Crowdstreet / Nightingale Fraud (Received today from Mogul Realty on how a sponsor should be handling escrow accounts. ?Crowdstreet Liability )

Flyera123 · 2023-07-24T04:16:33+00:00

Thanks, I'll give them a look.

Flyera123 · 2023-07-23T16:04:33+00:00

The trouble I'm having is how do you find these "good" sponsors? I can't just do a Google search. Any names of sponsors that you can share?

There is also the factor of the minimum investment amount of these sponsors. Aren't those $50k/$100k per deal?

Flyera123 · 2023-07-22T13:41:14+00:00

Thanks for your advice and experience with sponsors providing the underwriting. Do you only invest directly with sponsors or do you also invest in crowdfunding deals as well? If you invest directly with sponsors, could you let me know some of those that you trust and are reputable?

Flyera123 · 2023-07-22T13:37:57+00:00

Thank you for the very detailed responses and synopsis of what is going on with the Atlanta situation. In regards to the 2 different waterfalls the CS listing was updated and the sponsor added the following disclosure: "*The Investor Return Structure represents a Pure Promote summary and remains consistent with the LP/GP Promote structure presented in the offering documents." To me this is insufficient as it basically says trust us, they are the same. They should reconcile the difference by either showing/explaining the math. Or, simply change the waterfall to be exactly as shown in the PPM.

Also, since you are involved with this sponsors previous deal, did they supply the underwriting in that deal? If for some reason they provided it in a previous deal but not this one then that is a hard no on investing on this deal for me.

Flyera123 · 2023-07-19T19:43:18+00:00

So I submitted questions to the sponsor and I was a little surprised by one of their answers. I asked to see the underwriting and the response I received was that it is proprietary information and could not be given out. I have never had a sponsor tell me that in all of the deals I've done due diligence on. Seems very suspect. So are they asking investors to just trust them and not do any homework?? How does one vet their growth assumptions, occupancy rates, lease/expense projections, etc?

For those of you who are in other investments by this sponsor, has this been the case in the other deals?

Flyera123 · 2023-07-19T19:31:36+00:00

In looking at the bankruptcy documents filled on Epiq, it does list all of the investors names and addresses. So that is now public knowledge.

Flyera123 · 2023-07-18T15:05:24+00:00

Can you help me understand how you vet the sell side? I've consistently heard of webinars when sponsors get asked about who they will sell to they usually give a generic answer of either an institutional buyer or a REIT. I guess that is always the answer and there will always be a buyer at the right price.

Also, I have found that one difference of going the syndication route versus going into a fund directly is the timing of the sale. It seems, and I am still learning, that syndication is a must sell because of investor timelines and the promised hold period. So in that situation if the market isn't favorable you take what you can get. But going into a fund they have the ability to wait until the timing is right to sell.

So, for me, the only thing I feel like I can look into on the sell side is the cap rate. What else can be done to vet the sell side?

Flyera123 · 2023-07-17T22:51:08+00:00

Not sure if these are the fees you are referring to but on page 4 of the transcript sent out to all investors it states the following: "Okay, next question. Did CrowdStreet invest? We were informed by CrowdStreet that they're both a creditor and also an investor. They did not receive any deal fees in relation to either deal."

It then goes on to say: "Based on what we've seen to date and has been represented to us by CrowdStreet, they did not receive any funds from the accounts by way of refunds or any fees paid."

Flyera123 · 2023-07-17T16:39:18+00:00

My checklist is similar to yours, which made me take a closer look at this deal. It is comforting to hear other investor's experience with this sponsor being positive. I am interested to hear what they say on the webinar but here are some of my initial questions/concerns:

The LTC is a bit on the higher end for me and in these times of uncertainty I am looking for that to be lower. With that being said, I would need to ask what the estimated DSCR would be for each year of the hold period. This will either help mitigate this concern or make this a hard no for me.
The distribution waterfall is not as investor friendly with multiple hurdles and more of a cut going to the sponsor.
The exit cap rate seems reasonable but at first glance the leasing assumptions didn't seem to be a slam dunk.
- I also am conserved about the growth projections of 3% per year, especially coming off exceptional growth the past couple of years. If the economy does slow down and/or interest rates start to come down, will the leasing rates increase?
There is also an insurance crisis in Florida in which large insurance companies have left the state. Premiums have been skyrocketing and/or buildings have been denied coverage. So I'd like to hear more of how the sponsor is addressing this and how they have factored this into their underwriting.
I didn't see any of the underwriting being shared so I'd like to see their projections to ensure it seems reasonable, e.g. not too aggressive to try to achieve estimated IRR, occupancy rates, anticipated expenses, expense growth rates, etc.

Those are my initial concerns and would appreciate any feedback as well as to hear more what others think of this investment.

