Market Downturn: Why Syndication Deals are Collapsing

Added: 2026-05-31

[00:00:00]Well, folks, the collapse of the syndication, the guru syndicator, has officially started with one of the biggest names taking a $15 million hit.

[00:00:11]Uh unfortunately, this is not about one individual. This is really about timing.

[00:00:16]And as Brandon indicated in his post on Instagram, he could not have timed it worse if he tried.

[00:00:23]But, I think the deep dark secret is everyone who closed around that time is suffering. And if your debt is short, three, four, five years, you are in trouble. Jonathan, this is your world.

[00:00:38]We have been talking about this collapse eventually coming. It is officially showed up with one of the biggest names in the game posting a $15 million loss in investor capital. Where does it go from here?

[00:00:51]>> This is just the tip of the iceberg.

[00:00:55]>> Oh.

[00:00:57]Yeah. This is This is just Now, we are finally starting to see the stuff you and I have been talking about for a number of years now. It's finally happening.

[00:01:06]The road of extend percent extend and pretend has run out.

[00:01:12]There's nowhere else to go but foreclosure from here, basically.

[00:01:18]Um because properties are just not worth what they were at the top of the the market, which was now five years ago.

[00:01:28]And that's just a plain hard, cold fact.

[00:01:33]Like, you if you if you buy a property for $10 million, and five years later when your debt is is due, it's worth $7.5 million, you have a problem.

[00:01:46]>> Yeah.

[00:01:46]>> Because, you know, you cannot refinance that seven you know, you when you refinance that seven point that property worth 7.5% you know, 7.5 million at 75% you're looking at about a $6 million debt. You're looking at a gap of 1.5 million or so.

[00:02:04]And unless your investors have a lot of faith in you they are it's they're not going to pony up that money in order to refinance and live to fight another day. Even though that might be the smart choice. Part of the reason for that that they're not ponying up that money is because many of those investors are invested across 10, 15, 20 deals.

[00:02:26]>> I I wanted to ask you that.

[00:02:28]You know, this is not my world, right?

[00:02:30]I'm in one deal with you on a hotel actually. Um >> That was bought after the crash mind you.

[00:02:36]>> No, yeah, yeah, let's be very clear.

[00:02:38]Yeah, [laughter] this is at the bottom seller we're already up 100%. We're we're fine. I'm not upset. But the reason I wanted to bring that up is I had thought that like if you like if you invest in syndications like if that's your thing, you're very rarely like me one and done, right? You took a flyer on a friend who's who's had a great story. That's why I did the deal.

[00:02:59]It's not it's not and will not be a part of my investing you know going forward. Um but I'm guessing that a lot of people if they commit one, they're going to commit two, three, four, five. Is that kind of common? Do you see you don't see a lot of one and done.

[00:03:14]>> I mean you see some.

[00:03:15]But you do see a lot of people who really liked that asset class. And the people that you see who invested in numerous syndications are actually the people who got in early and made money on their early earlier deals and they just and they reinvested.

[00:03:30]>> They didn't take profits.

[00:03:32]>> Yeah, and a lot of them you know towards the top of the cycle a lot of the syndicators figured out how to do 1031s with the syndication which nobody really had known how to do before. So people rolled over their money >> because free.

[00:03:47]>> Yeah.

[00:03:48]>> They were they were greedy. Didn't want to pay tax. So >> Yeah.

[00:03:52]>> And this is this is like precisely the situation that I was warning people about in like 2019 where, you know, the market was getting frothy. People were doing, even at that point, uh you know, 1031 exchanges into really, really tightly valued properties. And I was arguing, you know, with people in my then Facebook group that uh about the danger of doing 1031s. And they said, you basically the pushback I got was two things. One is like you should never pay tax if you can help it. And two, two, you should never have a penny uninvested.

[00:04:29]Right? And and I I would say to people, "Okay, what is inflation right now? It's about 2%. Right? Even if you want to say it's 4%. Even but it wasn't. It wasn't 4% in 2019.

[00:04:42]>> Yeah. It was 2% in 2019.

[00:04:45]>> Yeah, yeah.

[00:04:46]>> So, I said, "Look, if you put your money in the bank, right? It'll take a 2% like seven seven years or so to lose 10 per- 20% of its value, right?

[00:05:00]So, if you invest it within a couple of years, like you're fine. Like you you're losing 2% value on your money for a good deal. However, if you put that money into a property now at the top of the market and it loses 20% right away, you're wiped out. Right?

[00:05:18]>> yeah.

