeks ago, principal repayments were received for 4 properties whose sales must have completed as per their latest updates.

I'm waiting on the actual updates from IRM for the details but it looks like around 95% return of principal in general which, when considering some distributions were made, I think I'm looking at around a net break-even, maybe slightly higher.

That's great. After all that we've been through it's nice to hear about "success" stories.

JD

Quote from: Hindsight2020 on July 14, 2020, 04:38:50 PM
Quote from: JD on July 14, 2020, 07:06:01 AM
Quote from: JD on June 24, 2020, 05:50:15 AM
I've been somewhat critical of IRM on here recently as distributions have slowed to a drip and many deals are getting downgraded.

However, IRM seems close to closing some buyouts on several properties I'm invested in which would return a pretty reasonable amount of my principal back. If they can pull it off, it will be an impressive step in the right direction IMO.

Deals are set to close by July 4th weekend so I'll keep posted here.

As per my post here about this a few weeks ago, principal repayments were received for 4 properties whose sales must have completed as per their latest updates.

I'm waiting on the actual updates from IRM for the details but it looks like around 95% return of principal in general which, when considering some distributions were made, I think I'm looking at around a net break-even, maybe slightly higher.

That's great. After all that we've been through it's nice to hear about "success" stories.

Absolutely.

Official numbers are in and with distributions included, payback total was anywhere from 95-98% of principal.

Dgilpin

Yep,  I was in on Penbrook with this one, which forecasted a 14% IRR and promptly never distributed more than a few $10 payments.  What a joke.  How bad was RS's scrutiny of these deals that so many failed right out of the gates?  All said and done this was a 3 year investment that returned -4% for me. Could have been worse, but I sure wish I never heard the name Realtyshares in the first place.  1 deal down,  3 to go.

cfojim

Quote from: Dgilpin on July 17, 2020, 09:34:45 AM
Yep,  I was in on Penbrook with this one, which forecasted a 14% IRR and promptly never distributed more than a few $10 payments.  What a joke.  How bad was RS's scrutiny of these deals that so many failed right out of the gates?  All said and done this was a 3 year investment that returned -4% for me. Could have been worse, but I sure wish I never heard the name Realtyshares in the first place.  1 deal down,  3 to go.
I was on Penbrook too.  On the dashboard, they are showing the distribution as earnings instead of return of capital.  Just sent an email asking for that to be corrected.

barnold24

Well have my first 100% lost of principal on an investment from Realtyshares. Just got notice that the sponsor is talking with the bank about giving them the shopping center. Overall with distributions, it is a 49% cash on cash loss.

Dgilpin

Ouch.  Can you link us the original deal?  Was that a 2nd lien offering?

barnold24

Quote from: Dgilpin on July 21, 2020, 04:56:37 PM
Ouch.  Can you link us the original deal?  Was that a 2nd lien offering?

It was an equity deal from 2015. Let me see if I can find the original deal link.

JD

Quote from: cfojim on July 19, 2020, 01:20:36 PM
Quote from: Dgilpin on July 17, 2020, 09:34:45 AM
Yep,  I was in on Penbrook with this one, which forecasted a 14% IRR and promptly never distributed more than a few $10 payments.  What a joke.  How bad was RS's scrutiny of these deals that so many failed right out of the gates?  All said and done this was a 3 year investment that returned -4% for me. Could have been worse, but I sure wish I never heard the name Realtyshares in the first place.  1 deal down,  3 to go.
I was on Penbrook too.  On the dashboard, they are showing the distribution as earnings instead of return of capital.  Just sent an email asking for that to be corrected.

Still waiting to see this corrected. It was the same for all 4 of my investments that were paid back so it needs to be rectified.

More importantly, today is the termination date for the FG restructure. It's concerning that we haven't heard anything about it yet, leading me to believe there will be a further extension (though that would have to have been finalized 5 days ago) or that the revised deal is unlikely to complete.

Either way, we should hear an update soon...