Let’s take a look at what a real estate crowdfunding loss looks like. When you invest in real estate crowdfunding, you have to expect there will be losses given there are no guarantees.
I recently published The Worst Landlord Horror Story Ever, a story about a reader who bought a Las Vegas residential property several years before the bottom fell out in 2008-2009. He went through hell dealing with maintenance issues and suspect tenants.
Eventually, the complex started accepting Section 8 housing where the government would subsidize 80% of the rent to lower income earners.
His housing complex of 157 units turned into a drug infested war zone. Only after buying two more units at the bottom of the market did the reader finally break even after 13 years.
A Potential Real Estate Crowdfunding Loss
So it is with complete surprise that I got an e-mail from on real estate crowdfunding company the very next week notifying me my real estate crowdfunding fund invested in a 168-unit garden-style apartment complex in Las Vegas! This was also after I decided to invest another $250,000 in the fund, bringing my total up to $500,000. It was as if the real estate gods were mocking me.
I was informed that the property had been originally constructed in 2001 as an affordable housing development, but that recently the property had been purchased by the now-seller under a “qualified contract” that released the property from its affordability requirements. Although technically a market rate property, residents in occupancy during the conversion maintain protected below market rents for a period of up to three years, so that only about a third of the units had rolled over to market rate units.
This was a preferred equity deal, though, so is more like a loan than a true equity position. The sponsor contributed over $3 million for the common equity position, so that at least provides some degree of “cushion” to the preferred equity position. Additionally, the sponsor was to set aside 28 months of preferred current payments in an account controlled by the crowdfunding platform.
Still, my heart sank when I read that not only was this a Las Vegas apartment complex, it was also an affordable housing development. I’ve got nothing against affordable housing from a social good perspective. Rocketing housing costs are making it difficult for everyday people to live.
But as an investor who is hell bent on staying financially free due to his investments, I worry about investing in an affordable housing complex for all the reasons my landlord horror story mentioned. In addition, in order to reach the project’s targeted internal rate of return (IRR) the sponsor is relying on turning the remaining units (2/3 of the total) into market rate housing.
It remains to be seen whether the tenants will simply accept the rent increase, move voluntarily, or be evicted with potential buyouts.
Related: Taylor Fitzpatrick LLC Lost People Money
Some of the features of this investment included:
Demonstrated rent increases. Approx. 33% of the units had now been moved to market rates, and where the units had already been renovated, the new market rents were nearly 25% more than the earlier “affordable unit” lease rates.
Property was acquired at a discount to market. The property was acquired off-market, having been sourced through a relationship of the sponsor. The property sold at an effective price of $108k per unit, apparently well below comparable assets of a similar vintage. The offering information also indicated that the purchase price was about 15% below comparable properties, both on a per unit basis and on a per square foot basis.
One thing to note from my landlord horror story is that an institutional investor picked up those units during the financial crisis for roughly $60K/unit, but I’m not sure if these units are like for like since the newly acquired apartments are newer.
Strong Submarket. The property was located in a submarket of Las Vegas for which REIS reported a mean vacancy rate of 3.2% in Q1’17 across all property classes per REIS, and average vacancy is expected to decrease to 2.6% by 2021.
Sponsor’s Common Equity Cushion. The sponsor’s $3.5 million common equity contribution meant that its own money would be at risk before the preferred equity investment would be affected.
Reserve for Preferred Payments. 28 months’ worth of preferred current payments were to be reserved for in an account controlled by the crowdfunding platform.
Decent Estimated Population Growth. ESRI forecast population growth of 6% over the next 5 years for the area within a 3-mile radius of the property, translating to over 8,000 new residents in the near vicinity.
Access to Local Amenities. The property was located in close proximity to numerous amenities and employers, with Las Vegas strip located just 3.5 miles away.
Setting Low Expectations For This Potential Real Estate Crowdfunding Loss
Perhaps I’m being too pessimistic on the deal given the Sponsor is putting up $3.5 million of their own capital before investors lose money. It just totally caught me off guard regarding the timing of the deal given my post. Further, just because I’m not a Las Vegas real estate expert doesn’t mean the Sponsor isn’t either. The catalyst is very clear: a “qualified contract” that releases the Property from its affordability requirements by October 2019.
But given the risk involved, I’m disappointed the target IRR is only 13%. A target IRR of 18% seems more appropriate. For reference, a 13% IRR is lower than all the previous target IRRs for projects in the fund that aren’t investing in affordable housing.
