Syndicators are sinking. Who’ll make it out alive?
Rookie mistakes put struggling multifamily firms in deeper hole
Last month, the bank came calling for Alan Stalcup.
It was the usual script of syndication — pooling equity to buy property — gone wrong. Stalcup had tapped floating-rate debt, then fallen into delinquency and default under crushing interest rate hikes.
Another factor, though, has deepened the hole swallowing up syndicators like Stalcup.
Seasoned shops, having built relationships and know-how needed to prop up loans until interest rates retreat, may be able to weather the storm. But the crop of green investors who started syndicating when rates were low lack experience — both in years and deal volume — in negotiating workouts.
“A lot of people who are in trouble on multifamily syndicated deals, they were in high school in 2008,” said Levi Benkert, who syndicates industrial deals as CEO of Harbor Capital and previously developed multifamily. “They didn’t think this could happen.”
Insiders expect the distress hitting select syndicators to spread. Scores of operators fueled by cheap, floating-rate debt went on buying sprees from late 2020 until March 2022, when the Federal Reserve began pushing borrowing costs up to tame inflation.
Many overpaid, failed to complete renovation plans and haven’t been able to raise rents enough to keep pace with operating costs and debt payments.
“Everyone is facing capital calls,” said Zamir Kazi, who owns multifamily firm ZMR Capital and has syndicated some deals.
Some $31 billion in collateralized loan obligations — short-term, floating-rate debt favored by syndicators — comes due in the next two years. More than one-third are watchlisted, in special servicing or delinquent.
Ask the industry how to head off distress, and the answer is unanimous.
“Communicate, communicate, communicate,” Benkert said, adding that general sponsors — the lead investors on deals — must inform lenders and limited partners of struggles.
Despite that, “inexperienced general partners are not communicating well,” Benkert said.
Some fledgling investors seem frozen by their inexperience, insiders say. They may see no path to salvage a struggling property, and fear that breaking the news to lenders could speed a foreclosure.
But prudent borrowers understand that a lender’s priority is to get paid back, not to own property.
“These debt funds are in the business to provide loans to get their capital out, and they want to be seen as cooperating lenders,” Andrew Kirsh, founding partner of law firm Sklar Kirsh, said on the podcast “The Fort.”
“A lot of people in trouble on multifamily syndicated deals were in high school in 2008.”
Modifying a loan requires a willingness to speak with lenders by phone or in person and to show them a plan to bring the loan above water. “They would rather have you approach them earlier than later,” Kirsh told The Real Deal.
Veteran syndicators have a leg up in negotiations. Established firms with “meaningful exposure” to one lender are also better positioned than newer ones with fewer deals spread across many lenders, said Jeff Santoro, president of JSRE Capital, who is helping syndicators, many of them less experienced, to restructure deals.
“Having a lot of volume and exposure to a lender really helps in a negotiation,” said Tides Equities co-founder Sean Kia, whose firm borrowed $1.3 billion of its roughly $7 billion portfolio from debt fund MF1. About $425 million was on servicer watchlists this summer.
Tides managed multiple workouts with MF1 this fall. Modifications included waivers of loan extension fees and reduced interest rates on floating-rate debt, according to the firm.
Lenders are also keen to tackle their biggest problems first. Kirsh compared it with “a doctor spending his or her time with a patient who’s on life support and not someone that has a cold.”
For borrowers who haven’t built relationships with lenders, a rescue plan, including cash sourced to fund shortfalls, is all the more important.
“What matters to lenders are the sponsor’s commitment to the asset and ability to contribute equity capital when necessary,” Santoro said.
Kazi’s ZMR, which has struggled with debt service, arguably lacks the same pull with lenders as Tides, which has done four times more deal volume.
But the decade-old firm does have institutional backers with capital at its disposal. An equity infusion is often needed to convince lenders that a modification won’t be for naught.
On the Julia, a Phoenix-area property struggling with elevated debt payments, Kazi said he drummed up more capital and is working to secure a loan extension.
Bearing bad news
Keeping limited partners in the loop can be just as critical. Withholding adverse news risks unfulfilled capital calls, ruffled investors and a burned reputation.
“Obviously, it’s painful,” Aleksey Chernobelskiy, who advises limited partners at Phoenix-based Centrio Capital Partners, said of notifying investors about distress.
“Syndicators that operate in the retail space that are in trouble tend to under-communicate,” he added. “They tend to say things too late.”
When Elevate, a Dallas-based firm run by former contractor Jorge Abreu, made capital calls on two Houston properties this year, one of his investors was blindsided.
The first-time limited partner, who requested anonymity, had put $100,000 into the deals. He suspected something was wrong when he hadn’t received distributions months after investing.
When he asked for an explanation, Elevate’s response — “They’re working diligently to get everything going again” — seemed canned.
“It wasn’t really a reassuring answer,” the investor said. He declined to give more money. Abreu did not comment on the capital calls.
Investor frustration can also spiral into litigation.
