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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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JD

BTW, I'm getting prepared for a huge loss on my CRE investments, thanks to world health and economic events. It was bad enough already with RS but I think I'm going to expect to potentially lose anywhere from 1/3-2/3 of my CRE principal and expecting to lose around 50%.

As such, I'm going to hedge against the alternate hope that things will turnaround just fine and I'll get all of my money back plus perhaps interest.  I'm doing so by buying inverse REIT ETFs. Not gonna recommend this to anyone or name anything specific as I am not an investing professional. But I feel a lot better knowing that I can cover myself a bit so I thought I'd mention it.

Sdb

I would like to see your message from Peerstreet, I've invested in that platform for years and I have not received any correspondence other than the usual working remotely that most businesses in the country have sent. I received a distribution last week.

JD

And I would like to see the message from CrowdStreet as I have not received that either. Individual sponsors have messaged but nothing as dire as you say.

However, I'm in agreement that this could shutter many crowdfunding CRE platforms.

ramesh

The following update from this morning is an illustration of the situation that even strong sponsors are facing in a market marked by disruption in various segments of the financial markets including repo markets, bank lending, and property transactions, despite strong Fed commitments to buy MBS.  In one of my equity investments, Woodcreek Farms, the sponsor indicated two weeks back that they expect to refinance at very attractive rates given the interest rate declines, and return 40% of equity capital -- not sure if this is likely to happen any more.  It is clear that we are going to have to sit around on most of these deals waiting for better times.  In my own investment tracking, I am mentally preparing to write-off large fractions of invested capital in the weak deals, as well as deals in sectors like hotels.


Regarding, RS368, University of Toledo Student Housing, William Fideli Investments, since the last update.

The sponsor recently informed IRM on behalf of RealtyShares, that due to recent national business hardships caused by the worldwide pandemic of the Coronavirus or COVID-19, the potential buyer has pulled out of the purchase of University of Toledo Student Housing for $37,900,000 from Edge 1120 Apartments due to the buyer's senior lender withdrawing their offer to finance the purchase of this student housing property.

The sponsor originally signed a Purchase & Sale Agreement (PSA) with this qualified buyer to sell the property for $37,750,000 with the buyer paying approximately $150,000 for a transfer tax for a gross sale price of $37,900,000 in late 03/20.

According to the sponsor, the potential sale of this property was projected to close and fund in late 04/20 to early 05/20.

The sponsor is considering either refinancing this student housing property or relisting it for sale in Q32020 or Q42020.

IRM will supply additional updates regarding the potential sale or refinancing of this property as it progresses.

Chicago81

I thought that today was the deadline under the Franchise Growth deal, and that IRM was going to provide an update prior to the deadline.  Has anyone heard anything? 

Although the pandemic was not foreseeable, it was absolutely foreseeable that allowing Franchise Growth to string us along for well over one year would open the door to setbacks in the local or broader real estate markets.  I am especially frustrated because Realtyshares, and then IRM, have refused to speak with me (not even once) or respond to any of my emails.  I had been warning Realtyshares that my FG deal looked like a full-blown fraud long before they finally admit that anything was wrong.  Especially under such circumstances, it is important not to be fooled twice, three times, etc., when a borrower simply cannot be trusted.  I now expect a potpourri of "gee shucks" excuses, if we even get an update.

We have all been biting our tongues to help IRM close the settlement with FG.  But, at this point, I worry about criminal/civil statutes of limitations approaching.

JD

Quote from: Chicago81 on April 09, 2020, 06:44:48 PM
I thought that today was the deadline under the Franchise Growth deal, and that IRM was going to provide an update prior to the deadline.  Has anyone heard anything? 

Although the pandemic was not foreseeable, it was absolutely foreseeable that allowing Franchise Growth to string us along for well over one year would open the door to setbacks in the local or broader real estate markets.  I am especially frustrated because Realtyshares, and then IRM, have refused to speak with me (not even once) or respond to any of my emails.  I had been warning Realtyshares that my FG deal looked like a full-blown fraud long before they finally admit that anything was wrong.  Especially under such circumstances, it is important not to be fooled twice, three times, etc., when a borrower simply cannot be trusted.  I now expect a potpourri of "gee shucks" excuses, if we even get an update.

We have all been biting our tongues to help IRM close the settlement with FG.  But, at this point, I worry about criminal/civil statutes of limitations approaching.

Fortunately there are some class action lawsuits going on against them. I'd encourage you to reach out to one of them if you're concerned.

I agree with everything you say and it's pretty pathetic they haven't communicated about it by now. Even covid isn't an excuse after all of this time.