But here’s one thing that concerns me. The seller is selling the property for an approx. $6.5 million gain relative to its own purchase price just two years ago! I’d be selling too if I could make an almost 60% return on my money in two years. Yes, the sellers had to spend money renovating some of the units, but they couldn’t have spent that much since two-thirds of the units are still below market rate units.
Tough Deal To Invest In
I personally would not have invested in this deal because I’m trying to stay away from coastal boom bust cities like Las Vegas, the #1 city that got crushed during the housing crisis. The other cities that got hit the most were Phoenix, Fort Lauderdale, Miami, West Palm Beach, and Tampa. Further, it doesn’t sit right with me to convert below market rate units. Nobody wants to experience a real estate crowdfunding loss.
I’ll be happy if this project just gives us our money back (0%) return in three years. That said, it still looks like there is roughly 50% more upside before the Las Vegas property market gets back to its 2007 peak. San Francisco, on the other hand, is ~25% above its previous peak, which is one of the reasons why I was happy to sell.
Now you know the downside of investing in a fund. You can do all your research, but once you hand over your money, it’s up to the investment committee or fund manager to decide how to best invest your money. Sometimes their investments won’t align well with your beliefs, and you’ve got to be OK with it. Instead, it may be best to spend the effort to choose your own real estate crowdfunding investments.
My problem is that I’ve been hands on with all my investments my entire life. Therefore, it’s hard for me not to watch where every dollar goes. But as a 40-year old father who has better things to do than pick every single investment, I need to outsource my investing to others who do have time and expertise.
The more I can let go, the more I can focus on enjoying life to the fullest. And who knows? This Las Vegas investment might very well return 40% after three years as targeted and prove me wrong. I’ll be sure to let y’all know if it does! And if it’s a big bust, I’ll be sure to let you know too. At least this is only one of potentially 10 – 15 investments within the fund.
Update: Based on feedback from many readers, it seems like investing in Las Vegas isn’t as bad as I initially feared. The Raiders are moving to Vegas, employment is growing, and there continues to be a migration to low cost cities and states with no state income taxes. But the Raiders sure are sucking under John Gruden, despite his $100M contract!
Update 2022: The deal actually ended up being a home-run, with a double-digit IRR because Las Vegas blew up, in a good way. Real estate prices in Las Vegas skyrocketed once the pandemic hit in 2020. Who would have guessed? Not me.
Related:
Buy Utility, Rent Luxury: The Real Estate Investing Rule To Follow
Focus On Trends: Why I’m Investing In The Heartland Of America
Best Real Estate Crowdfunding Platform
If you’re looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise, one of the largest real estate crowdfunding platforms today. They allow everyone to invest in mid-market commercial real estate deals across the country that were once only available to institutions or super high net worth individuals.
Fundrise is the pioneer of eREIT funds. They are creating an Opportunity Fund to take advantage of tax-efficient Opportunity Zones. Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America.
Two questions on this older thread–
1-how is the LV property doing so far? Have you changed your opinion?
2–I know you said this property included some Sec 8 units…my sister has some rental homes in San Antonio, TX that have Sec 8 renters…for the most part they have been better than those not Sec 8–mainly because they lose all their ties to other programs if they lose Sec 8 eligibility…
In LV I have read there are many “working poor” because of the hospitality workers in the city (any resort town has that strata of working-poor +/- %)
and there are many seniors retiring to LV who qualify for rental-assistance.
Do you have any idea what the makeup of those specific Sec 8 renters are…
And would that factor influence your assessment of the quality of the investment?
I think people should not necessarily assume all Sec 8 eligible renters fall into the same profile.
I should mention that pure equity deals through RS often do underperform projections. That is why in the future I will only invest in preferred equity and debt through that platform. Given my additional geographical limitations, that makes about 1 deal in a hundred worth considering. Even then, my other criteria might knock it out. I just think at times like these, it is better to be extra careful.
I also go almost exclusively with debt and preferred equity deals through RS, with a few exceptions. Out of my 18 deals so far, 3 have exited successfully (but early, which is not worth the hassle of tax reporting, etc. for only a few months of interest), and one was just recently referred to foreclosure. Fortunately I’m only in that one for the $5K minimum… we’ll see how it turns out. RS ‘says’ the borrower is working to find a way to come current on the loan. Strangely, this came only a month after RS posted an update saying the borrower had applied for a loan to payoff RS.
