Top of Mind: Is There a Real Estate Syndication Bubble? | Aspen Funds
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Top of Mind: Is There a Real Estate Syndication Bubble?

In this episode of the Invest Like a Billionaire podcast, co-hosts Bob Fraser and Ben Fraser delve into the recent headlines about a large apartment syndication foreclosure. Bob and Ben analyze the story and share their insights on what went wrong and discuss some of the red flags. Additionally, they explore whether this is an isolated event or a broader issue in the real estate market. Lastly, they discuss how to evaluate capital calls and whether or not to participate. With lots of practical analysis and thoughts, you don’t want to miss this episode.

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Ben Fraser: Welcome back to another Invest Like a Billionaire podcast. I’m your co-host Ben Fraser, joined by fellow co-host. Bob Fraser and today we are doing another top of mind episode. We’ve been on a roll of these recently. Uh, we’d kind of come out and do these when there’s some newsworthy things to comment on and there’s been a lot of the news recently that’s, uh, interesting to discuss and wake up call for investors.

Yeah, wake up call. It’s been definitely a unique time in the market and, uh, you can see the screen behind me here. I pulled up an article that we, uh, it was just on the Wall Street Journal front page, just a week or two ago. And it’s called a housing bust, comes for thousands of small time investors and we’ve got a lot of, you know, investors of ours and others reaching out saying, oh, is this, you know, a, a, a bigger issue?

Is this what you guys are doing? And, you know, the whole concept, uh, of syndications and. You know, the, the, the article kind of talks about the story of what happened here. Explain what happened. This is the Invest like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth.

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We focus on macro driven alternative investments, so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. So basically what this, uh, article is showing is, is a firm called Apple’s Way, um, was a syndicator, right? And so you’ve heard the term before, you, you know, if you invested with us, you know, what we do is syndications and, uh, basically pooling together investor capital to go purchase.

Um, in this case, multifamily apartments 

Bob Fraser: syndicator raises money from a pool of investors. They go put it together. And they go buy an asset, like an apartment complex, an apples away case, and then they take fees and that from, from that, um, right. And so very common business model. 

Ben Fraser: Yeah, and, and generally the idea as you go and you buy a apartment complex that’s maybe mismanaged, but it’s in a great area.

It’s got some good bones and you can. You know, do what’s called a value add to it, where you’re improving the, um, the area, you’re improving the units, and you can rent them at higher rates, kind of at the market rate, and you can force appreciation. So it’s a, it’s a business model that’s been proven for decades and decades.

It’s, um, a proven way to make money if you do it right. But what happened in, what’s so interesting about this is we’ve been. Kind of talking about this, you know, not, not a lot on the podcast, but at least internally 

Bob Fraser: of where we’re, we’ve been warning our investors for a couple years that this was 

Ben Fraser: happening.

Yeah. And, and, and basically calling it a syndication bubble, right. Because what we’ve seen over the past, really three years especially, is. All these different syndicators, you know, I put air quotes around that syndicators are coming outta the woodwork and being kind of sold the idea that, oh, I can go and start raising money and replace my W2 and, you know, become a real estate investor and expert without any background or any experience.

And that’s kind of what this guy did. So the genesis 

Bob Fraser: of that is, is these guys that created these masterminds. Around syndication and capital raising. So the idea is this, you hate your job. You wanna stop working for your money. In fact, a quote here says, I’m sick and tired of working for my money. The guy who started apples, I’m sick and tired of working for my money and it, I became a syndicate.

So you go to these groups and they teach you how to raise money from investors, how to find deals and how to, how to do deals. And, but these are guys that don’t have any, they don’t have a financial background. They don’t have a, you know, fin a real estate background. And what happened is they’re doing deals that shouldn’t have been done.

So as prices were skyrocketing, so you saw rents going hockey stick, right? Last couple years. And prices of these properties are going hockey stick. And so the, the ask is going huge. Well then these syndicators, because they’re trying to get a deal, they have to get a deal done. Yep. They’re overpaying.

Right. They’re overpaying and then they’re adding leverage, mean borrowing that they shouldn’t be adding, they’re over-leveraging with really bad debt in order to get a deal done. Then to go to investors, say, got the deal. We got the deal, but it’s a deal that hasn’t, should never have been done. And yeah, professionals would never have done these deals.

