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The projections with syndicated real estate (whether through a crowdfunding site, an individual syndicator, or a fund) are often rosier than reality turns out to be. Several times I've been sent notices like this one I just received for one of my investments.
I think this is about the third one of these I've received in the last few years. The "reason" for the shortfall is always unique but the lesson is that they occur and they occur fairly frequently. There is a lot of risk here and very little liquidity. With these equity investments, there's pretty much nothing you can do for a half decade or more.
The lesson? Diversification protects you from what you don't know. This particular investment represents about 0.5% of my portfolio and only about 5% of this asset class in my portfolio. Will it catch up to pro-forma? Probably not. Will it still provide a reasonable investment return? I hope so. Will it hurt me significantly if it doesn't? Not really. But it is just as much "hope and pray" as real estate investors say the stock market is, but with a whole lot less liquidity.
Caveat emptor.
Quarterly Update (Q4 2018)
We would like to provide you with an update on your investment in the Preferred Equity - Houston Multifamily offering.
Over the course of the last few months, we have been working closely with the Sponsor to finalize their 2019 budget which includes a renovation schedule for the remaining units. As mentioned in previous updates, one of the difficulties that the Sponsor ran into was lack of available subcontractors to effectively work through renovations. As a protective measure, the Sponsor has continued to lease out the Property to tenants on a month-to-month basis in order to generate cash flows and meet debt service.
The plan moving forward will be to renovate 65 units over the next 9-12 months while leasing out finished units at market rates. Eight units are currently under renovation and are scheduled for completion in early March. As part of the new plan to address labor shortage, the Sponsor has informed us that they have signed employment contracts with electricians, plumbers, and HVAC crews in addition to contracting a larger team to handle carpentry and other renovation work. The Sponsor may add 2-3 more skilled laborers over the next couple weeks to help expedite the entire process and is committed to adhere to the schedule. After many discussions with the Sponsor, we now have a concrete plan in place to complete the unit renovations.
Additionally, we have discussed cash flow distributions with the Sponsor extensively. As noted in previous updates, the initial Interest Reserves have been fully paid out at as of November. Per our Partnership Agreement, cash flow distributions to investors thereafter would be funded by available cash flows of the Property. Based on the current plan, distributions are projected to be partial with the remaining shortfall accrued until additional units are renovated and sufficient cash flows are generated. Delays in unit renovation have no doubt negatively impacted the timing of distributions to investors but all accrued amounts on Preferred Equity will be fully repaid ahead of any distributions to the Sponsor.
While the news on current distributions is disappointing, the Houston market continues to be strong and the prospects for an attractive exit remains optimistic. We have requested that the Sponsor increase their reporting frequency to us on a monthly basis so we can closely monitor the progress of the renovation and we will keep you updated accordingly. We appreciate your patience over the last months as we have focused our attention on working with the Sponsor to get this project on track.
I think this is about the third one of these I've received in the last few years. The "reason" for the shortfall is always unique but the lesson is that they occur and they occur fairly frequently. There is a lot of risk here and very little liquidity. With these equity investments, there's pretty much nothing you can do for a half decade or more.
The lesson? Diversification protects you from what you don't know. This particular investment represents about 0.5% of my portfolio and only about 5% of this asset class in my portfolio. Will it catch up to pro-forma? Probably not. Will it still provide a reasonable investment return? I hope so. Will it hurt me significantly if it doesn't? Not really. But it is just as much "hope and pray" as real estate investors say the stock market is, but with a whole lot less liquidity.
Caveat emptor.
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