JD

I remember somebody here saying that they talked to IRM and were told that there would not be any K-1s issued for deals that had gone under.

Assuming this is the case, does anyone here know how we would file such a loss on our tax return?

Thanks in advance :)

stingray

@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.

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.

That's great info, thank you so much!

Beat_The_Fraud

Just received this email notification from IRM:

Dear RealtyShares Franchise Growth Investor,

The deadline for the Franchise Growth forbearance agreement has expired a few days ago, on April 9th, 2020. The executive team at the Franchise Growth Group has been in contact with IRM for several weeks before the deadline expired and has indicated the following:

1. A buyer has been secured for the properties, has completed due diligence, and is still committed to the transaction
2. A lender has been secured for the transaction, but has backed out in light of the COVID19 crisis. they are seeking another lender
3. Given the COVID19 situation, the buyer is planning to convert several Fast Food locations to Emergency Care locations
4. Franchise Growth is unable to transact at this time, and is seeking an extension to complete the purchase

IRM has not granted the extension, but given the court system suspension of foreclosure hearings and the COVID19 slow down, IRM is evaluating the merits of an extension. We are seeking additional assurances and cash deposits from Franchise Growth and the buyer before making a final decision. If IRM is unable to obtain those assurances, our intention to commence a foreclosure process as soon as possible.

IRM will continue to update investors in this portfolio on a frequent basis, as news materials.

cfojim

Quote from: stingray on April 14, 2020, 05:24:31 AM
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.

Here is some more information: 
https://www.thetaxadviser.com/issues/2016/feb/taxation-of-worthless-and-abandoned-partnership-interests.html

The author of this article makes the point that if you have any liabilities allocated to you on the K-1, then it will be nearly impossible to claim the loss as ordinary.  Even without any allocated liabilities, the bar is high to achieve an ordinary loss instead of capital loss.  I personally would not try it, as I do not want to invite an audit.  If the loss is significant, then maybe it would be worth the risk - that is a personal decision that should be made only after consulting your tax advisor, as stingray suggested.

John_PVF

Hello all. Wanted to make you aware of some potentially favorable developments with some RS investments and give you my take on it.

Two of my remaining equity investments have recently announced they are refinancing the debt on the underlying properties to take advantage of more favorable financing terms. We will be getting a distribution from excess proceeds as well, so this is essentially a cash out refi.

I think this is smart for sponsors to do for a couple reasons:

  • Lowers the interest rate and/or improves terms of the debt outstanding, which will lead to improved cash flow.
  • Improved cash flow can support higher distributions or buffer against the upcoming downturn.
  • Gets us a partial return of capital today, which is preferable to waiting even longer for the market to improve for a full exit.
Both of these deals will return a meaningful (although sub-50%) portion of initial capital which limits downside while also preserving the upside of a full exit at some point down the road.   Additionally, both have distribution waterfalls which provide a disproportionate amount of early returns to deal-level investors vs sponsors. Given the complexity, I expect IIRM will provide some support for their distribution calculations.

While my preference since the RS issues began was to get my money back and just walk away, this is reasonable alternative in my mind since these coronavirus issues will likely impact exit timing/values for some time. Will be curious to see where the numbers land. Stay well everyone.

Beat_The_Fraud

Received this new notification from IRM:


Dear Franchise Growth investor,


You are receiving this update because our records indicate you are an active investor in a Franchise Growth entity;


The forbearance agreement with Franchise Growth LLC expired on April 9th, 2020. The executives at Franchise Growth have been in contact with IRM in the weeks and days prior to the deadline and have indicated that due to the COVID19 crisis, the main lender for the portfolio acquisition has backed away from the deal and they will not be able to finalize before the deadline expires.


IRM has asked to speak directly with the buyer, a private equity group from Chicago, IL to verify the identity of the purchaser and negotiate certain terms in order to extend the forbearance period. Our request was granted and IRM has since held multiple conversations directly with the potential buyer. IRM did not know this buyer in advance, and we are not familiar with their real estate activities.


An important factor in IRM's upcoming decision about this portfolio is the impact that COVID19 had on the legal landscape and the likely delays in executing any foreclosure and/or eviction of multiple Franchise Growth properties in several key States. No rights have been waived, and no fees have been forfeited, but execution delays are likely during the health crisis as many courts are not holding hearings, and prioritizing urgent matters ahead of other proceedings. This fact, by itself, is not a reason for IRM to decide one way or another but is an important consideration among all factors in pursuing the best course of action for investors.


The buyer has stated that it has completed the due diligence process on all locations and has already invested a considerable amount of time and resources in the transaction, and is therefore motivated to secure a new lender for the debt portion of the capital stack and complete the transaction promptly.


