Spread $50k across five deals and ended up with one sponsor. $35,500 back.

The plan was diversification. One portal, five deals, $10,000 each, different asset types and different states. Two extended stay hotel conversions, a small industrial infill, a build-to-rent townhome tranche, and a grocery anchored strip repositioning. I checked each deal's underwriting, ran the rent comps I could get, and read every operating agreement. What I never did was line up the sponsor entities against each other.

Three of the five were the same sponsor group. Different LLC names on each offering, different deal pages, same principals. I found out at month 14 when the same asset manager signed the update letters on two deals I thought were unrelated, and pulling the state entity filings showed a common manager on the third. So my $50,000 wasn't five bets. It was $30,000 on one sponsor's operating capability and $20,000 elsewhere.

Then both hotel conversions failed, and both were that sponsor, and both were in the same metro. Combined I put in $20,000 and recovered $3,400 across two liquidations that took nine and sixteen months to resolve. The third deal from that sponsor, the townhomes, came back at 1.35x. Industrial did 1.6x. The strip is still holding and I'm carrying it at par, which is generous of me.

Call it $35,500 back on $50,000 over four years, ignoring the deal still open.

The failure was at the diligence step, and it was specific. I diligenced deals and relied on the platform's sponsor track record page for anything about the sponsor. That page told me each sponsor's realized deals. It did not tell me which offerings on the site shared principals.

What I'd do differently: set a cap per sponsor group rather than per deal, and pull the entity filings on every offering before wiring so I know who the manager actually is. Filing detail and what's searchable varies by state, so some of that takes a phone call.

2 replies

1samantha_ruizAU4APRO6

I'd read the cause differently. The sponsor overlap is a real hole in your process and worth fixing, but you lost the money on two extended stay conversions in one metro. If those had been run by two unrelated sponsors you'd have had the same outcome, because the thing that broke was the demand assumption for that product in that submarket, and both deals were levered to it.

Concentration by asset type and geography is what actually got you. I've done the same on a smaller scale, two flips four blocks apart, and told myself they were separate deals right up until the same comp killed both appraisals.

Also, $3,400 out of $20,000 is a brutal recovery number. Was the equity wiped by the debt or by conversion cost overruns eating the whole budget before revenue ever showed up?

2joe_delgado5AP4CPRO6

keystone, the recovery number is where I'd put the blame. meridian, on both of those did the capital stack have a preferred bridge lender above the crowdfunded equity, and did the sponsor bring in rescue capital that sat ahead of you? That's the pattern I've watched twice now. Deal goes sideways, sponsor raises a new preferred tranche to fund the shortfall, the new money gets priority on liquidation, and the original portal equity is technically still in the deal and effectively at zero before anybody sells anything.

If that's what happened, the diligence miss isn't the shared principals. It's the clause in the operating agreement letting the manager admit new capital senior to yours without a vote. I've started searching the docs for that language first and it eliminates deals fast.

Spread $50k across five deals and ended up with one sponsor. $35,500 back.

2 replies