“Steamrolled:” Syndicator Lifeline on Life Support

“What's the most you ever lost on a coin toss?” - Anton Chigurh, No Country for Old Men

The Traveling HFC, the lemonade stand of property-tax forgiveness, the escape hatch for multifamily syndicators’ “dogshit deals,” the manna from loophole heaven for consultants and attorneys and debt brokers, and the gravy train for jurisdictions in the boonies of the great state of Texas, is now decidedly on life support. The most punitive version of a bill designed to torpedo it flew through the Texas Senate this week, in a move that took everyone – from its biggest proponents to those with the most to lose – by surprise.

“I’ve never seen the entire industry come together to try to accomplish something the way they have for this,” lobbyist Todd Kercheval of HFC trade group TAHLFA wrote to his clients Thursday, in a memo reviewed by The Promote. “And yet we have all been steamrolled by Paul Bettencourt in the Senate!” ♨️ 

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HFCs (Cont.)

In a 30:1 vote, the Senate passed HB 21 Wednesday. The bill calls for audits to ensure compliance, stricter affordability guidelines, and mandates that the majority of property-tax savings go toward cutting the rent. The House (sponsored by Rep. Gary Gates) had earlier passed it w/ a resounding majority, and it now heads to Gov. Greg Abbott’s desk 🖋️ Will he be down to put the kibosh on it even in the face of such overwhelming bipartisan support in both chambers?

Look, let’s be real: Everyone knew Traveling HFCs were a temporary thing - The Promote previously likened them to summer-camp romances. Lenders had already incorporated this ⏰ into their underwriting: Freddie had stopped quoting new HFC deals in Nov., and many other lenders – the smart ones at least – had underwritten LTVs w/o factoring in the property-tax freebie that the HFCs provide (here’s a primer). Much of the action was in loan mods, convincing lenders to move deals from a fee-simple structure to an HFC-workable ground lease. But because everyone knew the end was nigh, the final few months were a rampage of dealmaking: hundreds of new traveling HFCs have been formed, many on behalf of prominent sponsors (and some pilots too).

However, one of the scary things here is the specter of retroactivity: will lawmakers look to claw back property-tax exemptions from existing Traveling HFCs through audits? Such a move would throw hundreds of millions of dollars worth of loans into disarray, and give agita to both the CMBS and agency-lending markets. It would also likely be challenged on constitutional grounds 🦅 : Article 1, Sec. 16 of the Texas Constitution explicitly forbids retroactive laws.

A New York analogy for what’s happening here might be the ‘19 rent reforms: 🗽 landlords knew they had been getting away w/ banditry for years – in the most telling illustration, the alpha trade group’s boss called vet CRE reporter Charlie Bagli 🐐 from within the Senate office as he was writing the pro-industry legislation one year, as Bagli told me). But still, the force of the backlash caught them completely off guard, and over 5Y later, the rent-stabilized market is still trying to figure things out. 

A Nightingale’s Cry: Schwartz Channels Puretz Playbook

After copping to wire fraud in CRE’s biggest-ever (for now) crowdfunding scam, Nightingale Properties’ Elie Schwartz has found some room for contrition. Schwartz penned a letter to the judge on the case noting the steps he’s taken to protect others from his shadier instincts: He is no longer Elie Schwartz, investor – he is now Elie Schwartz, real estate consultant 👿😇 

“By working for others, I am making sure not to put myself in a position to hold other people’s money,” Schwartz wrote (h/t Bisnow). “I am ensuring that no matter how much pressure I am under, I won’t have access to any funds. “In a way, I am protecting myself from myself.” 🛡️ 🪞 Schwartz’s public defender attorney (his white-shoe attorneys quit) argued that rather than being an inherently bad guy, Schwartz was merely a mensch who fucked up. ”His boundless belief in his own abilities, seemingly justified by his record of success, caused him to take outsized risks,” the PD wrote. “He was almost too comfortable with high-pressure, high-risk investment ventures.” Schwartz’s playbook here rhymes somewhat w/ that of convicted mortgage fraudster Eli “from light gray to dark gray goes very very fast” Puretz, who went on David Lichtenstein’s Halacha Headlines pod and talked about being bewitched by the get-rich-quick promise of CRE, a vibe amplified by the 24-6 hustle yeshivish community that shaped him. (The judge in that case did go easy on Eli, giving him just 24 months compared to his father Aron’s 60.)

Schwartz is set to be sentenced Monday, w/ federal prosecutors recommending that he serve 6ish years given his cooperation and heretofore clean record. They noted something that might have broader implications for other victims of financial fraud: Because Schwartz’s 800+ victims (via CrowdStreet of c) were accredited investors, they were not thrust into “significant financial hardship” by his shenanigans. The deal agreements they signed allowed for the possibility of total wipeout, prosecutors added. (This specific theme, coincidentally, is something we dive into on next week’s pod so stay tuned for that).

See also: 7 Highlights from CRE’s Biggest Crowdfunding Scam 

Pulte’s Purge Persists

More sudden Veep-level axings in Freddie’s multi team: 1. Rich Carlson, who led portfolio surveillance 👀 2. Pam Dent, a decade-plus Freddie vet who led AM. 3. Deep Sheri 4. Ling Xu. “These decisions are never easy and can be difficult to take in, especially for those involved,” head of multi Kevin Palmer said in an internal memo reviewed by The Promote on Thursday. “However, the process of change is something that is inevitable if we are to evolve and thrive in the future.” These were not C-suite names, mind you, but they were higher-ups for sure – unlike in brokerage, where anyone who’s allowed to say 5 words in a meeting is given the VP title, it actually means something at Freddie.

Plus, they came as a surprise. Freddie insiders say both Carlson & Dent were slated to hobnob w/ Optigo lenders at the upcoming MBA conference 💼 But the way this was handled jives w/ the overall shock-and-awe that FHFA director Bill Pulte has brought to his oversight of the agencies. In March, he fired Freddie CEO Diana Reid, replaced much of the board at both Freddie & Fannie, and fired 100+ Fannie staffers claiming fraud concerns. Staffers still at Freddie say there’s a hall-monitor vibe to the place in recent weeks, and more departures are imminent. 🎒 

Open invite to Pulte: Come on the pod or do a Q/A in these pages, and let's have an unfiltered chat about your vision for Fannie/Freddie. We promise to be fair & thorough. Plus, all your new colleagues are already reading. 🎙️ 

🍇 Layoffs at Benefit

Benefit Street Partners, the Franklin Templeton subsidiary that’s a CRE-CLO heavy hitter, has laid off several originators (CMBS, balance sheet), insiders told The Promote 🛀 Those on the chopping block include some hefty rainmakers, we’re told. Remember that BSP is in the process of acquiring agency lender NewPoint from Meridian Capital Group for $425M, a move that will make it a triple-threat (Fannie/Freddie/HUD) license holder and deliver a hefty loan-servicing book.

Quickies

• 📹️ How closely have you read your PGs? Because rest assured, your lenders are giving them a cavity search 🦷

• Your annotated guide to the CO 100 Power List – Pt. II next week

• Arbor preps its first multifamily CLO since ‘22 – an $800M instrument

• Pretty cool & def rare: Both Blackstone’s & Starwood’s nontraded REITs now have women at the helm 🤼‍♀️ 

• 🇦🇷 Khafif family buys Vornado boutique office for $205M - $1,200/ 🦶 !

• Blue Owl raises $3B above initial target for data-center fund 🦉🖲️ 

• When the alien anthropologists want to understand CRE brokers/investors, this is the tweet they need to read 👽️🧑‍🎓

Unquotable Quotes

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