Rise48 - video response to Real Deal article

Where can I find these watchlists?

Probably pushing a 1.00 IO DSCR as well.

The downfall of taking on literally only bridge debt & having little-to-no prior operating experience (sorry Z, your 2 years operating as "ZH Multifamily" doesn't cut it) is that he likely has a huge blind spot as-to how stabilized, conventional deals get sized.

I also love the continued focus on barely beating proforma rents when cap rates have expanded 200+ basis points in PHX.

P.S - to the lovely Grace Haptonstall who is likely lurking here, many of the folks on this anonymous forum have multitudes more experience than you & have nothing to lose simply stating the facts. Xoxo

Thanks for sharing this! Mind sharing where you find the public debt info?

Esque_

I feel like a goof ball for even asking this, but you think they know a lot of their project details are public because of their debt?  They have to, right?  But this response seems so clueless, it further confuses me.

For example, Rise48 purchased Marble Creek (1985 vintage) in Phoenix, AZ for $65M in 2021 on a TTM of $1.87M.  That's a 2.88% cap rate, unadjusted.  If you adjust for property tax and insurance, it would be even lower.  Their internal business plan forecasted GPR @ $1,755 / unit.  The ratings agency's forecasted GPR @ $1,270 / unit.  They're currently asking $1,275 ($1,217 effective) for one bedrooms and $1,500 ($1,442 effective) for two bedrooms.  That's a weighted average effective rent (assuming all units at marked to market today, which some surely will be lagging) of $1,380 or a 21% miss on revenue assumptions.  Their forecasted stabilized yield was 5.78% and I'm getting closer to actuals of 3.58%.  These is the reality of the fundamentals.

But how about the capital markets?  Even with a rate cap and a fully renovated, fully leased asset, they're probably landing close to a 0.70 DSCR currently.  How are they making up this shortfall to keep payments current?  If you forecast a refinance today with a GSE based on a required 1.25 DSCR, you're looking at $28M in proceeds.  Their capital stack is $50.8M of debt and $18.7M of equity.  So you'd need to inject $22.8M, or 121% of the initial equity, to even save the deal.  But why would you do that if you're stabilized closer to a 3.50% yield?  You'd have to assume market cap rates are, or soon will be, below that mark to even have any equity left in this deal.  The reality is the equity is gone and the debt is probably worth $0.75 - $0.90 depending on the condition of the property.

This is ALL public information.  It is very easy to call b/s on any refuting the reality of what is going on.  Special servicers will have even more details that are less public, but are accessible.  Why even bother trying to refute this with a video?

No this Zach guy seems like a total financial pyschopath who lies just to lie

You review any of their deals done pre June of 2022 and the ingoing cap rates were anemic and were unprepared for debt to rise.  They paid like double what groups had paid two years prior.  
 

These guys are so stupid that the only capital they can raise from is individual investors who have no idea the right questions to ask and fall for their garbage 

Rise48 going to turn into Fall24 pretty quickly 

Thanks!

Esque_

I feel like a goof ball for even asking this, but you think they know a lot of their project details are public because of their debt?  They have to, right?  But this response seems so clueless, it further confuses me.

For example, Rise48 purchased Marble Creek (1985 vintage) in Phoenix, AZ for $65M in 2021 on a TTM of $1.87M.  That's a 2.88% cap rate, unadjusted.  If you adjust for property tax and insurance, it would be even lower.  Their internal business plan forecasted GPR @ $1,755 / unit.  The ratings agency's forecasted GPR @ $1,270 / unit.  They're currently asking $1,275 ($1,217 effective) for one bedrooms and $1,500 ($1,442 effective) for two bedrooms.  That's a weighted average effective rent (assuming all units at marked to market today, which some surely will be lagging) of $1,380 or a 21% miss on revenue assumptions.  Their forecasted stabilized yield was 5.78% and I'm getting closer to actuals of 3.58%.  These is the reality of the fundamentals.

But how about the capital markets?  Even with a rate cap and a fully renovated, fully leased asset, they're probably landing close to a 0.70 DSCR currently.  How are they making up this shortfall to keep payments current?  If you forecast a refinance today with a GSE based on a required 1.25 DSCR, you're looking at $28M in proceeds.  Their capital stack is $50.8M of debt and $18.7M of equity.  So you'd need to inject $22.8M, or 121% of the initial equity, to even save the deal.  But why would you do that if you're stabilized closer to a 3.50% yield?  You'd have to assume market cap rates are, or soon will be, below that mark to even have any equity left in this deal.  The reality is the equity is gone and the debt is probably worth $0.75 - $0.90 depending on the condition of the property.

