Kurt N.
Level 6: Top VoiceReviews by Kurt N.
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Cost Overruns Lead to SNL Removal as Manager
I invested with SNL Capital Partners in the development of a Class-A self-storage facility in New York. This investment has significantly underperformed across both financial and timeline projections. The project has struggled to meet its development timeline. It is currently in lease-up while operating at a net cash flow deficit. In 2023—three years into the project—SNL was removed as the managing member and replaced by ERI, a private equity firm and investor in the project, following a reported "loss of confidence" in SNL’s management. According to allegations from ERI, the transition was prompted by SNL's non-disclosure of significant cost overruns and other management issues. While SNL provided quarterly reports during their tenure, ERI’s findings suggest that these communications were not fully transparent. ERI has funded the cost overruns to keep the project moving toward stabilization. Given the breakdown in transparency and the formal removal of the sponsor from the project, I will not invest with SNL Capital Partners in the future.
Preferred Equity in Boat & RV Storage
I invested with Madison Capital in the development of two boat and RV storage facilities located in Tennessee. The investment was structured as preferred equity with a fixed 16% target return. The sponsor paid 8% distributions throughout the project and accrued the rest. The project faced significant construction delays. Opening of one facility was nearly two years behind the original schedule, primarily due to weather-related issues and entitlement challenges. In response to these delays, the sponsor revised the business plan to either sell or recapitalize one of the facilities to pay off the preferred equity. Based on current projections, this shift suggests a positive outcome is still possible, albeit over a slightly extended hold period. Madison provided short quarterly reports focusing on updated timelines. They did not include detailed financial statements, but kept investors informed of the project's physical progress. I like this asset class and would consider investing with Madison Capital again, provided the current exit materializes within the next year.
Lower Distributions and Extended Hold Period
I invested with Orion Real Estate in the acquisition of a built-to-rent (BTR) apartment community in Utah. The original business plan called for a light value-add strategy with a 3-year hold period. Overall, the investment has performed below its initial projections. Despite maintaining high occupancy levels, significant cost overruns have impacted the bottom line. Distributions were cut to approximately 50% of the forecast. While some of these deviations can be attributed to market conditions, a portion of the budget shortfall has been within the sponsor's control. Orion secured a great loan for this project: low fixed-rate financing with interest-only payments for 10 years, and an LTV of less than 60%. This provides some security for LPs, though the initial 3-year exit timeline has been extended indefinitely. Orion has maintained good communication, providing regular quarterly reports and financials. I originally invested due to the strong Utah location and the short-term nature of the deal. Given the underperformance and the extended timeline, I likely will not invest with Orion again.
Strategic Pivot: From Rental Apartments to Condo Conversion
I invested with Presidium Group in the acquisition and renovation of a mixed-use residential and commercial campus in Maine. The sponsor’s original business plan centered on a value-add strategy. While the project achieved top-line income that exceeded initial projections, it faced significant cost overruns during the first two years. These budget gaps were primarily due to rising labor costs, insurance premiums, and debt service. In their initial underwriting Presidium did not correctly anticipate these operating and carrying expenses. Due to softness in the multi-family market, the property could not be sold for a profit under the original rental model. Presidium pivoted toward a condominium conversion and the separate sale of the commercial buildings. This shift required additional capital from investors and has extended the hold time significantly. However, the pivot appears to be working to preserve investor capital and maintain the potential for positive returns. Presidium has provided clear communication regarding these challenges and the resulting changes to the business plan. While I credit the sponsor for their creative pivot to protect the downside, the lack of accuracy in the initial expense projections is a big concern. Because of the cost overruns, the cash flow I originally invested for has not materialized.