The others are still paying on schedule, but I agree that the projections are ‘best case’.
I have to say that I am surprised at how much they paid for the Vegas property. I think they could have gotten a better deal.
This looks like a Realtyshares or Realtymogul deal. I have investments with the former but not that latter. I do think you will make money on the deal. The restrictions are being eased over time and what happened in Vegas before was due to a perfect storm coming all at once. I have chosen to largely avoid investing in the overheated coasts as well except for PS which is really just short term financing. While the notes the provide are not secured, the underlying properties are. Expect about a 7% return.
I am actively trying to find deals in markets that haven’t overheated. I have done some crowdfunding through RS in Mississippi, Alabama, Utah and Texas. Wouldn’t mind finding properties in Kansas, Idaho and Minnesota as well.
Sam, I think your initial gut reaction to this particular property in Vegas will turn out to be pretty accurate. It will probably wind up being a drag on their total portfolio performance but that is why you are diversified among a number of investment properties. In the aggregate, you should still do fine as long as they don’t make too many more of these bone-headed decisions.
Fortunately, there are not too many worse places than Vegas for them to speculate ;)
Sorry to hear that, bummer. Well hopefully it’ll turn out ok and it’s good there are other diversified properties in the fund. It’s also good the sponsor has their own skin in the game first.
Investing is tough because there will inevitably be losses the more investing you do but it’s worth the risk imo. You have a diversified portfolio so you’re gonna be ok. Keep your eye on the long game!
You should be fine. Raiders are going to Vegas. Maybe they will convert them to timeshares or Air B n Bs?
Why don’t you call up that property lawyer on Fox Business and see what he thinks. He may do a segment on crowd funding.
This is not an equity investment. If you were taking on equity risk you would expect an IRR of 18%. However, the sponsor has to return 9% preferred quarterly and an accrued 4% at the time of sale before they return any of their $3.5 million, let along earn a profit.
It may be riskier than you’re comfortable with, but the sponsor is taking most of that risk.
True. This is a preferred equity investment analyzed as a riskier equity investment by Sam. It is 9% preferred plus 4%; How can a property a few miles away from strip not rent, so certainly high occupancy, and enough cash flow for preferred equity – 28 of the 36 months already reserved. I think the sponsor will keep this property, and is only seeking to raise money for now.
On a side note, is there a website where Real Estate Crowdfunding offerings can be discussed ad analyzed across internet? I mean, none of us are RE experts to choose a property, but when we share our knowledge and insights, its better when a property is “live” on a site.
RE Online sites, other than realtyshares, offer a far better return but connect you directly with the Sponsor. If one were to go to the Sponsor’s website directly, they offer even better – Its easy to find sponsors who pay 25% IRR, with 15% cash on cash on Class A properties with minimal risk. That makes me wonder how much “cut” these RE online sites take.
Still learning.
Can you share some RE sites that offer a 25% IRR you trust? I didn’t realize it was so easy to make these huge returns. Which ones have you invested with? I’d like to get me some of those. Thx!
I would not invest in a fund. The manager has too much control. If the investment underperformans, you can bet they will dig into your funds to the full extent of the law. If the property does well, they will keep as much for themselves as possible.
I always say “you don’t really own real estate unless you have the only set of keys in your pocket”
Stick to individual properties and hire a manager if you don’t want to get your hands dirty.
Thanks. What does your real estate portfolio look like and how do you manage them? How has the performance been and where are they located?
Sam, why are you chasing yield with these equity projects. Especially since I have no faith in their IRR. Given your large nest egg why not select just debt investments on all the top platforms with autoinvest set. Of course the debt ones may yield only 7-10%. Would love to hear your thoughts
What are your thoughts on how I can make it more clear in my posts that this was an investment by a fund and I had no say in it. I also bolded towards the bottom that I would not have invested in this deal.
Thanks for helping me become a better writer.
Have you written to the fund manager?
Just curious.
There seems to be a pretty legitimate value add play here being executed by an experienced institution. I haven’t read your Las Vegas story post but it sounds like a starkly different scenario in terms of asset class, strategy and economic landscape. I think that previous investor’s experience is irrelevant here. The operational plan here looks good to me and I hope it plays out well for you!
On another note, where is that chart with the 6 cities from?