This is ALL public information.  It is very easy to call b/s on any refuting the reality of what is going on.  Special servicers will have even more details that are less public, but are accessible.  Why even bother trying to refute this with a video?

Here is what's even crazier

in 2017 Western Wealth bought the deal for $16.6M

in 2019 they recapped it with Alliance Berstein as part of a portfolio recap at $28.3M

in 2021 they sold it to Rise48 for $62.3M

That is straight insanity 

Rise48 thought it would be worth $87.85M in 2024

So the thesis was a property that was worth $16.7M in 2017 would go up by 5.25x in 7 years

Keep in mind this property is not in a good area of Phoenix either

Never go full…insert tropic thunder line 

Based on the above, it is hard to believe that they were able to get to a loan of $50.8MM.  The property would need astronomical NOI growth for a Cash-Neutral refinance: 

Similar story with cap rate sensitivity.  Astronomical rent growth required to be breakeven on project cost:

It is not a question of "if" they will lose money but of "how much".

Pretend time is over.

When the debt payments stop or maturities start.

The pretend and extend is only going to happen so far until they realize these assets aren't worth the paper. 

Many of these CLO shops are already getting bid on these guys notes at 90-95 cents from the loan to own groups, but they are still holding at par. I suspect it'll be like that til the wave of maturities hit, and the notes start trading in the 70/80s. Lenders always hold out until it's too late, they never look like the hero for taking a slight hair cut to be safe. 

InfoMatix

The linkedin support comments after his video are super funny.  

They are literally the dumbest comments ever.  
 

It blows me away how bad things are going to get this cycle because of the massive groupthink 

Literally the real deal was just quoting the servicer comments 

stevenh

I loved watching him pat himself on the back that his DSCR is 0.88 and not 0.77!  They're burning money like its going out of style, but want to reassure investors there will be no capital calls?  That does not jive.  How does getting to  a 1.25 DSCR on your existing debt help you refi into an environment where rates are 2x? 

This video will not age well. 

I bet his investors have no idea how stupid that looks in reality 

Oh Zach said we will get to a 1.0 DSCR…that's great right 

Maybe some of their investors are clueless enough to feel comfortable from this rebuttal, but anyone who has a clue of how these financing mechanisms work will be even more certain how much trouble they're in after listening to these stats. 

Esque_

By the way, these are short-term, variable rate, interest-only loans.  The bond holders only care about making sure they are covered in their interest payments and secure in t heir principal.  This has nothing to do with an actual DSCR as the GSEs would evaluate it, i.e. that little thing called amortization.  If you're at a 0.70 DSCR currently and working your way to 1.00 DSCR, that has ZERO to do with a DSCR at i) a current interest rate and ii) amortizing.  Even if you get interest only from the GSEs, they're still going to size it to an amortizing loan to make sure they are covered.

So for the deal Marble Creek referenced above the As-Is NOI was $2M and they projected to get it to $4M. 

They took on $50.74M in debt at a 5.9% interest rate cap so their yearly Debt is $2.993M

Right now for 1st quarter they showed $726K in NOI.  Lets give them credit this is true so times 4 its $2.9M in NOI for 2023 so they are barely going to cover their Debt Service.  

And that's a big Maybe.

But lets say they push NOI from $2M to $3M by 2024.  I doubt they push it more given the market. 

At $3M NOI with current GSE financing at say 6% Interest Rate with a 1.25 coverage ratio that's a $33.3M loan    

So they need to put roughly $17M of equity

That means they would have $35M of equity in the deal.  There yearly mortgage payment assuming I/O would be $2.4M so they would have $600K in positive cash flow

That total equity would be earning a 1.7% Cash on Cash return then.  

Now if they sold it with a $3M NOI for say a 5.5% cap rate then that's worth $54.5M and they lose roughly $10M in Equity.  

Literally its all bad.  This is what happens when you overpay for assets.

He's got a punchable face for sure

Oh look... a syndicator investing other people's money into other syndicators.  Any investors with these clowns should be put in jail for their own safety...

60% - 70% post-renovation *proforma NOI / 4-handle exit cap ;)

What can be done?  There are hundreds of these groups doing the exact same thing.  The debt funds and CLOs are not dealing with the problems, which they helped cause.  The government isn't doing anything so far to come after these guys for misleading investors. 