So let’s, 

Ben Fraser: let’s walk through a little bit of the red flags here, right, because the concern is, One is this all of the things I’ve invested, I’ve invested in syndications before, or all my deals like this. And two, is there an apocalypse coming to multi-family? Right? Right. These are kind of the, the initial, you know, knee jerk concerns that, uh, investors are having when they read this.

And I think it’s important to kind of, you know, parse through this, uh, article because there are some really clear things that this, you know, individual did that were pretty big red flags. What are they? And so, you know, first off, The guy was an IT professional, right? So nothing against IT. Professionals.

We love the, well, we all need it, but that doesn’t necessarily mean you are gonna be a real estate entrepreneur success story, right? And obviously you can translate a lot of skills into it, but. Basically this individual went, he purchased over 7,000 units mostly, which is dollar amount. What is that gonna mean?

Uh, half a billion dollars, especially in these are Sunbelt market. So 500 million in real estate. Um, it didn’t have the timeframe that he did it in, uh, but it’s over a pretty short period of time. And so 7,000 units. And so the, the whole point of this article is that 3000 of those units are being foreclosed on right now.

So it’s, I think it’s Oh, in excess of 200 million. Um, and it’s looking like it’s probably gonna be complete equity wipe 

Bob Fraser: for, well, a foreclosure is an equity wipe. Yeah. So if it is an, if they complete foreclosure and they don’t do a deal, it is an equity wide, which means. Anybody, anybody, any, uh, junior debt is gonna be completely wiped and any private equity is gonna be completely wiped, and any equity is gonna be completely wiped.

Right. In a foreclosure. It’s, it’s a apocalypse scenario where Right. Everybody except the bank, the, the, the senior lien holder Yeah. Loses. So the, 

Ben Fraser: the first red flag was experience, right? When you’re looking at a syndicator, a, uh, sponsor firm to invest with, you wanna look at the track record, what have they done before and.

You know, this guy was a very good salesman, obviously to, to raise money to go purchase half a billion dollars worth of real estate. But it was all done in a very short period of time. And then some of the things he was saying, right, he’s quoting, basically almost guarantees of returns and just saying the, the sky is the limit on how much money we’re gonna make.

And he basically said, I don’t care about the economy cuz I just, I make money no matter what. And yeah, just saying all these claims that are just. Really to me, arrogance and exuberance. Right? It’s like, oh, the market’s only gonna go up. Um, and then kind of the next big yellow flag, and this is something we have talked a lot on the podcast about is debt, right?

And purchasing these, uh, properties with what we would argue is, is bad debt, right? And, you know, we’ll get this in a minute, but multi-family is an asset class. You know, it’s going through a, a reset right now, a little bit of a correction because there was so much, uh, price appreciation over the past several years.

But from a fundamental standpoint, supply and demand, right? There’s still a massive demand for housing. 

Bob Fraser: There’s a, there’s a shortage of how many units have we seen? Estimates, I’ve seen 

Ben Fraser: range, I think it’s five to 7 million right now. Shortage 

Bob Fraser: in America of housing unit shortage. And so, so you’ve got this, this, you know, this hockey stick price appreciation.

It’s like the stock market. If it suddenly, Just goes hockey stick. Well, there’s a period of time where it has to correct, but the fundamentals of the housing market are still very solid. So this is where these guys have been playing off this fundamentals and showing this housing shortage, but they’re, they’re doing deals.

It shouldn’t be done. I mean, and the guy growing this fast, well, he, the, the, I’ll tell you how you win bids. You just become the high bidder, right? And I can, I can become the high bidder on anything I want to and win a lot of deals. Doesn’t mean the deal should be done. And so that’s, that’s what he did.

And then you convinced these bridge debt to, to, to become lenders. But back, back to your point about debt, 

Ben Fraser: right? So, so the, the debt, right, we saw kind of in 2018, two 2019, I. With rates being as low as they were in bridge debt, which is basically non-bank debt. These are private equity firms that are coming in.

They were, they were funding, I remember getting quotes on some of the deals we were doing, uh, at 80% leverage loan to cost, uh, on just the purchase and then a hundred percent of the renovations. Alright, so a value add deal, that can be a pretty big deal. So your leverage probably. 85% on your senior senior debt.

