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.

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)

Inflation over Criminals: A recent Gallup poll reveals that the majority of Americans are most concerned about inflation (55%), followed by crime and violence (53%), hunger and homelessness (52%), the economy (52%), healthcare availability and affordability (51%), and federal spending and budget deficit (51%). Less than half but at least four in 10 Americans are concerned about illegal immigration (48%), drug use (45%), the Social Security system (43%), and future terrorist attacks in the U.S. (43%). The least concern is about race relations (35%) and unemployment (33%). When asked to name the country's most important problem, 28% of Americans named immigration, tying with the highest mention of immigration since Gallup started tracking in 1981. (Gallup)

One Third: Of home purchases were made in cash in Feburary, close to the record high. The median down payment for homebuyers was $55,640, a 24.1% increase from $44,850 a year earlier, marking the largest annual increase since April 2022. The typical down payment was 15% of the purchase price, up from 10% a year earlier. Home prices rose 6.6% year over year in February, contributing to the increase in down payments. Over one-third (34.5%) of home purchases in February were made with all cash, up from 33.4% a year earlier. All-cash home sales rose 2.9% year over year in February, while mortgaged home sales fell 2.9%. (Redfin)

$1.5M: A Northwestern Mutual study reveals that the average American believes they need $1.5 million to retire comfortably, a figure 17 times higher than the average savings of $88,400. This gap has increased by 16% from the previous year due to rising costs, the prospect of longer life spans, and potential Social Security cuts. The study also found that Gen Z and millennials aim for a retirement fund of over $1.6 million, while baby boomers aim for $990,000. The average savings by generation were $22,800 for Gen Z, $62,600 for millennials, $108,600 for Gen X, and $120,300 for boomers. The study suggests advanced tax planning to bridge the savings gap. (Bloomberg)

Free Homes? In This Economy? Nantucket, an island off Massachusetts, is known for giving away homes for free, with the caveat that the buyer must move them. The island, home to many wealthy summer residents, has a median house price of $3.6 million. However, when these residents buy properties to build their dream homes, the existing structures are often given away for free to avoid demolition costs. The buyer must pay to move the home, which can cost at least $100,000 for a 2,500-square-foot home. In 2022, 91 permits for home moves were issued by October, compared to just 19 a decade ago. The homes are often turned into rentals or housing for local workers. Since 1994, Housing Nantucket has repurposed 39 "free" homes into income-capped rentals. (BI)