It's a BiggerPockets buzzword. Similiar to calling units "doors". He's dog-whistling to that audience. 

MultiMan

The way he says "force appreciation" is bizarre - it's like a renovated unit is a magic bullet.

Oh, you must not know.
 

You simply inform the potential tenants the unit is renovated and they're obligated to pay the owner a $500 premium.
 

Voila! Forced appreciation. Thats how it works.

Is your name in tribute to the movie north shore?

brosephstalin

Alright everyone, time to put our best grave dancing shoes on. It's clearly showtime 

I've had mine on for a year now, I might need a new pair by the time this shakes out.

I'm sorry, not everyone can be "above average." It's kind of like in that example of a random study where they asked a group of drivers and 70% said they were above average at driving. These firms are all competing against other firms with the exact same business plan and the sucker that pays the most wins. 

All of these above-average "multifamily masterminds" believe their own bullshit.  They spent the GFC getting participation awards in junior high and deserve the fees they generate from overpaying for properties before passing them on to the next mastermind dipshit.  Perhaps they are all above-average in...naivety, negligence, delusion, psychopathy, bank account balances, and very soon . . . lawsuits. 

TheDebtStar

I used to work in acquisitions and development and this is why we never got a competitive offer for years. My/our underwriting was just way too conservative. So maybe I'm a little moody about it haha.

Yes, but now there will be a wave of opportunity.

At the peak of a frothy market, good operators and conservative underwriters don't do a lot of work.  But sitting that out and holding on to cash means you pick up a ton of assets when the market turns.  That's where you make the real money, buying at a relatively low basis.  Even if everything kept going as it was, you think the Tides guys or Rise48 guys would actually be making big promotes?  They're pushing every assumption they have and banking on every macro condition staying strong and they're still probably only underwriting to a mid-teens return.

Charybdis Alignak

They just closed on one today in Arlington - Alcove Oaks, says there is 219 individual investors, I can tell you about 219 people who just lost a ton of money.

Who the hell is still giving them money…

How hard would you be sweating if you're at Nitya?  Seems like only a matter of time TRD does some leg work on their deals and writes another article.

Charybdis Alignak

Their "brilliant" CFO snapped back this morning with a post on LTVs. These guys are like a bunch of children arguing.

Isn't this the same guy who didn't know about prepayments on fixed rate loans just 2 years ago!?

He turned off the comments as he got crushed on a Couple of the first ones where people called out his BS

These guys are going to lose so many people so much money 

Did this guy seriously use sources like "moneytips.com", the FannieMae SFH LTV calculator and "bankrate.com" to explain their positions?

I need to go to the store and buy some more popcorn.  

swimmingnaked

God this is so good- Nathan Reid deserves a medal- I swear someone could make a movie about this. They have been tricking ill informed folks for so long they actually believe their own bullshit and now when faced with actual real estate logic - can't handle it… math is math and facts are facts…. Dumb is dumb and fraud is fraud….

Yes, dumb is dumb, fraud is fraud, but dumb is not fraud.

The fraud would be if these guys have been stuffing opex expenses below the line for years, programmatically inflating building value by doing so.  That could be a potential explanation why Morningstar's DSCR number is different from their internal DSCR number, this discrepancy could happen if there were some "adjustments" after the fact. 

If they've all been doing this BS and incestuously selling to one another.  Once the chips start to fall they're all could start suing each other for the same things they're doing to eachother.  Amazing!

sosesi4965

Hi Everyone - I am a small time investor that invested in the recent Rise48 Oak Creek project. All of these comments have me very concerned about my investment and I was wondering if anyone had any advice regarding what I can do to protect myself? Rise48 says they will begin financial reporting for the project at the end of July 2023. If Rise48 put all renovations on hold, put the excess cash in a high yield savings account @5% and waited for the interest rate term on the variable debt to expire before a sale or refinance, I feel like that might yield a better return then spending all of this money on renovations for a depreciating property? Thoughts? Any advice on steps I can take to recover part of or all of my investment?

Unfortunately given the nature of syndications they are a Jesus take the wheel type investment meaning the only thing you can do is call them and ask if they will buy you out which I would do asap.

The challenge is the lender probably made them sign a completion guarantee in which case they have to do the improvement work.

I would write your investment off and in the future be wary of people soliciting for investments online.  I know it all sounds good but these are not the people you want to be investing with.  

