The website of Adam Neumann’s apartment startup Flow still reads “coming soon.” Yet, two of the venture’s earliest acquisitions are already facing cash flow problems.
The fix: find fresh investors to bridge the gap.
Two funds that recently appeared on crowdfunding platform Yieldstreet were opened to address a “cash flow deficit” at separate Nashville properties bought by Neumann’s family firm Nazare Capital, according to Yieldstreet’s site. Those assets were then transferred to Flow.
Money raised will go toward interest rate caps — a buffer against rate increases — and “operating shortfalls” at Stacks on Main in East Nashville and 2010 West End Avenue in Downtown Nashville, according to the fund pages.
In both cases, rising rates are to blame, the pages say.
At Stacks on Main, cash flow was barely covering half of monthly loan payments on its $60 million, floating-rate mortgage as of June, according to Morningstar. The ratings agency has watchlisted the loan, originated by Rialto Capital, since August.
A spokesperson for Flow said the property’s debt service coverage ratio in June was “north of 0.8,” when factoring in the rate cap. A figure below 1 signals that revenue does not cover debt service.
The West End building backs a $121 million mortgage provided by CIM Group, according to loan documents obtained by TRD. There is no publicly available data on the loan’s performance.
Though Flow is the general partner on both deals, a fund managed by Yieldstreet holds the larger equity stake in the properties as a majority limited partner, according to a spokesperson for the crowdfunding platform.
Yieldstreet, not Flow, opened the new funds, according to both firms.
“As joint venture partners, Flow and Yieldstreet have invested in Nashville assets consistent with our joint investment strategy, which has included, among other things, upgrades and capital improvements,” a Flow spokesperson said in a statement.
“Both partners are funding as the JV agreement calls for,” the statement added. Yieldstreet’s fund documents state Flow has already contributed capital to cover the cost of a rate cap and operating expenses.
The Yieldstreet fund that is a limited partner in Stacks on Main had previously fulfilled a capital call on the property. Money raised through the new fund for Stacks on Main will pay back the limited partnership, according to Yieldstreet.
In a statement, Yieldstreet noted “short-term pain” across the commercial real estate industry, blaming high interest rates, but added that it would continue to invest in multifamily.
Flow, founded by Neumann and heavily backed by venture capital firm Andreessen Horowitz, is the WeWork co-founder’s play to “revolutionize” residential real estate. Since Neumann started Flow in 2022, he has offered few details on its business strategy.
A recent walk-through of a Fort Lauderdale property by Insider revealed a proptech-fueled building that would aim to kindle a communal experience for residents. Flow manages $2 billion in assets with a total of 4,000 units, according to Yieldstreet documents.
Although Andreessen Horowitz, also called a16z, said on X that Flow’s goal would be to “disrupt the current residential real estate market,” Yieldstreet documents suggest the business plan at Stacks on Main, and its struggles, are not unique.
The strategy smacks of the value-add plans tapped by myriad multifamily syndicators: pool funds, purchase properties with floating-rate debt, renovate, and raise rents.
Thanks to a historic surge in interest rates, that playbook has led to distress for prominent players, including Tides Equities and GVA Real Estate.
Neumann’s Nazare picked up Stacks on Main for $79 million in 2021. Yieldstreet investors kicked in about $18 million through two funds; Nazare contributed $4.5 million, according to the recent fund page.
In mid-2022, a Yieldstreet investor update indicated the property was performing well. Net operating income was about 3.5 percent above expectations and new leases were pulling rent increases of about 10 percent. Renovations were projected to wrap by the end of 2022.
The update acknowledged rising rates had pushed up debt payments and “impacted cash flow available for distribution.”
The good news: “Investors should expect distributions to commence in 4Q 2023,” the update offered. But by the third quarter of 2023, the forecast had grown considerably darker.
Rent growth, when taking concessions into account, had plateaued. Operating income was 26 percent below budget. And the joint venture needed more money to cover the cost of an interest rate cap that Flow had purchased in the quarter.
Rate caps spare floating-rate borrowers from paying interest above a certain threshold. But caps expire, and their cost is tied to where interest rates are headed. As rates rise, caps become more expensive — sometimes considerably so.
Multifamily syndicator Ashcroft Capital recently paused investor distributions to extend a rate cap, the cost of which had exploded from $513,000 in 2021 to $18.6 million in late 2023.
At the Nashville properties, Flow’s hope is that new funds will do the job.
The fund for 2010 West End will pay to replace a cap set to expire this month, plus operating costs.
Cash pooled for Stacks on Main will cover the cost of the one-year interest rate cap Flow bought in the third quarter, plus operating shortfalls, according to a Yieldstreet investor update.
As for returns, investors in Stacks on Main likely won’t see any until the building sells.
“Yieldstreet investors should not expect to receive distributions given the current market dislocation and the need to conserve cash to support the property,” the Yieldstreet update for Stacks on Main reads. “Yieldstreet investors should expect majority of returns to be generated via capital appreciation at the time of future sale.”
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