[00:05:19]>> That that is an instant That's an like an instant loss of your capital. Plus, there's all kinds of then you you're going to like, "Oh, the deferred taxes on it." I mean, it's just it's just like a nightmare situation. So, I was telling people, "You shouldn't be reinvesting." And they just said I was a fool. But this is exactly the you know, not only that, but then you have the opportunity cost of now, instead of having capital where you paid your capital gains tax, you know, so now you would have your original principal plus your profit minus the taxes you paid, right? So, you start out with say 50 thousand to invest, now you've got 75 or 80 to invest after you paid your capital gains tax, and you can go reinvest that 80 at the bottom of the market after the crash, well you've missed that opportunity too because instead of having the 80, you have the zero, and you still owe the and you still owe the capital gains tax anyway.

[00:06:17]>> Right.

[00:06:17]>> Right, but you don't have the cash to pay it. Now you've got to go sell something else to pay that capital gains tax or have some other loss that you can use to eliminate it. So, this is but people got greedy at the top of the market and they reinvested and and look, this is this is happening to almost every deal that was that was bought at the top of the market if they did a couple of things. If they and this was very hard not to do because it's very hard to get to not It was very hard to get deals unless you did this.

[00:06:48]You had to pay top dollar, which meant you had to use floating rate debt with high proceeds, right? And >> That's that's the that's you've nailed it. That there was a 12-month window.

[00:06:58]>> Yeah.

[00:06:58]>> Where every buyer, right? The winning bid had to do Excel kung fu on the spreadsheet to make it pencil, and that often meant floating rate debt IO. I mean, just all of these things.

[00:07:12]>> It was IO, it was floating rate debt, it was it was high leverage, and it was also a it was also assuming, if not cap rate compression, still from like buying at a four cap to having further cap rate at least staying the same, right?

[00:07:28]>> I can't I can't believe I do This is This in in hindsight, this is going to be what you and I saw but most people missed. Yeah. Right, and I will use my market as an example. My market of Fresno, California, which I've been studying for 30 years, and I own some of this stuff. Historically, it's traded at an eight cap. It's a tertiary market.

[00:07:47]It's a little more rough around the edges. All of that stuff.

[00:07:51]It went to six. I sold.

[00:07:54]>> Yeah.

[00:07:54]>> It went as low as four and a half.

[00:07:58]So, I sold early, but I was happy. I was out.

[00:08:01]And people were telling me it was going to four.

[00:08:04]>> Yeah.

[00:08:04]>> That was the only way these deals were going down. I saw a building. I I track it. I sold it. I bought it for 700. I sold it for 1.1. It went as high as 2.1 million dollars. There is no way that apartment building in that part of town is worth anywhere close to that. And that building has been now been listed nine months. I guarantee you it's on a watch list and will be foreclosed.

[00:08:25]>> And And the thing is you could not Like the deals did not pencil for banks in 2021, 2022. Right?

[00:08:33]>> No.

[00:08:34]>> They did not pencil for banks because you could not produce the cash flow necessary to support that debt. So, the only debt that was available was from lenders who didn't care what the cash flow was. Right? Which are bridge lenders. Right? Because that's they lend on stuff that's riskier. But bridge debt got so cheap, it's crazy. The bridge debt got cheaper than >> No, it's not.

[00:08:51]>> than regular bank debt and and Fannie Freddie debt. They were so cuz they were getting their money at like nothing and lending it out like crazy because they all bought into the story, too. I mean, let's not forget that >> This is what happens in bubbles. This is just what happens.

[00:09:05]>> bridge lenders also believed that this was all that it this was all going to be fine and they were going to make a ton of money. Right? And so, those guys are all belly up, too, because all of their deals they've lost all their investors' money.

[00:09:18]>> Yeah.

[00:09:19]>> they've lost like, you know, they're now having to figure out how to repay the loans they took.

[00:09:24]Right? With less money coming in. So, and we're just starting to see this because there was this extended pretend.

[00:09:31]There was like a round of people raising >> The Fed's going to save us. Blah, blah Yeah.

[00:09:36]>> And And the thing is it it was just the the Fed's going to save us story never made sense for a single day because for that to happen rates would have had to go back to where they were in 20 at the at the at their absolute lowest point.

[00:09:52]And we all know that wasn't going to happen, right? Absent a major economic calamity or another pandemic or something of the nature of COVID that caused the the Fred the Fed freakout >> Mhm.

[00:10:08]>> where rates went to zero, right? And so absent they weren't going to just go to zero because real estate investors think it's it would be nice, right?

[00:10:18]>> Yeah.

[00:10:19]>> So that the whole premise of like extend and pretend was was never going to work.