And because of that, from an a syndicator standpoint, especially an inexperienced one. That’s really attractive because it means I have to raise less equity. Right. And so, and 

Bob Fraser: 80% on, what, is this on an on a, on a, uh, appraisal or is this on, on proforma or what is it? 

Ben Fraser: What is the 80? It was usually limited to the appraised value.


Bob Fraser: Yeah. But the appraised values went ballistic. Oh yeah. So, so it’s literally, it’s, it’s a really approaching a hundred percent of real value because the, the appraisals were, were kind of, were Right. Uh, optimistic. Yeah. Sure. And so, so here’s, here’s what happened. So basically it’s like buying this apartment complex.

With debt with no equity, you’re pretty much getting your lenders to, to put in all the money for this thing and including all the rehab costs, which can be significant. Right. And, uh, and you should, they, no one should be doing deals like that, right? 

Ben Fraser: And because of the low rates, obviously, it’s, um, they, they got really aggressive on leverage and it, it propped up a lot of these, these kind of 

Bob Fraser: marginal deals.

These, these bridge lenders, they’re private lenders. They’re not banks. These private equity companies. And they were lending at, you know what, three and 4%, right? Yep. But it’s variable 

Ben Fraser: rate. Variable rate. They would 

Bob Fraser: not fix the rate. They would not fix the rate. So, hey, as long as rates stay low, We’re all great and let’s, let’s just put in our, in our spreadsheets rates stay low, you know?

Yep. And, you know, abracadabra. Yeah. Unfortunately they don’t. So these are, again, not professional underwriters who did this kind of thing, and they’re not measuring 

Ben Fraser: the risks. Right. And it was, you know, at that stage everyone thought, oh, rates are gonna be low forever. There’s a lot of exuberance around multi-family.

Hey, everyone’s gonna make money hit this model’s been proven. And, and then, but you’re in a highly leveraged deal with a variable rate loan. And then obviously we all know what has happened over the past 12 months, right? With interest rates, they’ve. Gone up the fastest, uh, on record. Um, and so apparently it wasn’t initially covered in this article, but from word on the street from other people that I know that are around this, that he did not purchase a rate cap, which basically on bridge debt, a lot of times the lenders would require you, you fixed the rate to buy, like interest rate, swap, swap or a cap where you have a, a max amount of, uh, how far the, uh, interest rate can go.

But this case he did not. And so obviously, You’re gonna be already cashflow constraining on a big value add rehab. Well, the other kind of big downside with these, um, with these loans and the bridge debt is they have short maturities. So they only have three year maturities. And so it’s very difficult, especially in a really big, big project to complete a, uh, a full business plan reversal in three years or if it’s possible.

But everything has to go right. Right, and sometimes you can buy extensions, but meanwhile you have this floating rate. And so, you know, red flag number one, no track record, red flag number two, getting very aggressive on the leverage. And then red flag number three, and this is where I think everything kind of just started going downhill, was he was an individual operator, so he’d purchased half a billion dollars of apartments.

Just him as a long dude. He had no boots on the ground. He wasn’t, um, you know, he wasn’t tied in with asset management, with, uh, boot, uh, property management and, and the property managers let these, you know, properties just go into the toilet and you can see some of the pictures on this article. I mean, it’s just, just terrible that the, the tenants were in, you know, pretty bad conditions.

And so, you know, he was this. Very exuberant, charismatic, personally able to raise a lot of money and got this idea in his head. Um, and ultimately is gonna be so lots 

Bob Fraser: of money walking out. Let me just walk through the cash flow for a minute. Yeah. Okay. So you buy this 50 million apartment complex you put in, you know, you raise equity from investors of 5 million.

Or ish. Right. And now you buy this thing Well, and it’s cash flowing supposedly, right? It’s got, so you, you basically collect the rents and then you, you, you pay the debt at 3% and, and there’s usually the debt service coverage ratio is like 1.2 or 1.25. So you’re getting, you have enough money to pay the bills of the apartment complex and pay the debt and have, have a quarter amount of your debt payments kind of left over.

So that’s the idea. And it’s all great. You have a little bit of cash trickle into the bottom line. You pay your investors, you do distributions or you rehab the property. But what happens when that rate goes from 3% to, uh, 

Ben Fraser: seven, seven plus percent? 8%? 

Bob Fraser: Yeah. 8%. Well, all of a sudden that debt payment goes double or triple.

