When Greg Campbell and Dan Hick closed on a $405 million deal for five apartment buildings in Downtown Los Angeles from developer Barry Shy, things were good. Their investment firm, Laguna Point Properties, had made its bones in dustier Sun Belt markets, typically buying midsized complexes for eight-figure price tags. Here was its shot at primetime.
The deal gave Laguna Point control of over 1,000 units. Most were in need of a renovation, but the buyer saw significant upside given that monthly rents were about $300 below the city center’s average.
“It was set to be the biggest deal of Greg’s life,” a source familiar with the sale said.
The Shy properties, however, were ridden with red flags: The portfolio was subject to rent restrictions and a pandemic-related eviction moratorium, making it difficult to raise net operating income. And tenants were banding together to file a class-action lawsuit against the sellers, Shy and his two sons, Rommy and Eric, alleging gross mismanagement and inhabitable conditions, court documents show. Combine that with a neighborhood plagued by huge office vacancies and a declining population, and Shy’s asking price didn’t draw many enthusiastic bidders.
By March of this year, Laguna Point had fallen behind on payments on its $329 million acquisition loan. In April, after just 11 months of ownership, Laguna Point lost the properties in a lender-assisted sale to Fifteen Group, a Miami Beach-based investment firm.
The saga has raised questions about who is to blame for the deal’s collapse — the sellers for not disclosing key information about the portfolio, or Laguna Point for failing to properly vet what it was buying.
“Due diligence is pretty much on a buyer,” said Loretta Thompson, a commercial real estate attorney at Withers. “A buyer can allege the seller didn’t disclose, but a smart buyer will try to inspect and find out information.”
Laguna Point declined to comment, citing ongoing litigation. Neither Barry nor Rommy Shy responded to requests for comment.
The build
In 2006, Barry Shy bought five office buildings across one city block in Downtown L.A. for $75 million, less than $80 per square foot. Housing advocates were thrilled.
“I can’t see anything but good coming of the sale,” Con Howe, a former city planner and longtime booster of residential conversions, said at the time.
Shy planned to build more than 2,000 apartments and condos, with help from the city’s adaptive reuse ordinance, which allows developers to convert offices into residential buildings without any zoning restrictions.
Because the buildings were put up in the early 1900s, the apartments are subject to L.A.’s rent stabilization ordinance, which says landlords can only raise rates by between 3 and 8 percent each year, depending on inflation.
You had to deal with Barry Shy, for a long time, right? He’s got a bad reputation — just a bad dude.
Once Shy finished the conversions, the tenant complaints and city enforcement actions started pouring in. Some involved a lack of permits, others focused on fire hazards, Department of Building and Safety records show.
Shy hadn’t considered selling the portfolio and getting out of L.A. until the pandemic hit, according to a source familiar with the listing. Protections enacted by the city meant landlords were unable to evict tenants for not paying their rent, and could not raise rents at all on units that were already rent-restricted.
“He had issues getting to his goal price of $400 million,” or about $390,000 per unit, the source said of Shy. “But he wouldn’t sell for less than that.”
Meanwhile, the multifamily market was booming. Across the U.S., investors pumped $149 billion into the sector in the fourth quarter of 2021, up 73 percent from the previous quarter, according to CBRE.
Before Laguna Point came into the picture, Fairfield Residential was under contract to buy the portfolio at the same price point, according to the source familiar with the sale.
But at the end of the due diligence period — which took about three weeks — Fairfield tried to get out of two of the buildings, saying they were less desirable than the others. Shy declined and said it was all or nothing, the source added. Fairfield chose to pull out.
Doing diligence
Laguna Point did its own due diligence after it went into contract, asking for copies of third-party engineering reports, certificates of occupancy, bank statements, income records and rent rolls, among other documents, court records show. The firm also toured the property and inspected certain units — standard procedure.
Laguna Point also asked the sellers to disclose “any legal matters and any ongoing or threatened litigation affecting the property or the collection of rents or deposits,” the list said. Rommy Shy represented himself and his family when negotiating the deal, according to a source familiar with the sale.
The Shys did not disclose any threat of litigation, Laguna Point alleged in its complaint, but knew a class action was about to be filed. (The Shys have denied these allegations in court documents.)
Just two days after Laguna Point closed on the portfolio, a group of 38 tenants sued the Shy-run entities, claiming “substandard living conditions” at SB Manhattan, one of the properties. The tenants claimed more than 50 types of defects across more than 20 units, ranging from plumbing leaks, rats, mold and unsanitary bathrooms to lack of heating and inadequate security. Later, the tenants added Laguna Point to the suit, which has denied any responsibility.
As of April, Laguna Point was grappling with at least 14 separate lawsuits from tenants also claiming uninhabitable conditions across the five buildings, court documents show.
By the end of the year, Laguna Point’s principals had changed their tune on Shy, going from being optimistic about the deal to criticizing the seller, according to a recording TRD obtained of a conversation the founders had with a tenant at 215 West 6th Street.
It’s a classic example of an aggressive late-cycle deal where things get fast and loose and turn bad quickly.
“You had to deal with Barry Shy, for a long time, right? He’s got a bad reputation — just a bad dude,” Hick told the tenant in the conversation last October. “The guy was like a builder, and when he turned into an operator — he’s just not a good person.”
By late 2022, a group of tenants had started an Instagram account documenting issues at the building.
In the same recorded conversation, Campbell and Hick offered the tenant $45,000 — in exchange, the tenant would hand over the username and password to the Instagram account and stop speaking negatively about the apartment building.
“We’re not saying you can’t go and do whatever you want to the Shys,” Campbell said in the recording. “Go to town. Double down your effort. Just nothing about the residential side. It hurts what we’re trying to do.”
The buy-in
Given the eviction moratorium and rent restrictions, many multifamily investors would never have looked to buy the portfolio, according to two sources familiar with the listing. After Fairfield pulled out, there were no other bidders.
Because of those risks, finding financing for the deal was hard, too, even as lenders were rolling out the red carpet for multifamily owners in other markets.
Laguna Point extended closing on the deal at least twice, citing financing issues, according to the source familiar with the sale.
Eventually, the firm scored a $329 million loan from MF1 Capital — a joint venture between Limekiln Real Estate and Berkshire Group.
The deal shocked industry insiders. With a loan-to-value ratio of 83 percent, it meant Laguna Point was only putting down 17 percent in equity. Most multifamily deals, especially riskier ones, close with more equity.
The debt was also floating-rate, meaning Laguna Point’s interest payments jumped significantly in the second half of last year. When it was issued, the debt held an interest rate of 3.35 percent, according to DBRS Morningstar.
At that rate, Laguna Point would have been paying about $917,900 a month to service the debt.
But by December, after the Fed raised rates six times, the debt held an interest rate of 6.25 percent, meaning the firm was paying about $1.7 million a month.
By April, Laguna Point couldn’t keep up and became delinquent on the loan. Rising interest rates have placed other eager multifamily investors holding floating rate debt, like Sun Belt-focused Tides Equities, in a pinch.
“They put floating rate debt on it at the exact wrong time, as rates began moving up right afterwards,” said a multifamily investor unaffiliated with the Laguna Point deal. “It’s a classic example of an aggressive late-cycle deal where things get very fast and loose and turn bad quickly.”