Thoughts On RealtyShares Closing Its Doors To New Investors

[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]

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!

[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]

@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]

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]

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]

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]

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]

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]

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]

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...

[mspringer]

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...

JD,
I feel like RS reads this dashboard as their response is often timely with these discussions.  Let's hope we hear good news shortly.

[Beat_The_Fraud]

Again, if anyone is super depressed with the expected losses they have incurred through the Franchise Growth fraud, I have all the information regarding the partners involved, their names, addresses, the social security numbers of Mr. Li and his family. This might prove useful if anyone is willing to start a lawsuit against him and his family. He lives in a very reputed area in Rockville, MD and owns a house which is valued over 1M. I can provide all other details if you PM me. I am willing to provide all the details to an attorney as well if that helps anyone.

[Chicago81]

In my view, this should have been referred by RS and IRM to law enforcement long ago.  We invested money that was loaned to FG.  FG insists our money was "stolen" (per their webcast and slide presentation).  According to FG, this was not a deal that went bad.  It was theft plain and simple.  It is not acceptable for RS and IRM to do nothing for several years, then say, "gee shucks, it sure is hard to foreclose right now."  When a crime of this magnitude was committed against their own clients, RS and IRM should have been on the right side of cleaning up the crowdfunded real estate space.  Instead, they are permitting whoever "stole" our money to do the same to others.

I would rather recover less (or nothing) and see justice done.  If someone robs you on the street, you call the police; you don't cut a deal with the robber.

[babets]

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...

The FG termination is today (29th) and they have the right to extend one month by paying an additional deposit. I have no idea what will happen but I have a feeling we will get some money back. I have 3 investment with FG, 2 of them returned approx 50% (plus some interest) and 1 returned 0 capital but some interest. In the worst case I think the loss will be 30/40% on the total. just my opinion nothing based on fact.

[sdnerd]

Latest update on Franchise Growth:

"
The borrower (Franchise Growth) has elected to exercise their final extension of 30 days as per the agreement. The borrower has satisfied the required $35,000 non-refundable deposit to extend. The final extension expires on 8/29/2020. IRM does not plan to accept any additional extensions.


IRM has asked Franchise Growth for a status update of the asset sales. To date, no such update has been received. We estimate the chances of a sale at 50/50 with the other option still being foreclosure on all remaining assets.
"

Looks like we are on the final 30 day countdown. They have now put up $195,000 in non-refundable deposits.

It's going to be interesting to see if they can get a sale agreement closed out in the next 30 days. The cost of borrowing money is extremely cheap right now, and there's a lot of capital sloshing around... but I personally don't have much insight as to how fast food commercial real estate is doing right now. Not encouraging, although not surprising, they wouldn't give IRM any updates.

While I hope to lose as little (or none) as possible on my FS deals, I'm anxious for the saga with them to finally be over with. Even if foreclosure is in the cards, I'll be glad to not be waiting on updates from the FS folks.

Fingers crossed.