Right? Right. All of a sudden there’s no money coming to the bottom line. In fact, you can’t, there’s not enough cash flow from the property to pay the debt 

Ben Fraser: anymore, and that that’s if everything stayed. The same. In fact, he started having massive delinquency problems. The whole, the, the tenants started moving out properly, 

Bob Fraser: take care of these places so the tenants are leaving.

And so bottom line is that’s when a foreclosure happens. So again, this is just a really poorly constructed deal and Right. Without any thought of, of risk mitigation. 

Ben Fraser: And, and here’s the thing too that you, not to get too technical with on the math side of things, but when you look at cap rate, right, especially in these sunbelt markets and the Houston, Texas markets, obviously they’re gonna trade at a, at a premium to other markets because of the, of the growth that’s going on.

But the lower the cap rate, right? So if you’re purchasing a property at a three or a 4% cap rate, right? And cap cap rate is basically priced divided by, uh, annual income. 

Bob Fraser: So, and what that means, the cap rate is if you. Wrote a check cash for this apartment complex, what would be your earnings per year? Yep.

And in percentage. So I’ve seen CAPA rates in Dallas as low as two and a half percent a couple years ago. Right. 2.5%. So you write a a 50 million check, you’re getting a two and a half percent return on that money. Yep. That’s nuts. 

Ben Fraser: That’s wrong. It’s wrong. And so, but let’s think about this, right? So we’ve, we’ve seen, um, 

Bob Fraser: okay, but then.

And then the way, so how does that make, how they make it make sense? Well, as soon as you leverage like crazy, and if you can put in 90% leverage, right? And we saw deals, I saw a deal in Dallas, Texas, two and a half percent cap rate, 80% loan. And then 10% private equity on top of that. Yeah. So it’s 90% leverage.

Yep. So your equity dollars, you’re buying 90% leverage. Will you put 90% leverage on a two and a half cap yield? It actually makes great returns, but it’s a bug looking for a windshield. Right. I mean it, this is, this is a disaster with, but they put in the projections of what it’s gonna be, you know? 

Ben Fraser: Yeah, a hundred percent.

And you know, a lot of these deals, it’s, you’re highly leveraged. You can make the numbers say what you wanna say, right? But what, what I kind of equate them to is you’re, you’re paying for the future value of an asset right now and taking all the risk to get to that, right? When you’re buying at a two and a half cap, you’re basically, you’re paying so much for the current income.

You’re basically buying your future price, but you’re paying all of it now. You’re taking all the risks. So, Again, not to say all multifamily is bad and all, you know, um, you know, these value add strategies are bad, but when you have a poorly constructed deal with a bad capital stack, you buy it for an insane price and obviously has some, some, some something.

One of the Domino’s tips, which in this case was interest rates and it just cascaded into the whole set of other problems. Um, it’s, it’s a big, a big deal. Yeah. So obviously we wanted to come outta here and just, just share some of the, the, the concerns, right? Yeah. Well, I, I think it’s the big question right, that we’re getting from investors is, is this, is this the first one to pop and this is, you know, all coming down, oh, multi-family is gonna explode, right?

Right. And so that’s why we said we wanna thread the needle of, you know, what, what’s, what’s important to understand from the fundamentals and what was just a bad deal. And I think, again, there’s a lot of red flags here. But as we stated earlier, multi-family is an asset class, still has a lot of tailwinds behind it.

Right, right. And and from our standpoint as investors and opportunistic investors that are looking at the macroeconomic picture of where the best opportunities are gonna be, we still like multi-family. We want to keep investing there, but. We’re gonna, we’re investing differently than we were a couple years ago because the strategies, um, are, are changing.

So we’re shifting with the ties. But multi-family, you know, it’s still a big shortage. There’s still a big need for housing. There’s a huge need for housing. And, and right now we’re actually seeing new construction starts plummeting, uh, for obvious reasons of us getting more expensive to, to build. And some of the exuberance has, has left the market.

So, A couple years from now, we’re gonna be in actually a worse position, uh, than we are right 

Bob Fraser: now. So, so playing the long games here, here’s our forecast. Yeah. At Aspen. So playing the long game apartments are apartments. There’s not enough, there’s not enough single family homes either. So it’s both multi-family and single are, you just are reco.