I don’t like being a landlord for section 8. Sure, the rent check comes straight from the government, but they are tough on the property. We had a couple at our old 4plex. They were okay, but were not proactive about notifying me of problems. My FIL evicted a section 8 renter earlier this year. They really messed up his place. Anyway, it’s much easier to rent to professionals.
I’m all for investing in lower COL markets. Portland is getting too expensive as well.
Have you checked if the equity is really from the sponsor? Sometimes a sponsor will offer equity investments on a different site.
We flew into Vegas in Aug to rent a car and drive to Zion National Park for a hiking trip. We stayed the night on the way out. I did not care for the place at all and would be disappointed with the decision to invest there. If there is a downturn, Vegas will crash again. The entire place is an illusion built on sin and vice and the service economy that supports it. I really hope it works out for you Sam. Sometimes you just have to grin and bear it.
Thanks for sharing your thoughts on the Vegas deal. I can imagine that it was disappointing to get notified about the property, particularly after you just invested the additional $250K. Would you still invest in the fund given the property selections as a whole? Like you, the idea of investing in the fund and not having to worry/pick the individual ideas resonates, but I also share many of your reservations. Assuming one has the appropriate NW and the desire to increase their exposure to RE, do you still think it is a reasonable vehicle to invest in? Any thoughts/feedback would be sincerely appreciated.
Seller’s return is probably much much higher than 58% because of leverage. At 70% leverage and $1m rehab they are probably looking at a 2.25x return! However, anyone who bought multifamily in 2015 is looking like a genius right now. We are selling an asset that we bought at the end of 2015 and in DFW and going to 2.5x investors money. Totally not the norm though…
I would be bummed out too if I found out the fund was placing capital in Las Vegas. There are plenty of assets in strong economies out there. Plus, like you said seems like the returns aren’t risk adjusted either!
Since this is a commercial multifamily property, the valuation is purely a function of the net operating income (NOI). If they are successful in raising rents, as planned, NOI should increase and you’ll have forced appreciation. What I’d be asking about is the structure of the preferred payments – specifically, are the payments cumulative. If so, then even if they run into cashflow issues, you’ll be paid back in full for all the preferred payments that were missed. Do you know if it has cumulative payments?
I think you’re safe in this deal, but only because you’re a preferred shareholder. As you said, the previous owner is the one who made a great return. But with proper management, the property should cashflow sufficiently to pay the preferred payment. In terms of the forced appreciation on the back end, who knows. I think that depends a lot on the economy and rental market. If rents stay strong you should be in good shape.
Good reply,
May I give reference to the book ‘security analysis’ where capital structure on railway roads and other utilities can give preferred stock holders bond like insulation?
The ability to raise rates will depend on the overall housing market in Vegas, a function of the local economy.
The devil will be in the detail and economic forecasting.
Valuation is also a function of cap rates, which are at historic lows. If/when cap rates rise, the value of this property will drop.
Thanks for the insights. I’ll double check. All I got was this: For Vernazza Apartments, the Sponsor is contributing $3.5mm of capital to the deal (100% of JV equity), putting its own money at risk before any losses would be incurred by RealtyShares. Additionally, the Sponsor is expected to set aside 28 months of preferred current payments in a RealtyShares controlled account.
So it’s kind of a like a hybrid where we’ll be getting I think a 4% yearly coupon, and the remaining proceeds in 3 years to hit a 13% IRR upon sale. But I just wonder…. who is going to buy then?
It should be reasonable that after 13 years, prices should surpass their prior peaks like many cities have currently and the stock market has currently. But… who knows. I hope I’m wrong about my lukewarm outlook.
A 4% yearly coupon for a real estate deal? Wow that’s really cheap money… that’s analagous to a 4% interest only loan. With that kind of financing in place I imagine they are generating some serious net cashflow. I’m assuming those cashflows are being reinvested to finance the renovation costs. I wouldn’t worry so much about the sale on the backend… I think if they are successful in driving up NOI, there are different exit strategies available to them. If they can’t find a buyer at that point, the sponsor could always refinance (at the higher valuation, due to higher NOI) to pay off the preferred shareholders and then keep the property as a hold. Also, if they are successful in driving up NOI, then they should have a cashcow on their hands… even if interest rates and cap rates go up, the cashflows are more valuable since they can be reinvested at the higher prevailing interest rates. If they have good management in place this could be a great deal for you! Anytime you want high return on a purely passive investment you get these kinds of risk.
