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  • Randy Rodenhouse

$230 million up in smoke…apartment owner loses 3200 units

Recently, there has HUGE foreclosure in Houston TX on 4 multifamily complexes. I wanted shed some light on why this happened and some takeaways for us all. But before I do, let me give the summary of what happen as I understand it.

Arbor Realty Trust lent money on 4 apartment complexes to a sponsor called Applesway Investment Group between August 2021 and April 2022. The properties were in Houston TX and totaled 3,200 apartment units. Arbor lent Applesway an estimated $69 million for the Redford Apartment, $66 million for Reserve at Westwood Apartment, $48 million for Heights at Post Oak Apartments and $47 million for Timber Ridge Apartments, according to the Harris County Clerk’s Office. These were low income multifamily properties in Houston valued at around $230 million.

Arbor initiated the foreclosure on March 13 after Applesway defaulted on its mortgage payments. The properties went to auction on April 4, but no bids were made. Arbor initiated a credit bid, in which the lender can use the outstanding debt owed on a property as collateral for their bid at a foreclosure auction, for each property. That allows the lender to bid without bringing cash to the table. The lender won the bid and took over all four properties.

Why did this happen? All the details are not out yet, but here is what I have gathered to date. The rising interest rates forced the debtor to default on their floating rate loan when their rate went from 3.4% to nearly 8%. As the Federal Reserve increased rates, the rates on their commercial loan(s) also went up to a point where the debtor could no longer make the payment with the income from the properties. Apparently, they did not purchase a rate cap which would have limited their rate exposure by capping the interest rate on the loan(s).

Takeaway lessons:

  1. It is super important to vet your sponsors and make sure they have experience in the type of asset they are buying and a track record of success in good and bad times.

  2. When investing into a larger deal that has a floating rate make sure the sponsor gets a rate cap to protect all parties involved. It is like buying insurance, you hate to pay for it but you have to have it.

  3. Never put money into deals or syndications unless you are able to continue to live without that money if, for some reason, you lose it all.

  4. Making sure that the underwriting policies of the sponsor are sound and conservative. There should be several months operating reserves in the sponsors underwriting to help mitigate risks.

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