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I mean, what could go wrong?

Real estate syndications have surged in popularity since the passing of the JOBS Act in 2012. Another word for crowdfunding, this investment vehicle allows general partners, who put in sweat equity, and limited partners, who put in the cash, to come together to make investment magic happen.

In this case, general partners do all the heavy lifting, and some have been caught up in some trouble lately (more on that below 👇). By heavy lifting, we mean they find the property, deal with the headaches, and basically act like the project's mom, making sure everyone is playing nice and the investment doesn't eat glue.

Imagine you and a bunch of your mates want to buy a bar because, obviously, what could possibly go wrong with that idea? But instead of a bar, it's an apartment complex, and instead of your mates, it's a group of investors you've never met but are now financially entangled with.

Welcome to real estate syndications! And business is booming…

The real estate crowdfunding space is currently valued at over $10B globally and is expected to grow by an annual growth rate of 50% between now and 2032.

Unfortunately, rising interest rates have made the syndication calculus harder, and deals with poor underwriting that didn’t account for rising rates are now feeling the pinch. Well, it's more like a face punch.

Let's talk first about Jay Gajavelli, who apparently graduated magna cum laude from YouTube University with a degree in Real Estate Dreams and a minor in Floating Rate Nightmares.

Jay, an IT professional turned real estate syndicator, began amassing a sizeable portfolio of value-added multifamily assets.

Last year, Gajavelli owned over $500 million of Sunbelt apartment buildings with 7,000+ units, making him one of Houston's largest landlords. Over the last five years, he has grown his empire faster than you can say. "Houston, we have a problem." But we have already written about Jay “The Gazoo” Gajavelli.

Today there’s another whopper to discuss: GVA.

lan Stalcup, the head of GVA and a seasoned player in the multifamily syndication space, ambitiously expanded his portfolio to a staggering 30,000 residential units across the Sun Belt. This rapid expansion occurred at a particularly precarious time as interest rates began to spike, challenging the conventional wisdom of leveraging floating-rate loans for property acquisitions and renovations.

Stalcup, unlike his contemporaries, who leveraged social media and large online followings to attract investment, maintained a low-key digital presence but nonetheless managed to secure significant partnerships and funds from big firms like Crow Holdings and Fortress Investment Group and retail investors. His approach focused on value-added multifamily properties, aiming to renovate them and boost rents as part of his growth strategy.

However, Stalcup's aggressive acquisition spree, particularly throughout 2022, became problematic as rising interest rates started to bite. GVA's strategy of using floating-rate loans to finance purchases backfired spectacularly as the Federal Reserve hiked rates, drastically increasing GVA's monthly debt service obligations. Furthermore, many of the properties acquired by GVA were older buildings requiring significant capital expenditures for repairs and upgrades. As rents in the Sun Belt began to stabilize, the expected income to cover these increased costs and loan repayments started to falter, signaling financial distress.

By early 2024, GVA was delinquent on almost half a billion dollars of securitized debt, with foreclosure actions filed on numerous properties. The situation underscores the risks of rapid expansion and reliance on floating-rate loans amidst volatile economic conditions.

The fallout from GVA's ill-timed buying spree is a stark reminder that while significant growth exists within real estate syndications, so does the potential for considerable loss, especially when external economic factors shift unfavorably.

HEADLINES

Today, in ‘Everything is Fine, ’ we present…

Financial Selfie Nightmare: A recent report by MSCI revealed that the spread between corporate debt and commercial real estate (CRE) debt has risen to a 24-year high, making it more expensive to finance commercial properties through direct mortgages. The spread between commercial mortgage rates and corporate bonds widened to an average of 121 basis points over the last six months of 2023. After the Great Financial Crisis, the gap between corporate and CRE mortgage debt averaged only nine basis points. (Globe St)

More Sweat, Less LTV: Commercial real estate lenders have reduced the debt they offer borrowers due to increased risk and higher capital costs, with CMBS providers cutting their loan-to-value (LTV) ratios by 14% to 55.7% from 2015 to 2023. During the same period, the average loan size more than doubled, reaching nearly $22M in 2023, up from $17.6M in 2022 and $10M in 2015. This reduced available debt means more equity is needed to complete deals, creating opportunities for some investors. The decrease in LTVs began before the current credit crunch and the pandemic but became significantly steeper in 2022 due to interest rate hikes. (Bisnow)

Rent Controlled Trouble: US banks with significant lending exposure to multi-family properties, especially rent-controlled housing, are at risk of posting losses this year due to rising costs for landlords, according to Fitch Ratings analysts. Lending to multi-family borrowers by banks grew 32% since 2020 to $613 billion at the end of 2023. However, supply has begun to outstrip demand, putting downward pressure on rents; landlords also face rising interest rates, insurance premiums, and decreasing apartment values. (Reuters)