Thoughts On RealtyShares Closing Its Doors To New Investors

[Chicago81]

Over the past six months, I have been asking RS, then Iintoo and RREAF, if there is any evidence that the FG deals were not a complete fraud from the onset, given the strong circumstantial evidence.  I have received no response from anyone.  That is shocking.

The latest string of communications proves that we should no longer trust anything that the supposedly new management says, they could care less about our best interest, and their plan is to conceal the true nature of the deals hoping they do not get sued.  For what it's worth, I think now is the time for a group of FG investors to hire a lawyer to sue FG, RS, and potentially the new companies (if law permits; e.g., de facto merger doctrine).  The alternative is to wait for a distribution to determine the extent of our damages.  (Spoiler alert: your senior secured notes for a development deal are now worth pennies on the dollar even though the borrower never broke ground.  And by coincidence, the same thing happened on 10 of our other deals at the same time.)  Now that we know the damages will be "substantial," and there may be criminal referrals as a result of this, along with the ongoing string of broken promises and a refusal to speak with investors (i.e. ongoing breaches), I'm in favor of finding a good plaintiff's lawyer to take this on a contingency.  We will all feel better, and we will have some assurance that our interests are finally being protected.

As an aside, I am shocked that others are even contemplating ever investing with these companies ever again.  Crowdfunded real estate should not be a thing.

[DECA]

Hindsight2020 an Chicago81, I agree with both of you.  Perhaps by getting an attorney now, we can prevent any low-ball sale of the loan to FG and also prepare for suits against FG and RS.  Does anyone have an attorney that they recommend? RS is San Francisco-based, so perhaps a California firm that does plaintiff securities fraud actions?

Another thought is whether to try to spark a criminal investigation of FG.  Their default on all of their deals at the same time  makes me think Ponzi scheme.  If each deal had its own problems, one would think the defaults would be staggered.

[gabe]

I just registered for the forum and am in a few FG investments. I'd be delighted to contribute to legal costs for any lawsuits against RS, FG, etc. I'll continue to follow the thread for any next steps.

[Dgilpin]

The loans to construct FG restaurants were generally 90% of totally committed capital, with the other 10% or so being equity from FG. The loans are senior to the slim equity tranche but bear significant downside risk if something goes bad before the restaurants are completed and operating successfully. They say FG is still interested in buying the loans, but I presume at a predatory price that values them at some percentage of the invested PP&E. That would provide FG with massive option value to finish construction on incomplete restaurants or re-open the closed Decatur, IL Dog Haus, and then dispose of them for huge profits as a percentage of the loan purchase prices. I have made it clear to RS and the JV that it would be unacceptable to hit a stink bid from the (possibly intentional?) defaulter and transfer our losses to their pockets as profits. 

How the JV companies handle this will determine whether I ever invest a nickel in any investment offered by either of them.

If the JV companies are serious about helping RS clients work out bad investments, they should be assembling a structure/framework for investors to counter stink bids from FG. That would involve foreclosing on these properties, working with Goalz to ensure rents are set at sustainable levels, obtaining mortgage/construction financing to finish incomplete restaurants, getting them valued properly as operating entities, and repaying a bigger portion of our loans than would a predatory FG bid. There is a bargaining zone here that would result in superior outcomes for the franchisee and us, and it would also stop FG from profiting from our losses. I just don't know if the JV is on the same page.

I would be willing to get behind legal representation as well.  I can’t speak For other FG deals but the west islip AFC is a complete and operating business.  There’s no excuse that we should expect “significant losses”.   At face value this situation sounds like RS is just throwing up their hands and trying to unload these deals to get them off the docket.  Which doesn’t meet their obligation to investors.  Here is the original listing for that deal as requested.

https://www.realtyshares.com/investments/long-island-american-family-care-tranche-1

[gabe]

Thanks for that contact email, I just sent something there with messaging along the same lines as what you posted.

[Nosferatu_FL]

I urge everyone to email priority@iirrms.com and let them know that hitting low FG bids on its own (intentionally?) defaulted loans is not an option, because they could have closed Decatur without a rent reduction negotiation (which the franchisee wanted) and staged the construction cost issue so they could force this very outcome. I also urge that you tell them to come up with a solution that would preclude FG from translating our losses into their profits. I have already done so.

I think suing RS directly is a lost cause. I don't know what would be left in that shell at this point, but it could easily just file bankruptcy to avoid all legal action. That's why I think we need to focus on sharing our views with the JV, which is running the FG recovery process now (with the old RS workout people still there, I believe).