There’s a lot of building that needs to happen. There’s still a shortage in America of, of housing units. So long game. It’s going up long game. Part two is you’re going to see inflation continue. And this is part of my, yep. You know, our economic thesis is you’re gonna see higher inflation, not, not sky high inflation, but we will see higher than 2% for an extended period of time.

Well, that is going to raise rent. So this stuff, long game apartments are gonna be super good. Short game. I do think it’s gonna get a little ugly. Yep. And, and so to me this is a great opportunity, right? For those of us that haven’t, haven’t, you know, been walking the knife S edge for the last three years in our deals.

Um, we’re gonna do just fine. And, and in fact, I think there’s gonna be a lot of opportunity. In fact, we’re seeing some opportunities right now being presented to us that are extremely lucrative for 

Ben Fraser: investors. Right. And I think the, the, the key here, right, is to play the long game, you have to have good debt in place.

Yes. And that’s what we’ve been saying from the get go. And we’ve, we’ve actually never done a deal with bridge debt. We’ve only ever done five, five year fixed rate term with traditional from, from traditional lenders, which is base where we’re actually signing on the loans. Right. And that, that’s the big deal with these, these, uh, bridge debt guys.

They didn’t require recourse. They would actually, what does that mean? They, they didn’t actually require the general partners to sign and guarantee alone personally. 

Bob Fraser: So literally, if we lose a deal, the bank’s coming after us to collect. Right. You know, personally. So, and we sign that paper, you know? Right.

And, uh, so let, let’s 

Ben Fraser: get into it real quick. Uh, it’s kind of the last thing here because. Again, but, but let’s, 

Bob Fraser: before we do that, so just the short term, I mean, so one of the, one of the stats that, uh, that we saw recently was from Fitch, and these is Oh, sure. This is a ratings agency, um, that rates commercial mortgage backed securities.

Okay. They’re well-known wages ratings agency like s and p or Moody’s, and they rate them and they were looking at the 2023 this year maturities, right. Um, what’s coming and, and they said of the, of the loans that are maturing this year, 23% of ’em will not qualify for refinance due to loan to value. The too high of, too, the loan is too big and the value doesn’t support it.

Or debt service coverage ratio means there’s not enough cash flow to pay the new rates. 23%. Right. Not qualify. So they’re gonna literally blow up. Now their, their view was that the servicers were gonna. Do something to help these guys and not just, not just take the property. So I think that’s a little optimistic, but it just gives you a picture with a scale.

Um, I saw, I saw another, another statistic from some of the track us, I can’t remember the name of the firm. Mm-hmm. Um, yeah. And they’re saying over five years we’re seeing about, uh, about just shy of a trillion dollars worth of. We’re the financing that’s going to hit maturity. So we do think there’s gonna be some price softness in multi-family for, from our point of view, that is an incredible buying opportunity.

When, when you see the long game going up. Yep. And you see the short game going down that’s called a bi signal. It’s called this location price dislocation. So it’s a real, really a great opportunity and we’re, we’re looking at distress deals right now that we could, we could jump into and. And really make a killing on.


Ben Fraser: um, and I think it begs the question, right, is, well, how do I distinguish between a good deal that’s just, you know, run out a little bit, little bit of capital, my operator’s doing a capital call, right? Versus a sinking ship. Like one of these deals that, you know, 

Bob Fraser: one more point before you get, you get to there, what is this?

2008? Is this 2008 all over again, right? Where we saw a dramatic, I mean we really saw the. You know, the whole economic system of the United States and the world starting to, to spiral down. Okay. Let me say unequivocally, this is not 2008. Right? Okay. 2008 was a, what Started as a, as a, uh, it was a, uh, A, uh, a, a debt crisis in, um, you know, it was a, uh, in what you call it, a subprime crisis, right?

It was lending. The sh should not have been made, and it was a very large scale and it became a banking crisis. And that’s the reason it became systemic was not real estate values, but banks. Okay. Ba when, and banks were going under in droves, if you remember. Yep. Okay. We are, this is not, doesn’t have, there’s no way this is gonna become a banking crisis.

Okay. Which, it’s not happening. And we’re we’re seeing where the, where the world had been overbuilt in terms of housing units in 2008. We’re seeing the opposite now. So fundamentally it’s different. And two, it’s not a banking crisis. So we’re not gonna see the same kind of systemic meltdown that we saw in 2008.