Hi Sam,
I appreciate your take on this investment. I feel like I’m missing the boat on this whole crowd funding thing. The biggest problem for me is that these investments haven’t been through a recession yet. I’ve been through 2 in the stock market. I know potentially how much I can lose, and more importantly I know how I react.
The biggest positive I see is that your pretty well diversified. You can afford to take some risks. Worst case scenario and you lose this investment, your still better off financially than 99 percent of the worlds population. Congrats on your success!
Thanks, Bill
Don’t worry Bill. You aren’t missing anything. You’re letting folks like me test the space out for you so you can make better decisions if you decide to proceed. The thing is, I was considering putting another $250,000- $500,000 into the fund for a total of $750K – $1M if it wasn’t for the Vegas deal. In other words, I was getting super bulled up that using REC as a way to arbitrage valuation and rental yield spreads would be the way to go.
With some feedback so far from this post, and me editing it for updates, I don’t feel as bad about the deal when first presented to me. The initial e-mail was a shocker. Like a slap in the face after I published the worst landlord horror story post.
FS, you are clearly a savvy investor to be where you are at but always remember it’s never a bad idea to sit on your large pile of cash as better opportunities always surface when you’re patient. I’ve sold two commercial properties in the last 18 months and at insanely low cap rates as investors are downright desperate for a return on cash. My plan is to pay my taxes and sit back with the cash ready to deploy once we see the inevitable downturn.
We are WAY overdue and when commercial properties are selling at such heights that it only makes sense for cash/1031 buyers, it’s time to stay calm and remember it could be night and day within a year or two. And this coming from someone who made a killing on property in 2006 and instead of being patient and waiting for better opportunities, I plowed the money into another “investment” that I still own today (UGH!).
Best of luck on that one, but I agree that Las Vegas deal would scare the youknowwhat out of me.
Yes, having a nice cash pile is nice. Three months later, I still do not regret selling my rental home in San Francisco yet. I think starting next year I will start regretting it because I will see prices continue to hold strong and I will forget about what a pain in the ass it was to manage.
Selling 18 months ago was a long time ago. Have you been sitting on cash for those proceeds since?
I agree that we could easily see a 10 to 15% correction in the stock market and less so in the real estate market because it takes time to correct. But what I also remember from investing days in 1997-98 is that the bull market tends to last longer than anybody thinks.
Related: https://www.financialsamurai.com/investing-is-the-ultimate-case-of-fomo/
Affordable housings in Las Vegas…Hmm. Behind the strip, it’s mostly suburban (my friend lives in the burbs). She said theres some really run down people in LV beyond the burbs and the wealth of the main road. I can understand how you feel, it’s a very one show town. And wouldn’t hold their own in a downturn. But I don’t think it’s going to be as bad, not 0% for the next few years.
I am drawing down my investment at Lending Club. Simply, because I feel there are to many defaults. This experience is the reason I haven’t invested in RealEstateCrowd funding but I still look at the offerings and wonder about the returns. Would you consider posting the results of some of your investments with RealtyShares? Returns, loses, positive and negative?
Indeed. That’s the plan. Check out the very last paragraph of this post.
Hi Sam / all Financial Samurai readers – I am an avid reader of blog and have a slightly offtopic NYC real estate question? Would you rather rent a $3200.00 / month 2 bed 2 bath rent stabilized new construction apt in downtown bklyn with 2% capped annual rent increases or buy a 1 bedroom 630 sq ft 750k coop with $600 monthly cc in the seaport district with possible chance of appreciation? The 1 bedroom would require a full gut renovation costing an additional 100k on top of the 150k down payment. Which offer would you personally take and why? I am single and 34 yrs of age. Thank you in advance!
HH
I’m surprised you’re able to find a 2/2 in downtown Brooklyn for that price! My wife and I lived in the 11201 area (Brooklyn Heights on Montague, Court and Atlantic near the edge of Cobble Hill, & DeKalb and Flatbush) for 7 years. One bedrooms went for that price (if not more now). I’m actually working on a post on this.
As for your question, I don’t know all the other respective aspects / variables you’re considering, but how long you plan to stay in a particular location can be a factor. Additionally, it could depend on what your long-term goals are for the property (among numerous other things).