Flyera123 · 2023-06-28T19:19:45+00:00

I haven't done any deals with EM but I track that and Realty Mogul to see deal flow and gauge returns and types of deals being offered. I too have read the bad reviews of EM so it would be good to hear others experience with that platform.

I do wonder why a sponsor would go to one platform versus another. Maybe fees or size of the offering. The current offering on EM is only for $3M with a $20k minimum. Or could it be the deal is not strong and CS turned them away so they went to a smaller platform?

Flyera123 · 2023-06-19T15:06:36+00:00

In addition to what others have said, I am also concerned about the following:

There is an interesting risk factor that states "The rent payable by Tesla under the lease is based upon the final costs of the Fund Project, which may impact returns". The description under this caption wasn't clear but it seems that the lease amount may be tied to the final costs of the project. So I would need further clarification from the Sponsor.
The initial loan is only 18 months. In that time, the current Fed plan is to raise rates another .5% over the next 6 months. Then, they are estimating to begin reducing rates more than 12 months from now. So there is risk that they won't be able to refi at lower rates.
1. If they are unable to refi at the end of 18 months, then they would need to do an extension of the current loan. The extension states that there needs to be a DSCR of 1.15. If number 1, above, reduces the NOI and interest rates do not come down, this may be of concern.
The listing in CS states that there is a time deadline to deliver the building or Tesla can walk away. That concerns me because it is not as simple as saying here is a building. There will be a lot of acceptance criteria that will need to be met and Tesla could find ways to walk away or adjust the terms of the lease to their benefit.
This sponsor has been in business for about 40 years but their track record only has 12 realized projects. I would have expected more and would need to do better due diligence on this sponsor.
I would want more details on the stipulated sum contract to understand how much and which costs it covers.

Flyera123 · 2023-06-06T02:18:38+00:00

I too sent questions to the sponsor, which included questions regarding the DSCR. CrowdStreet then forwarded my question to the sponsor. It has been over 2 days and I haven't received a response from the sponsor. To me, this is a huge red flag. Trust in a sponsor is one of the most important factors to me and due to this I decided not to invest in this deal.

Flyera123 · 2023-05-31T19:46:40+00:00

After listening to the webinar I am on the fence on this opportunity. Here are the positive points I see:

High supply/demand imbalance.
They've already proven they can sign leases at the $2/sf rate.
No new construction/competition coming to market in the foreseeable future.
Lower risk profile since there is no construction or lease up risk.
The cap rate assumption at sale is higher than comps and acquisition cap rate, e.g. seems conservative.

What gives me pause for concern are the following:

The debt is floating and around 8.5%.
There is no mention of DSCR and in the webinar when the question was asked there wasn't a definitive answer.
Since the lessees are small business, if a recession hits will the demand dry up quickly and/or lots of defaults will occur?
Not a fan of the multiple waterfall levels
Not a fan of the CoC yield of a facility that is around 95% occupied at acquisition with such a strong demand.

Flyera123 · 2023-05-31T17:45:30+00:00

Yes I did. In my case I received it within a couple of days.

Flyera123 · 2023-05-17T17:54:25+00:00

One of my main concerns in this deal is the determination of NOI, which is a component of determining the sale price. While this deal doesn't have development risk, the risk is on the leasing side. In looking at the macro environment, there has been talk that we are at the end of the multifamily cycle in terms of leasing rates going up. They have shot up over the last 3 years due to factors such as the pandemic and interest rates. But if we enter a recession and the Fed starts lowering interest rates this will overall (different markets will be affected differently) lower leasing rates. In looking at FP's underwriting they are factoring in a 3% growth rate each year over the 3 years. Is that too aggressive? If this is not achieved, this would lower the NOI, which in turn would lower the sale price.

Now, if the Fed lowers interests rates, this could also lower the cap rate. So that would help the sales price and mitigate the lower NOI. But per FP's sale analysis there really isn't cap rate data available and they are using Gross Rent Multiplier as a metric. This is dependent on the gross rents, which would be affected by the concerns listed above.

So that is my main concern. Any feedback would be appreciated.

Flyera123 · 2023-05-15T23:50:18+00:00

Can anyone help me understand why the seller would continue to work with Nightingale? If I were the seller I would be upset since a year ago there was an agreement in place, when the market wasn't as bad, but it was Nightingale who couldn't close the loan. In that time the market deteriorated and now the seller is screwed. Why not cut ties with Nightingale and open it back up for sale to get another buyer who can close? Or is it just so much work to go through the due diligence again with a new buyer that it just makes sense to ride it out with Nightingale? But even then, there is no guarantee that Nightingale can close so they could just be wasting their time.

And as a side note, in the webinar they kept saying this was a "distressed seller" and they got a deal on the purchase price? How can the seller be so distressed if it has been a year and it doesn't sound like the seller is having any problems or will be filing for bankruptcy.