And I think to your 

Ben Fraser: earlier point, inflation is going to cover over a lot of sins. Oh yeah. Right. So if a lot of these deals can hold on, just, just, just get through the next couple years. The turbulent make a lot of money for the, you’re gonna be okay. Cause that’s why I think, again, debt is so, so key here.

And I think why we’re still bullish on multi-family and you know, some of these opportunities. So yeah. Okay. Now to your point, So I, I think to, to, cause I’ve had this question a lot from investors and other, you know, capital razors that are in deals that are having capital calls and they’re asking what’s a capital call?

Um, yeah. So basically a, a operator, if they have run out of funding to either complete their, their business plan or to finish renovations or, um, you know, maybe the vacancy is higher than they expected at that, at that point in time. Um, uh, they need more capital to get through, right? And so, A lot of times they’ll first go to the equity investors.

We’ll first probably go to the bank and say, Hey, can we get a little bit more to complete the plan? Right now, banks are tightening. They don’t wanna let any more money out, out to deals. So the next, the next place that these operators are going is to, um, uh, the equity investors. Right? And so you may have, so put 

Bob Fraser: more money so you’ve already invested Yes.

In this deal, put in more capital to rescue the deal. It’s a troubled deal, but put in more capital. In order to save your existing capital. 

Ben Fraser: Really? Exactly. And you know, the, the initial kind of thought is, well, I don’t wanna put good money after bad. Right? If this is a bad deal, I don’t want to put more money in there and potentially lose more than I already was going to lose.

And so I think it’s important to distinguish, you know, it’s this a deal that can be rescued with a, another capital injection or is this a sinking ship? So 

Bob Fraser: you’re a banker. How do you do that? Well, 

Ben Fraser: I will say it, it is complicated, right? But some, some of the things to, to look for is, Really understand what went wrong.

Right, based on the initial projections. Mm-hmm. The initial underwriting where, where did it get off, right, because you didn’t plan on running outta money. So where, what was that and was it something that was out of control of the operator and was it something that one makes sense and two is fixable?

Right? So in a lot of cases, especially during covid, We saw a massive, uh, run up in prices on, uh, construction materials. Uh, there’s a massive labor shortage, so renovation and construction costs skyrocketed for a period of about 12 to 18 months. Mm-hmm. Right. That was, that’s out of the control of the operator.

Um, but then, you know, was it, was it something that, you know, they just. Mismanaged, was it, uh, a property management problem? Uh, did the property manager not do good tenant screening? Were they just putting anybody that could fog a mirror into the units and you know, just collect your right, but now delinquencies back up.

So what you wanna be able to see and understand is, What, what went wrong? Is it fixable? And then two, where are they at right now in the business plan? So are they able to achieve the rents that they thought they were gonna hit beforehand? Or are they achieving higher rents? Right. And, you know, where are they at?

How much capital do they need? What’s the runway that they, that they have to make it? Because I will say if a deal is fundamentally in a good position, but they just need, you know, say X percent of capital to finish the plan and get it back to where it needs to be. It might make sense to pull a bit more money in there than to take a big, a big loss Right.

On whenever you’ve invested, um, if the business plan is sound. And so, um, it can be a little bit scary, right? And understandably so. But really, really diving into and ask, asking all the hard questions, right? And asking an operator who’s, who’s gonna be very face up with what, what’s going on 

Bob Fraser: is really important.

You, you give three points, I’ll give a fourth. And that is, you know, so let’s say they do a capital call for 2 million bucks. But they don’t bring in the full 2 million. You’re not, you haven’t saved anything. Right? So, so they do a capital go, they need 2 million. They do a capital go for 3 million, but only half a million of people agree to it.

Well, you’ve just put in your money and so you, they, you really have to know that, that they, they can get the money in that they need to. Otherwise, you’re just writing, you are writing good money after bad, but, Um, you know, and, and I think the number one reason to not do a deal is if it is an operator failure.


Ben Fraser: Give an example of, of the, of the Salt Lake deal that they, you know, mismanaged the budget, it came back, did a capital call, and you did not participate. Yeah. Uh, because you felt it was misrepresentation. Yeah, 

Bob Fraser: this is a very large deal and this is not an Aspen deal. Let me, let me say this. So just my own personal capital that I put in into a deal.