An investor in a deal the Applesway Investment Group lost to foreclosure this spring said he grew concerned months before, having watched his dividend plummet by six percentage points without a word from CEO Jay Gajavelli.
“I was left in the dark for three to four months,” said the investor, Chris, who requested that his last name be withheld.
Six weeks before Arbor Realty Trust filed to foreclose, Chris said, Gajavelli finally told investors the lender was “coming to collect.” Gajavelli did not respond to a request for comment.
Texas-based Applesway has since lost control of nearly $300 million in assets and now faces multiple lawsuits from investors. One alleges that the sponsor did not disclose in offering memos that it would use floating-rate debt.
Chris, who is still looking for answers from Gajavelli, is also gunning to sue.
“Excuse my French, but where’s my fucking money?” he said.
Some syndicators, likely fearing investor pushback, have publicly denied struggles in the face of loan data that shows otherwise.
Zach Haptonstall, co-founder of Phoenix-based syndicator Rise48 Equity, took to Vimeo this summer to tell investors the firm “was not distressed” after TRD reported warnings about its loans. Rise’s watchlisted debt has since grown to $250 million.
Swapnil Agarwal of Houston-area syndicator Nitya Capital talked to Multifamily Dive in May to respond to “rumors” that he was looking to sell 40 percent of his portfolio after rising rates drove up debt costs.
Agarwal had already unloaded more than half of Nitya’s portfolio, but said the deals were “business as usual, with strong returns.” He sold three more assets in November.
Industry observers say keeping quiet runs the risk that limited partners will hear of bad news through the media or the grapevine.
“The worst thing you can do is have LPs find out about your distress through other people in the market,” Chernobelskiy said. “It can ruin your reputation.”
Reputation can make or break a multifamily syndication. It’s how operators source deals, secure loans and recruit investors. If any of those relationships fracture, deal flow and the fees many syndicators depend on can dry up, dooming their business.
When words aren’t enough
Communication, although crucial, can only go so far.
Stalcup made a stab at transparency ahead of the San Antonio foreclosure, sending a letter in the second quarter to assuage limited partners’ fears. After pausing distributions on over 40 properties, Stalcup said GVA would begin doling out dividends again.
The firm reported getting fixed-rate refinancings, freeing up capital that would have been consumed by buying rate caps. Given that the Federal Reserve was expected to pause raising interest rates, he was hopeful that “markets will settle,” and added that the rental market “is the strongest I have seen.”
“If you’re still feeling uneasy … please go for a walk,” he wrote. “Barefoot in the grass or on the beach and force yourself to smile and recount 5 things you’re grateful for.”
Stalcup’s third-quarter update, however, was bleak.
“We are seeing softness in the rental market,” he wrote. “Property values are 30 to 50 percent less than when we bought them and in many cases, not worth the debt.”
“Property values are 30 to 50 percent less than when we bought them and in many cases, not worth the debt.”
He floated capital calls as a solution, but only if they were fully funded “so there is a realistic chance of success.” His to-do list included “working with lenders to find solutions to buy time for market conditions to improve.”
A week after the San Antonio foreclosure, Stalcup suffered a bigger blow. GVA defaulted on $288 million in debt backed by five apartment buildings in Texas, South Carolina and Tennessee. Lender LoanCore filed to foreclose on three of them.
The debt had been packaged into CLOs, which are sold to bondholders, meaning a special servicer likely had the final say. Special servicers are known to be tougher than banks when it comes to workouts.
A chunk of GVA’s portfolio is vulnerable to a similar fate. Of the nearly $1 billion in loans coming due by the end of 2025, Stalcup as of November was late on nearly half of it.
Stalcup did not respond to requests for comment.
But those owners have earned the confidence of lenders and investors. For syndicators such as Stalcup, foreclosures pose a major threat to creditworthiness and give lenders a reason to deny future financing.
GVA is hardly alone.
Rockstar Capital, a syndicator built on the ashes of the Great Financial Crisis, lost a Houston property in September after defaulting on a $51 million loan. The firm’s CEO, self-proclaimed “Apartment Rockstar” Robert Martinez, said he’d tried to cut a deal with lender MF1, but the situation was unworkable.
Martinez did not respond to a request for comment.
Think Multifamily, an investment firm and education program co-founded by Mark Kenney in 2015, lost a West Texas apartment building in September. A former student of syndication guru Brad Sumrok, Kenney had co-signed the loan with Tracy Hubbard, a finance worker who described himself as “somewhat new” in the real estate industry on a 2020 episode of the “Think Multifamily” podcast.
“Kenney was not hands-on with any of these deals, and that’s why many are now in serious trouble,” said a source tracking the firm. Neither sponsor responded to requests for comment.
More foreclosures are coming, according to Aaron Jodka, research director for Colliers’ capital markets team. As more properties fall, circling vultures will swoop in to pick at the remains. Private equity firms have spun off new funds juiced by family offices and ultra-high-net investors to buy multifamily assets that lenders won’t save.
“There is a record amount of capital sitting on the sidelines, ready to be deployed,” Jodka said.
“There will be pain in order for somebody else’s gain.”