I'm resisting the urge to dunk on you and would encourage everyone else to do the same since you came here hat in hand.  So hopefully the below helps,

• No one is going to be able to give you advice, legally.  So take this as broad direction.  Consult an attorney.
• It is impossible to give specific direction without reading the Operating Agreement / Limited Partnership Agreement, but
• As a Limited Partner, you have little to no control over the decision making of the Partnership.  The General Partner, presumably a Rise 48 affiliate entity, gets to make the decisions.
• With that said, generally there are carve outs for actions like fraud, misappropriation of funds, etc.  But it is very difficult, near impossible, to act on these until you're too far down the road.  Further, this entity likely has hundreds of Limited Partners that would need to come together - generally via a Special Meeting - to vote the General Partner out and replace them.
• This is all to say, you're married to the deal and the General Partner and are likely along for the ride.
• As far as what your position is, hard to say without knowing a lot more details about the Business Plan, assuming you even have them.  But given their other projects, it probably isn't good.

So what can you do?

• Mentally write off the investment.  You'll lose sleep for a few weeks and then move forward.  That's better than agonizing over it for months / years without any real insight into the deal.
• Ask yourself, why did you do this?  Why did you make this investment?  Is this really for you?  At the very least you purchased a very expensive lesson/s learned, hopefully.
• If you're really interested in real estate, there are plenty of blue chip REITs that are a better place for your capital - $AVB, $EQR, $MAA, $PLD and even indexs and ETFs that trade buckets of publicly listed real estate companies.

If you're interested for more specifically direction, feel free to shoot me a DM - but will need a copy of the Business Plan, Operating Agreement and/or Limited Partnership Agreement.

Hey if you invested with Rise, I may have a bridge to sell you. Just kidding

I hope it works out for you, would just be cautious for next time you invest with a group that seems to good to be true, because generally they are and it's only a matter of time before they get caught.

To be fair, this is also a very biased blog, where most folks in here are in the industry and hate when new comers who have no prior experience come in on the scene and think they know better just to get burned and the whole while take the deals away from the diligent/intelligent groups who wouldn't nearly pay those kinds of prices or take on that type of debt and risk. So everyone wants to see the financial justice being served. 

Also by the excess cash do you mean the capex money? That's probably sitting with the lender so they wouldn't have access to put that into a HY savings account. Generally, the lender will fund 100% of the future capex, and the borrower funds all the equity up front, and if they are smart holds additional funds in self reserved funds (which seems doubtful that they did a material amount here). 

Lol just look at their post from today... Rise Lakeside is outperforming by $30, it's doing so well! Property website: 1 month FREE or $1,500 off PLUS $500 off move-in. Their false marketing is enough of a reason to at least initiate a case against them should equity be lost.

Rick Kane

Proofs in the Pudding...Look at some of these Rise deals offering discounted rents and lots of concessions

In all fairness, this isn't necessarily a sign of financial weakness.  Everyone does this.  What matters is looking at their P/L compared to their  underwriting, and where the rents are versus their original pro forma.

If they were getting $50/ft when they were expecting $40, a 10% discount isn't actually a sign that the deal is falling apart.

Live in a complex owned by a large institutional investor in the Midwest... Rents are down ~13-15% from the peak ~18-24mo ago and they are now offering what equates to ~70% off your first months rent... They are clearly struggling to keep & attract tenants. I'm sure there's much more of this going on than people realize.

The real estate sales and syndication mafia is keeping their BS rolling. Posting positive market stories on LinkedIn doesn't change the facts of what's happening on the ground.
 

They probably actually believe their own hype at this point. It's sickening.

Rents are going down FAST, concessions are rampant. We are seeing waived application fees, $0.00 deposits + 4-8 weeks free for immediate move-ins. Widening application criteria.

The turnover rate is exploding, lease renewals are much harder to earn.

No one is talking about this reality but its hurting over-levered operators and they can only hide it for so long. 

How long until the lenders figure out they're going to take a bath on these projects?

spunmonks

First time reviewing one of the investment summaries today. Unreal. Charging 3.5% acq fee on $43m purchase. Their investors are dumber than rocks 

3.5% acq fees?  If true that is so wrong. That is literally targeting low-knowledge retail investors and taking them on a ride.

How could they look themselves in the mirror in the morning?  I couldn't do that.

3.5%?! wtf? What were their AM and Dispo fees?

Thanks for posting the article

Trepp significantly underestimated the problem on the floating rate loan.

I like trepp and I follow them but their data tends to be reactionary and too granular. The debt service on the loans mentioned in the article are certainly way under 1.04x. I wish they would dive in more and understand the effects of rate caps and interest only payments.