IRM has laid out several demands, as described below, that if met, could lead to an extension of the forbearance agreement due to COVID19. If these demands are not met in full, IRM will start the foreclosure proceedings at once, even given the likely delays in the legal system:


1. An additional, non-refundable deposit towards investors overall returns

2. A bank signed, proof-of-means by the equity investor

3. The name and terms of the debt providing lender

4. A statement of hardship due to COVID19 in closing the transaction


Please note this process is being conducted directly with the potential buyer at this point, and not solely with Franchise Growth management. All parties' concurrence is required in order to execute an extension.


As of this morning, our demands have not yet been met in full, and we continue to communicate with the buyer for the terms of a possible agreement. IRM will update investors in this portfolio in the coming days regarding the outcome of these negotiations, and the resulting next steps and timeline.

JD

How are everyone's K-1s coming in so far? You'd think the sponsors with IRM chasing them up would have had plenty of time to get them done during lockdown.

Personally, I've received 2 out of 12 of mine - a whopping 17%.
As a point of comparison, CrowdStreet and their sponsors have sent me 10 out of 12.

In the COVID notice IRM put out last month, they patted themselves on the back several times, including: "IRM and our Fund Admin team is ahead of schedule and have processed more than 90% of the K-1 forms provided to us already." Of course, upon reading it more closely, they are only talking about the K-1s that have been provided to them.

Throw in the 1 distribution per month I've had the past 2 months (not even breaking into triple digits) and then getting updates about properties that are Tier 1, have paid per their expectations and I haven't seen a red cent from them because it's all eaten up by management fees... Yeah, I know, COVID but seriously - what are these people doing? They shouldn't be delivering at 20% of their competitors, claiming victory and siphoning off what little profits we have.

stingray

@JD:  Thank you for sharing your statistics.  I am afraid that some K-1s will not be available until September, if ever.  As you know, the IRS deadline for LLCs to file partnership returns is September 15 after extension.  I suspect that many partnerships will wait until then to file.

It is a fact of life for people who hold partnership interests:  K-1s are often delayed, and we have no choice but to request a 6-month extension to file our own tax returns.

Beat_The_Fraud

A new update posted by IRM on 5/21

IRM currently classifies this investment as a Tier 3 asset. interest payments from this investment have not been distributed in accordance with the original business plan.

Since the last update, Franchise Growth has accepted all the demands set by IRM, and we have fully executed an extension to the previous forbearance agreement with Franchise Growth LLC. This agreement provides Franchise Growth additional time to execute a sale of the portfolio and return capital to investors. Failure to execute a sale of the portfolio will result in IRM foreclosing on the assets, with the aim of selling each one at the highest market value attainable.

This was not an easy decision, and ultimately IRM decided this route presents the best potential outcome for investors given the COVID19 crisis, based on the following considerations:

1. IRM has negotiated this agreement directly with the potential buyer, and not the Franchise Growth management executives.

2. IRM has secured an additional, non-refundable cash deposit towards a final settlement.

3. IRM was seriously limited in its ability to execute an efficient foreclosure during the COVID19 crisis, and refusing to extend the forbearance would likely have espoused investors to a holding period with no payments and no recourse. We believe that securing additional funds and allowing the time to be used for a potential sale is the most effective and economical use of the period.

4. IRM can't guarantee a successful outcome, and the ultimate return of capital to investors depends on the buyer's ability to execute the transaction, which in turn depends on their ability to secure a lender for the purchase.

The agreement has now been signed by all parties and will become effective with the deposit of the required funds. IRM will update investors with the final timeline and confirmation of execution, once the process is completed.

**Disclaimer: All information and financial statements above are presented on an as-is basis, as provided to our team members, and have not been independently verified by IRM. IIRR Management Services, LLC (IRM) has taken over the Asset Management and Fund Admin functions of this investment from RealtyShares in June 2019.

IRM Asset Management Team

rs_thoughts

Does anyone know why IRM never posts the pdf of the actual agreement word for word?
I mean we are the stakeholders...so it's seem logical that they post the signed agreement so we understand items such as actual extension time, deposit, etc...I'm not a big fan of them generically saying "extension" because that word could mean anything

If they are worried about us contacting buyer, then just black out that section. Strange

Beat_The_Fraud

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.

babets

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??

cfojim

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??

I'm in two of these FG investments.  I'm not counting on anything until I see the eventual proceeds, if any, hitting my account.  At least there is a little more money to distribute with the increased non refundable deposit, as long as it isn't eaten up by legal fees.