I wrote a very stern email to the priority email that was set up and to the former CEO and current asset managers that an easy way out and a way that benefits the FG screw ups would not be accepted.  I have invested significantly amounts of $$ into RS and into FG deals... I would be willing to look at legal advice/options if anyone has good ideas.  maybe go after the FG losers if they have assets?

[Nosferatu_FL]

Did anyone get the reserve $$ that was supposedly to be returned to Investors on some fo the FG deals?
I did not get any of that back.  I wrote them about this too and have not heard back.

[Nosferatu_FL]

Hindsight2020 an Chicago81, I agree with both of you.  Perhaps by getting an attorney now, we can prevent any low-ball sale of the loan to FG and also prepare for suits against FG and RS.  Does anyone have an attorney that they recommend? RS is San Francisco-based, so perhaps a California firm that does plaintiff securities fraud actions?

Another thought is whether to try to spark a criminal investigation of FG.  Their default on all of their deals at the same time  makes me think Ponzi scheme.  If each deal had its own problems, one would think the defaults would be staggered.

Deca I like your thinking.
Has anyone thought about getting a conference call for all the FG investors and exchange ideas and maybe divide and conquer how to go about
getting legal representation at this point? I have tried to contact few lawyers early on but did not feel they were helpful.

[dwengca]

I urge everyone to email priority@iirrms.com and let them know that hitting low FG bids on its own (intentionally?) defaulted loans is not an option, because they could have closed Decatur without a rent reduction negotiation (which the franchisee wanted) and staged the construction cost issue so they could force this very outcome. I also urge that you tell them to come up with a solution that would preclude FG from translating our losses into their profits. I have already done so.

I think suing RS directly is a lost cause. I don't know what would be left in that shell at this point, but it could easily just file bankruptcy to avoid all legal action. That's why I think we need to focus on sharing our views with the JV, which is running the FG recovery process now (with the old RS workout people still there, I believe).

I wrote a very stern email to the priority email that was set up and to the former CEO and current asset managers that an easy way out and a way that benefits the FG screw ups would not be accepted.  I have invested significantly amounts of $$ into RS and into FG deals... I would be willing to look at legal advice/options if anyone has good ideas.  maybe go after the FG losers if they have assets?

I agree and willing to participate as well.  It's not just the FG deals.  I am seeing evidence that RS and possibly the new management are taking the easy way out all non-performing deals.  I have several non FG deals, and RS asset management is letting the original borrower doing the same crap as FG without challenaging them.

[ramesh]

Per Hindsight's suggestion, I sent a note to priority@iirrms.com.  Here is the note:

---------------------------------------------------------
I have an investment in several RealtyShares (RS) investments, and in particular a debt investment in Church's Chicken, Westminster CO.  I have recently received a notification from you stating that significant losses are to be expected in this deal, and that you are considering selling the note back to the borrower at a discount.  I also gather from speaking with  several other investors that

a) Franchise Growth, that has offered this and other investments, has defaulted on every one of these
b) In every case the plot line seems similar: in most cases they have either failed to start construction claiming elevated construction costs, or, where construction is complete, failed to negotiate a rent with the restaurant operator  that is economically viable for the project
c) Franchise Growth now wants to buy back these loans at a discounted price.

All this smells of malfeasance on Franchise Growth's part:  it is too much of a coincidence that this is happening in over a dozen situations.  It appears that IIRR is in a hurry to let these scamsters off the hook.  You have a fiduciary responsibility to do right by your investors, and in the absence of detailed communication explaining your position, I and other investors will view this as a sacrifice of our interests. 

As such I suggest the following:

1.  Promptly return the construction reserve.  This has been held at RS for a year earning interest for RS, while investors are taking the risk.  You were supposed to return this by May end, per your latest notification on the topic.
2.  Pursue the scamsters vigorously
3.  If you have reasons to believe that pursuing Franchise Growth is against the best interest of the  investors, please communicate your reasoning in a detailed note. 

My investment in this deal is small, but I want to be confident that you will not sacrifice my interests for  expediency, on other deals.

[1846flickj]

I am new here, but I did get a response back from the priority email on Friday in regards to the construction reserve:

Dear me,

Its going through the approval process. We are accounting every dollar to make sure the distributions that go out to investors are correct.

Your patience is greatly appreciated.

--
Best Regards,

Eric Sullivan | Director of Customer Service
IIRR Management Services, LLC
on behalf of RealtyShares, Inc

What a jag... I think we've been pretty patient to date.

