Multifamily investor Lynd is considering asking its investors in a Miami Gardens apartment complex for additional capital as soaring insurance premiums and other cost increases weigh on the South Florida real estate market.
The San Antonio, Texas-based company has warned investors in the 234-unit Parc Place Apartments that it may ask them for $9.1 million in a potential capital call, according to copies of a document Lynd sent to investors in July and a first-quarter financial report from the complex. If Lynd invests $9.1 million in the property, he could pay off an existing loan that came due last month, as well as fund repairs and renovations to the remaining units in the 52-year-old complex.
More than 80 percent of the funds, or $7.3 million, would come from equity partners who invested in the complex through CrowdStreet, according to a memo the crowdfunding platform sent to investors this month. The total capital call of $9.1 million represents 62.9 percent of investors’ original funds and will be structured as common equity.
Lynd CEO David Lynd said there was “no panic” and the capital injection was not necessary as the property was financially underwater. Rather, he said, it was a way for Lynd to continue the renovations that have so far translated into higher rents, allowing investors to earn higher returns in the long run.
“It’s important to note that this capital call was a value-added call to both extend the loan and increase the value of the property. It is not an indication that $9 million is needed for the property to survive,” David Lynd said. Rather, it is an opportunity “to invest more in capital improvements to the units, given that the property is getting $600 in rent increases, so we suggested to investors the opportunity to invest more to increase its value. … There are many places where panic is appropriate. This is not one.”
The capital call notice is more of a pulse check for investors. If they are not willing to provide more money, Lynd is considering an alternative plan. He envisages keeping Parc Place and selling it in about a year, when interest rates are expected to have come down, he said.
However, the capital call shows that, contrary to the portrayal of those who have hyped it up over the past four years, South Florida’s multifamily housing market is not entirely immune to financial pressures.
From late 2020 through 2022, the housing market in the tri-county region was at its peak, seeing record rent increases due to unprecedented demand fueled by an influx of out-of-state newcomers. Investors took advantage of the bonanza, buying up many older apartment complexes to renovate, raise rents, and sell at a profit.
Then the Federal Reserve imposed 11 aggressive interest rate hikes in 2022 and last year; insurance premiums soared, more than doubling in some cases; and material costs remained high. Although some in the real estate industry remained confident that South Florida multifamily properties would continue to outperform due to high demand and rent increases, the increased costs began to cause problems for some investors.
In 2021, Lynd paid $40.8 million for the three-story Parc Place complex at 17600 Northwest Fifth Avenue, which was completed in 1972. According to CrowdStreet’s memo to investors, Lynd’s original strategy was a three-year hold period.
Since the purchase, Parc Place’s insurance premiums have increased 183 percent and payroll has increased 65 percent. At the same time, Lynd has experienced unexpected maintenance delays in areas such as roofs, elevators and gate repairs, as well as other cost increases, according to Lynd’s July filing and the quarterly report sent to investors.
Lynd has budgeted $2.2 million for interior and exterior renovations over two years, CrowdStreet’s letter to investors said. So far, Lynd has upgraded 72 units, allowing for an average rent increase of $461 per unit. Sixteen of the units were renovated with ultra-luxury finishes, referred to in Lynd’s memo to investors as LUX-K, allowing for an average rent increase of $660, Lynd said in one of its notes to investors. But Lynd has “limited cash left for renovations,” CrowdStreet’s letter to investors said.
Lynd has said it does not expect real estate costs to continue to rise and touted the rent increases in its document sent to investors in July. “With only 31 percent of units renovated, we exceeded our third-year rent projections and total revenue, leaving significant potential for further rent increases and total revenue,” the company wrote.
Parc Place was 88 percent occupied at the end of the first quarter, in part because 14 units were offline and needed repairs to roofs, plumbing and resident-caused damage, according to Lynd’s first-quarter report. Lynd said in the report that it hired a contractor in May to fix those issues.
In a note to investors, Lynd said the biggest headwind was the tripling of interest rates.
At the time of the purchase, Lynd took out a $32.5 million loan from New York-based Lument and secured the financing against rising interest rates with a rate cap with a strike price of 1.75 percent, according to public filings and Lynd’s first-quarter Parc Place report. The loan, which comes with two one-year extension options, expired last month, as did the rate cap.
Lynd’s quarterly report said it would need more than $1 million to extend the 1.75 percent interest rate cap for another year, and $500,000 would be needed to pay off the current loan balance.
David Lynd pointed out that the information in the documents he had received The only true about Parc Place is not yet final as negotiations with lenders are ongoing. “It’s all very uncertain,” he said.
Lynd has received an offer from a potential buyer who wants to buy the complex now for $42 million, but that could result in a loss on the investment. It would yield a negative internal rate of return of 15.8 percent and an equity multiplier of 0.57, a metric that indicates how many times an investor’s initial capital would multiply, according to Lynd’s documents sent to investors.
By injecting new equity through a capital call, the return for investors would increase to 1.62 times equity and an internal rate of return of 17.4 percent within three years.
According to CrowdStreet’s letter to investors, the Parc Place investment agreement includes punitive dilution. This means that if an investor fails to make the capital calls, either their ownership interest will be diluted because other investors will cover the shortfall, or they will not receive a return until the investors who participated in the capital calls first receive back the missed contribution plus 200 percent, CrowdStreet’s letter said.
CrowdStreet did not respond to requests for comment, and a representative for Lument declined to comment.
Some investors are not happy.
“I was just excited about that presentation (about the initial investment), but that was a pretty bad investment. Since then, I’ve invested in my own properties, which have done very, very well, and other sponsors that have done better than expected,” said one investor who asked not to be identified.
Others give vent to their frustration in private chat forums.
“This investment is garbage. I will not double. Sell the property,” one investor wrote on August 6, according to a copy of a chat conversation between investors obtained by TRD.
“This is ridiculous… I invested $25,000 and now they want almost another $16,000?? No chance, no time to realize that this investment will not survive without a significant cost reduction,” wrote another investor. “I will not waste another cent with this group, diluting my shares is fine and better than losing more money.”
The capital call follows turbulent times for CrowdStreet. Last year, the platform came under scrutiny after Nightingale CEO Elie Schwartz was accused of defrauding investors on two properties purchased in part with funds raised through CrowdStreet. In February, a group of Nightingale investors filed an arbitration award against CrowdStreet with the Financial Industry Regulatory Authority, seeking damages and a ban on the platform marketing or selling securities online. At the time, CrowdStreet responded that “any allegation that CrowdStreet acted as a broker in connection with Nightingale’s offerings is inaccurate.”
A third investor in Parc Plaza wrote in a chat forum on Wednesday: “Lynd management has lost my trust. And so has CrowdStreet. I visited this Parc Place property in Miami and after seeing it with my own eyes, I will not put another dime into it. The condition of the property is far worse than the GP (General Partner) portrayed. … Good money after bad … I’m not doing that.”