It was a big development deal in Salt Lake City, and it was, uh, doing a big hotel development and, uh, it was a really good deal. And, and I believe the, they got a 50 million, uh, gmax bid with construction bid. Well, 

Ben Fraser: it wasn’t, wasn’t gmax, it wasn’t gm, sorry. When 

Bob Fraser: they went back to go and. To, to actually, you know, sign and write the checks.

They raised the money successfully. Well, it wasn’t 50 million, it was 80 million. To do the construction. To do the construction. And I’m going, how do you miss that? I mean, yeah, we did have, but where is the gmax contract? They didn’t have a gmax contract in and. You assume that there’s basic things like this.

And their first lender dropped out and they, their, their bridge lender came in and said, well, we’ll pick up the deal at a much higher interest rate. It was like double the interest rate. They didn’t even disclose this in the whole thing. So, so these guys were clearly incompetent. Well, so they wrote you 

Ben Fraser: letters and said, Hey, you know, this is what I thought was so, so ironic.

So, well, our construction costs almost doubled. Right. Our first position lend our, first, our bank freaked out and dropped out. So now our second position lender is taking first position and interest. Interest costs are way higher than they originally planned. But hey, you know what? We actually discovered that we, uh, were really conservative on our rent projection.


Bob Fraser: Our projections. So our new, we wanna make a lot more money than we 

Ben Fraser: thought. Yeah. So our, our new investor returns are actually higher than we originally thought. How, how does that work? That 

Bob Fraser: that’s called spreadsheet magic. Spreadsheet magic. You know, so I didn’t, I didn’t participate in that, in that deal, you know, so I still think I’m gonna actually make money on that deal, believe it or not.

Yeah. So they, they raised, they raised the money and off, off to the races they go, you know, so, Right. 

Ben Fraser: But again, uh, you know, hopefully some, some helpful thoughts here. We wanted to kind of come on here and just talk about what, what we’re seeing and what investors questions are being asked to us. And hopefully this was helpful for you to understand just some of the basics and looking for red flags, right?

And doing the right due diligence and asking, you know, a lot of times individuals and investors, I think make it a lot more complicated than it needs to be. Just ask the basic questions, ask the really simple questions, and if, if it doesn’t add up, Yeah. You know, dig deeper and if it continues not to add up pass.

Bob Fraser: Yeah. And I’ve, I’ve been saying for almost two years now. Look at the debt. Yeah. That’s the main thing you wanna look at. Back before interest rates blew up, I said, you’ve gotta look at the debt. You’ve gotta look at the debt. Understand how deep is the debt, right? Here’s the value of the property and here’s the value of the debt.

That’s, if you’re at 80%, it’s too much. If you’re at 70%, it’s probably too much. Right? And it’s gotta be lower than that because then if property prices drop 30% and it’s at 70, you’re still probably okay. And look at the rates. Look at the rates, and look at private equity. So look at the entire capital stack.

That’s the most important thing. Right? So, you know, in our, in our view, one of the things we do with every deals that, that we look at is we, we look at A, we have a always have a plan B for every asset we buy. So we do, Hey, we have a three year development plan or a five year value add plan, which means we’re gonna do our thing in three or five years, we’re gonna exit.

But what if that doesn’t? What if there’s a hiccup, right? I wanna make sure that in every one of our deals we can, we can pull the rip cord on a deal and go long term. Yep. Knowing that inflation will save our bacon. Right. Even if, even if the deal goes, but we’re not gonna lose the deal short term, and if we hold it for 10 years.

Yeah. We’ll, our investors will be disappointed because they went, we went longer, but in a 10 year period, we’re gonna make more money. Okay. The idea is that. That will at time will let inflation bail us out and turn, return a really nice deal to investors, even if it’s a little bit late. So every deal we do has a plan B.

Yep. You know, that’s one of the advantages of, of having, you know, gone through multiple economic cycles that you know that a few of us have done. You know, we, we understand that, hey, the music stops sometimes, right? And everybody’s happy when the music’s playing, but, You know when the music stops, you better have a place to sit down.

You hope you have a chair? Yeah. Hope you have a chair. 

Ben Fraser: Awesome. Well thanks so much for listening. Hope you got some value added today’s and be sure to it next time. And if you’re enjoying the podcast, we always appreciate you to rate and review so we can share this with more people. Thanks so much.


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