[JD]

I am sending a similar e-mail to priority@iirrms.com regarding both FG and the Chicago Retail investments. Will update back when they reply.

[tim2018]

Anybody receive their K-1 tax documents?

[ramesh]

Response from IIRR to my email (reproduced in my previous message above):

My name is Eric Sullivan and I am the Director of customer service. IIRR management services will be handling all customer concerns on behalf of RealtyShares. We will be happy to try and help.

We understand your concerns in regards to the Franchise Growth investment. Our asset managers are trying their best to work out the situation that is in the best interest of the clients involved.

In regards to the construction reserve distributions, I have reached out to our administrator to find out why they haven't been deployed yet. I will get back to you with an answer.

[Nosferatu_FL]

I urge everyone to email priority@iirrms.com and let them know that hitting low FG bids on its own (intentionally?) defaulted loans is not an option, because they could have closed Decatur without a rent reduction negotiation (which the franchisee wanted) and staged the construction cost issue so they could force this very outcome. I also urge that you tell them to come up with a solution that would preclude FG from translating our losses into their profits. I have already done so.

I think suing RS directly is a lost cause. I don't know what would be left in that shell at this point, but it could easily just file bankruptcy to avoid all legal action. That's why I think we need to focus on sharing our views with the JV, which is running the FG recovery process now (with the old RS workout people still there, I believe).

I wrote a very stern email to the priority email that was set up and to the former CEO and current asset managers that an easy way out and a way that benefits the FG screw ups would not be accepted.  I have invested significantly amounts of $$ into RS and into FG deals... I would be willing to look at legal advice/options if anyone has good ideas.  maybe go after the FG losers if they have assets?

I agree and willing to participate as well.  It's not just the FG deals.  I am seeing evidence that RS and possibly the new management are taking the easy way out all non-performing deals.  I have several non FG deals, and RS asset management is letting the original borrower doing the same crap as FG without challenaging them.

Here is the email and response from the Former CEO.
I also got the same generic Response from Eric Sullivan about the distributions..etc.

"Alexis
I recently received notifications that there would be substantial losses to some of the FG deals.
It seems the transition team is trying to take the easy way out and possibly sell the loans to the FG guys who totally
Screwed this up in the first place
I have written to the priority email that’s something that is opposed by many investors and will lead investors to consider all options.
I have been in discussion with many of the investors who are involved in the FG deals.
I urge you to talk to the transition team to be more diligent on handling this.
This is a bad situation and we need to look at the best way out, and definitely without benefitting the
FG sponsors who may have set this up to fail in the first place and at this point have major legal liability."

His response:

"Thank you for the email.
IIRR MS is handling FG Asset Management in continuity with RealtyShares and I have no reason to believe that the transition to IIRR Management Services has lessened any pressure on the sponsor.
Best regards,
Alexis"

My response:

"Thanks Alexis.
I appreciate the prompt response.
I received an email From Eric Sullivan this am who is going to look into this.
ALL investors are watching the development on the FG situation very closely.
There is strong feelings among the investors that criminal activity/negligence
on the part of the FG sponsors precipitated this situation.
Thanks"


I suggest We chip in and hire a lawyer who can dig up the details on the finances for the FG and RS folks to see what are our options.
If anyone knows someone who does that kind of work, I'm open to have that option in place.

[JD]

I am up for chipping in for a lawyer, as previously mentioned, should it come to that. I don't have any contacts at the moment but I did know a real estate lawyer who I worked with in the SF area over a decade back that I could try and track down again if needed.

Here's my response from Mr. Sullivan. Nothing new from what others have posted here but it is good to have a specific contact who will reply.

"My name is Eric Sullivan and I am the Director of customer service. IIRR management services will be handling all customer concerns on behalf of RealtyShares. We will be happy to try and help.

We understand your concerns in regards to the Franchise Growth investments. As well as your Chicago retail and Elmhurst investments. Our asset managers are trying their best to work out the situation that is in the best interest of the clients involved.

In regards to the construction reserve distributions, I have reached out to our administrator to find out why they haven't been deployed yet. I will get back to you with an answer.

When the K-1 package is ready for your investments, you will receive a notification and you will be able to access your K-1's through the "documents" section of your investor dashboard.
Please login to your account at RealtyShares, check for updates. There is a chance your K-1's have been uploaded. If it has not been uploaded then your tax documents are not ready.

