What Happens To A Real Estate Fund When They Lose A Property?

I've been investing with origins since 2017, I think was my first investment in one of those growth funds that aren't currently available. I was invested in Fund 3, which this year may wrap up. By the end of this year, I think it was 17 properties total, mostly multifamily, but also some office properties. I think 14 of those were sold off at, at a gain, some quite large, some of them smaller. And then two of them are still in the fund waiting for an opportunity to exit from those properties. And then one of them, the fund basically decided to mail in the keys to the lender. Can you talk about that decision and how that affected the rest of the fund and take us through that moment that the fund managers decided to do that with that property in the fund?

Yeah, 100%. So that's fund three. And in fund three, we were in office and multifamily. So that was a period where I think if I look back, I always say, did we make the right decision, given the information at hand? Because there's a difference between making the right decision and having the wrong outcome and making the wrong decision and having the wrong outcome. And I think our investment was sound. We bought an office in the West Loop of Chicago, one of the hottest neighborhoods in the area that we knew, and Covid hit and office demand just cratered. And we looked at it and we lost some tenants. And then you look at where cap rates and where interest rates went. And we looked and we said, look, do we really want to spend the time and effort and money trying to rescue this property? And when we really looked at the math, we said, look, even if we're right, this is only going to add two to three basis points to the fund. But now are we chasing good money after bad money? And those are the decisions and it's never easy. But I will touch on this. Number one, as a sponsor who only engages in institutional investments, you have a put right on these properties. And I can't emphasize that enough. A lot of times when you're an individual and you're guaranteeing debt, you're on the hook for that debt. Well, we don't guarantee debt at the fund level or at an individual level. So that gave us an opportunity to sort of hand the keys back and said, there you go to the bank. So we did that and we took a full loss on that deal, which obviously hurt. There were a couple things, like, I wish I had a few mulligans on that fund. When we look back, Jim, that would be one of them. Maybe connect At First Creek, the sister property would be another one. And for the few things that really, I would say the couple things that went wrong in that fund, that fund will still end up for that vintage being kind of right around the top quartile performer, as we look at it in Preqin. But that was an unfortunate outcome. And there could be another one. We also have a deal in there, another office deal down in Texas that it's fine, it's occupied, it's doing all that. But the office market, no other sector has gotten hit worse than office. And we did have some good exits on the office side in that particular fund. And thank God we got rid of those before COVID hit some of them right after. So all in all, that was a lesson that we kind of take home and hurt returns on that particular fund.

Yeah. It demonstrates one of the big benefits of being in a fund rather than individual syndications. Right. If somebody had their entire investment just in that particular property, it would have been a total wipeout of their equity. By being in a fund, you still end up with quite good returns.

Yeah. And Jim, I'm glad you brought that up, because I'm on the road right now. I'm doing a road show around the country and talking to a lot of investors and people. They like deals, they like funds, they do different things. But I think what they're really, many of them are finding out. I'm hearing sort of the horror stories about these are sponsors who are doing syndications, they're under capitalized. And what happens in a fund, a fund is like a company that you can borrow from one property to use for another, and it's all legitimate. It's underneath the same company, the same owners. You can't do that if you have a bunch of syndications. Right. If you have one syndication, syndication losing money, you can't borrow from another syndication. That's called fraud. And so with what happens with these undercapitalized sponsors or these deals that are going bad, when suddenly you have seven or eight or you need cash in refinances, they're getting capital calls that they would have never expected at this point in time. And they're like, oh, I just got another capital call. I just got another capital call. And so I like funds. We do both. We do some individual deals as well on the side, like if the fund can't take the whole deal. But I think syndications, you have to be very careful with because sometimes there is the propensity for if the deal goes wrong, it's going to be the bank of the investor that needs to step up and fund that deal.

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