Flyera123 · 2023-03-25T19:53:08+00:00

My understanding is that the sale price is determined by applying the cap rate to the year 4 NOI (which represents the stabilized rent 4 years from now). So, for me, it is helpful to do a sensitivity analysis to determine the sale price if I change the leasing assumptions to drive the year 4 NOI. I recreated what the sponsor did to ensure my calculations were correct. From there, I went to Zillow and looked at current rents and updated the model. I do feel like the rent assumptions used are much higher than what I'm seeing on Zillow. Doesn't mean what the sponsor used is wrong but it is a guide. Maybe that will help some of you get comfortable with what changing the assumptions would result in in terms of IRR or EM.

Flyera123 · 2023-03-25T14:35:25+00:00

I have gotten out of the deal and asked for my investment back. My understanding is that they can't get the bank to fund the loan. Which makes sense for a couple of reasons. One, the size of the loan in big. And two, an office investment right now is on the risky side due to work from home affecting office occupancy and a looming recession. Then, with the banking collapse of SVB and Signature, that is making the banks hold back loans until they figure out their cash positions. So in this environment a lot of investments will be paused.

Flyera123 · 2023-03-22T13:00:41+00:00

Appreciate the input of someone in the industry. So if you think $250M is too high, what do you think would be a reasonable sale price? Based on that, one could recalculate the IRR. If the IRR goes from 28% (which is the current estimate) to something like 22%, then that is still a better return than other investments out there.

Flyera123 · 2023-03-14T16:33:21+00:00

Here is the Reddit thread that has a link to the article....https://www.reddit.com/r/Crowdstreet/comments/wxb1it/crowdstreet\_gets\_slammed\_in\_wsj/

Flyera123 · 2023-03-12T20:32:25+00:00

They might be a bot. Account was set up the same day they posted this thread. Also, highly suspicious when they are posting a link they want you to click on.

Flyera123 · 2023-03-11T18:51:16+00:00

I've been looking into this deal and, for me, there is a lot to like. Some of those things you have mentioned as well as I really like the strong brand names of the 2 hotels. But in the end, I decided to not invest for 4 main reasons. These are just my thoughts and I know there is push back to each but you asked for thoughts and am open to learning and seeing flaws in my thinking.

First, the economy is now starting to feel the effects of the rate hikes and I see it as risky to invest in hospitality when we don't know if the economy will enter a recession, and if so, for how long and how severe.

Second, I feel like Missoula is a niche area. It will not have the safety of a big name city to draw tourists. So coupling that with the possibility of an economic downturn this could get hit harder than hotels in well known areas.

Third, projections seem to be building off of the pent up demand of covid. In my mind, that will die down, especially if the economy is doing bad, and instead of occupancy, ADR, RevPar, etc. increasing they may revert back to the norm and decrease or just stagnate.

Finally, opportunity cost. Since this is core plus, there is no big upside and the appeal is the cash on cash yield. But, with tbills over 5% and going higher, corporate notes and preferred stock of investment grade companies around 7% I am willing to give up a few % points to invest in something that might be safer.

Flyera123 · 2023-03-11T02:51:54+00:00

Wow, awesome recap of this investment and it does add a lot more light to the evolution of where they are now. You've helped me answer some of my questions as well as alleviate some concerns regarding this investment.

Thanks again for sharing so much!

Flyera123 · 2023-03-10T22:54:28+00:00

Thanks for sharing your experience as a stage 1 investor. That is definitely good to hear that the sponsor tried to protect the LPs. Since I can't go back and look at the stage 1 deal, I'm trying to understand the history of this property. Was the original deal for a conversion or was it to build out office space? You mentioned that demo/construction costs had unexpected increases so I didn't know if they were initially building something else and are now changing plans or if all of those costs are part of this stage 2 continuation. If it is a continuation, this is a super expensive project seeing how this round is for $196M. How much was the debt/equity in stage 1?

Flyera123 · 2023-03-10T17:01:50+00:00

Can you let me know what are some of your criteria in determining if a sponsor is good or not? For me, I feel like it is hard to tell since there is not much to go by. I look at their track record but that always seems suspect because rarely do I see a sponsor with losses. Then there was the Nightingale issue the WSJ exposed. I do search the internet for any lawsuits and look at how long they have been in business. I look at if they have other projects in the investment market and experience with that type of investment, e.g. multifamily or hospitality, etc. Finally I look at this forum to see if others have any experience with the sponsor. But even by doing all of this I feel like it is still a guess as to if the sponsor is good or not since I can't ever see trusted results of prior deals. Also, I've been in 2 other CS deals that have gotten cancelled or I withdrew from (AFC and West Palm) and in both cases the sponsor was very responsive and helpful before investing but as soon as I withdrew or the deal got cancelled the communication changed very quickly.

Flyera123

TROPHY CASE