We are working on getting more clarity on specific K-1 documents to give investors with missing tax documents an ETA on arrival. "

[Nosferatu_FL]

“RealtyShares continues to try to work with the sponsor to resolve the maturity and payment defaults but the borrower remains difficult to reach.  Further, RealtyShares has not been able to obtain an update on the status of the construction. RealtyShares researched the property and found on Redfin that it was listed for sale in October 2018 for $3,850,000. The price was increased to $4,050,000 in February 2019 and increased again to $4,350,000 in June 2019. It may be that the price increases are due to elements of development risk being overcome. However, the listing says the property is a “developer take over opportunity” perhaps suggesting a distressed sale. The current sale price is less than the $7,500,000 underwritten exit price. Further, the 1st position construction loan could be for as much as $4,825,000 (depending on how may construction draws have been taken) and has repayment priority over our $1,415,000 2nd position loan. RealtyShares reached out to the 1st  lender to find the loan balance and for additional information to help gauge the 2nd loan's exposure.
 
If the property is sold for the listed sale price, this investment will likely result in a large or total loss of the invested funds. If the 1st Lender responds, RealtyShares will inform investors of that conversation. RealtyShares expects to be able to provide a material update on the status of the investment within two months.”


I don't think the Sponsors are taking them seriously.
I spoke to Dari who said that a group of RS investors had a conference call with Kip the New CEO.
Anyone has information on this?

[Nosferatu_FL]

I am up for chipping in for a lawyer, as previously mentioned, should it come to that. I don't have any contacts at the moment but I did know a real estate lawyer who I worked with in the SF area over a decade back that I could try and track down again if needed.

Here's my response from Mr. Sullivan. Nothing new from what others have posted here but it is good to have a specific contact who will reply.

"My name is Eric Sullivan and I am the Director of customer service. IIRR management services will be handling all customer concerns on behalf of RealtyShares. We will be happy to try and help.

We understand your concerns in regards to the Franchise Growth investments. As well as your Chicago retail and Elmhurst investments. Our asset managers are trying their best to work out the situation that is in the best interest of the clients involved.

In regards to the construction reserve distributions, I have reached out to our administrator to find out why they haven't been deployed yet. I will get back to you with an answer.

When the K-1 package is ready for your investments, you will receive a notification and you will be able to access your K-1's through the "documents" section of your investor dashboard.
Please login to your account at RealtyShares, check for updates. There is a chance your K-1's have been uploaded. If it has not been uploaded then your tax documents are not ready.

We are working on getting more clarity on specific K-1 documents to give investors with missing tax documents an ETA on arrival. "

JD if you have any good leads with that lawyer i'm also in.  At minimum we might need serious research into the finances of the FG sponsors and any guidance we can get.  I will make some calls for SF area lawyers and give updates.

[1UnknownSubject]

Still haven't received them - I have two deals that both have not been reported.

[JD]

I am up for chipping in for a lawyer, as previously mentioned, should it come to that. I don't have any contacts at the moment but I did know a real estate lawyer who I worked with in the SF area over a decade back that I could try and track down again if needed.

Here's my response from Mr. Sullivan. Nothing new from what others have posted here but it is good to have a specific contact who will reply.

"My name is Eric Sullivan and I am the Director of customer service. IIRR management services will be handling all customer concerns on behalf of RealtyShares. We will be happy to try and help.

We understand your concerns in regards to the Franchise Growth investments. As well as your Chicago retail and Elmhurst investments. Our asset managers are trying their best to work out the situation that is in the best interest of the clients involved.

In regards to the construction reserve distributions, I have reached out to our administrator to find out why they haven't been deployed yet. I will get back to you with an answer.

When the K-1 package is ready for your investments, you will receive a notification and you will be able to access your K-1's through the "documents" section of your investor dashboard.
Please login to your account at RealtyShares, check for updates. There is a chance your K-1's have been uploaded. If it has not been uploaded then your tax documents are not ready.

We are working on getting more clarity on specific K-1 documents to give investors with missing tax documents an ETA on arrival. "

JD if you have any good leads with that lawyer i'm also in.  At minimum we might need serious research into the finances of the FG sponsors and any guidance we can get.  I will make some calls for SF area lawyers and give updates.

Here's a link with some info about him. He doesn't appear to be a perfect fit but it does mention that he has done work in real estate disputes, as I had used him for (it was a personal one though).

https://www.avvo.com/attorneys/94403-ca-cary-kletter-256645.html

If there's enough interest, I will reach out to him.