I intend to stay long term for at least 10-20 years. However, the 1 bedroom coop would not suffice if I have a family in the future. The 1 bedroom coop would be a purchase for mainly appreciation potential. What are your thoughts?
Can’t really comment on what you should consider doing, but I can say that the 2/2 rental is an incredible below market price for downtown Brooklyn. You mentioned in your comment above from 24-Oct that it’s a new building – were you the original occupant in the unit?
I have some colleagues who’ve managed to lock-in very good terms that way (I believe in the Brooklyner and also in the BKLYN Air buildings) – but not a 2/2 for those terms. Overall, there is still a lot of new builds – City Tower, for example, is huge!
The post I referred to yesterday is also now up:
balanceddividends.com/10-years-lost-renting-remorselessness/)
I listed out the prices we paid for 1 bedrooms in Brooklyn Heights, etc. several years ago.
I would never buy a one bedroom condo.
I agree that the IRR seems low compared to similar investments. I just bought into a 202 unit multi-family complex through RealtyShares with a 15-17% IRR, but a 5-Year target hold in Columbus Ohio. Seems less risky with a higher return than what you described, but no deal is ever an apple-apple comparison. This is the most aggressive one I’ve signed up for so far, but it wouldn’t be a true experiment without taking some risk. At least you’re diversified within the fund, so really not worth losing too much sleep over it. Good Luck!
Hope for the best and be prepare for the worst!
At this stage in your life, you want stress free investments. You have enough saved and have online income for several lifetimes. If you are losing sleep on this deal then don’t do these types of investments ever again.
Simplify your life and keep your financial nut.
Adam
Not losing sleep yet. Just miffed by the timing right after I published the landlord horror story post.
I like to talk about my losses and potentially bad investments to provide a more balanced perspective for readers.
The reader who bought Vegas property in 2005 thought it was a great deal then too. It’s easy to feel one can’t lose in a bull market! Yet as we know, nobody has a 100% investment success rate.
The 10-year U.S. Treasury yield just passed 2.4% today. Is this a big deal? I need the Financial Samurai take on this huge development in the bond markets!
Blind pool funds are tough – you really, really need to have confidence in the manager. Although you trade off a better incentive structure (American carry vs. European carry), I still prefer deal by deal. Gives you a chance to pass on the sub-par deals like this one.
Not sure what the full terms are on the fund, but if you’re interested in this type of exposure Sam, shoot me an email and I can send you a few high quality managers. Best of luck!
What’s American carry? Just curious.
Great question! European carry is where you look at the performance of the entire pool when determining incentive compensation. A few great deals can be offset by a few bad deals, which lowers what you pay the manager. As an investor, this is far superior to American carry. American carry is deal by deal, so if one deal goes great, the manager gets paid. If one deal goes poorly, the manager doesn’t (but at that point, the impact to the manager is far less significant than it is to the investor).
Really bad fund structures have American carry. However, if you, as the investor, can pick and choose your deals, then the manager generally gets American, or deal by deal, carry. It’s a trade-off: more control for a worse fee arrangement. I like control, so I don’t mind paying American carry.
I see. Negative convexity. :-)
I was going to look into Crowdfunding but I may be too much of a control freak to get into something like this. I would just want to run! But it may turn out to be one of your best investment.
Is there any industry in Vegas other than gambling/tourism? That’s what would put me off of investing there. I can only imagine how queasy you felt when you learned about this, Sam. Fingers crossed we’re all wrong and it works out beautifully in the end.
Las Vegas picked up an NFL team. Will be a large economic drive and help diversify the economy a bit.
They also have an NHL team that started play this year.
Good stuff guys! I wasn’t aware Of the NHL team and I forgot about the Raiders moved since they are still playing here in Oakland. Maybe there truly is another 40 to 50% upside until the previous peak.
Of course I hope I’m wrong. But the timing of this deal is such déjà vu.
Sam, you must have balls of steel!
I wouldn’t be able to sleep at night doing deals like this. But, then again, I’m more of a conservative, index fund kind of guy. Also, I think you have more money than me, so you have more wiggle room than I do.
I don’t seek Alpha, so you have more upside (and downside) potential then I’ll ever have. I hope this deal works out well for you.
I’m with you Sam it smells like a bad deal. I don’t know what recourse you have but I definitely don’t think the upside is worth the investment. Hopefully we’re both wrong but I have a feeling that’s not the case for you very often.