[00:10:24]And then, you know, that's even putting aside the massive supply increase in in precisely the markets where there was where cap rates were lowest. And And those things are connected. Like let's not forget or or maybe people don't really understand like how this works. When when cap rates get to that extremely low point, like that is a signal to develop, right? You can't You can't buy product that makes sense anymore, so you start developing it and developers pour in and interest rates are super low. That's, you know, another reason why cap rates are so low because interest rates are low, that makes construction much more, you know, profitable. So these things are all connected. So when you have like these markets like you know, Austin, Texas, Dallas, Texas, Phoenix, you know, where the there was so much investor frenzy around this idea of like population growth as if the idea that as if population growth was going to solve every problem, right? Or or or eliminate every problem or, you know, everybody rushed in with the same thesis, which was the population's growing, we better buy, and drove cap rates down, interest rates low interest rates allowed them to go then go even lower, right? There was already a bubble in 2020, and then COVID hit, and it just blew up the bubble even more. But then, you know, that signaled to developers to develop, right? So, and so there was no way interest rates would not help those deals, because if if you're like in Austin, Texas, where the market occupancy is now below 90, right? The market occupancy is below 90%.

[00:12:04]>> Not good.

[00:12:05]>> Like you cannot refinance those deals.

[00:12:07]You literally cannot refinance those deals, right? Unless you're like the one outlier that's above 90% occupancy, but then, like, you know, it doesn't matter cuz prices have dropped, as we said before, precipitously. So, it's just the whole there's no escaping from this. What what's going to happen is we're going to have a lot of deals going into foreclosure or being worked out, right?

[00:12:29]Quite seems, you know, short sales, >> so let's try to let's try to let's try to put some numbers on this. I believe I read, and if you have other data, cuz this is your world, not mine, tell me, but there was roughly a trillion dollars in loans executed in the period we're talking about, 2020 and 2021. Roughly a trillion. I think it's 1.2, but we'll call it a trillion for easy math.

[00:12:49]>> Right. That wasn't all multifamily, but but yes, there's a ton of debt.

[00:12:52]>> so in any idea what the split would be with multi like 60%? Let's say let's say it's 40%. Let's just say it's 40%. Cuz it is the biggest part of commercial real estate, but there's a data centers and storage and all these other things.

[00:13:06]So, let's just call it let's call it half a trillion, just for easy math.

[00:13:08]Half a trillion, so 500 billion.

[00:13:11]If there was 500 billion in lending, that means there was probably 750 billion in assets, cuz the assets would be above the loan, right? So, if loans are here, we're up to like let's call it 750 750.

[00:13:26]So, we're going to see So, again, back to your example of 10 million going to 7 and 1/2, investors can't kick in, you lose the building.

[00:13:34]We're going to see all that equity's gone. So, >> Yes.

[00:13:37]>> damn, we're going to see investors again, in my example, 250 billion dollars is going to be lost in this. So, even if you cut that in half, 125 billion dollars in investor capital is wiped out. And the other thing I'll say here before I throw it back to you is you and I have videos. We have receipts saying that this 125 billion was lost the day the deal was closed.

[00:14:04]Crazy. Crazy.

[00:14:06]>> I mean, it's just like really, really typical bubble behavior with the the predictable result of of bubble behavior, right? Where you know, you have a run-up you have a run-up that goes for such a long time, people don't believe it can it can ever change and they >> This time is different and blah blah blah.

[00:14:27]>> is different.

[00:14:29]A lot of anger directed at people like me who say even even mildly cautious things like I think you should exercise some caution right now. I mean, that that statement >> taxes, raise some capital, yeah.

[00:14:41]>> Yeah. That statement on a on a in a forum got me like, you know, made fun of by someone who now has lost dozens of deals, right?

[00:14:55]Because he knew it. When I said it, he knew it was true, but he was in denial about it, right?

[00:15:01]So, >> Uh yeah, I think So, so I want to talk about that cuz I I I'm actually hopefully going to interview Brandon Turner. He He and I are communicating via text, so we'll see if it happens. I don't know if he wants to go out public or not, but but we'll see. Um how does a syndicator make money?

[00:15:16]Like the old model. So, like in 2021.

[00:15:19]Cuz cuz Cuz think people realize yes, these deals are fun, and yes, there's some social embarrassment, I'm sure, losing 15 million. But, does the syndicator, in most examples, they're not really Are they hurt, right?

[00:15:33]Cuz doesn't a syndicator make money at point of closing, point of management, point of sale? Or are all Is it all back end, and they lost, too? How do How does it work?

[00:15:41]>> The The majority of it's back I mean, the biggest payday is on the back end.

[00:15:45]Right? But, they have not So, the way that typically syndicators get compensated is there's an acquisition fee that's paid at closing.

[00:15:53]>> And that's closing of the deal. So, let's So, it's like 1%, 2%?

[00:15:57]>> It depends. Yeah, 1 to 2%, but I've seen as high as 4.

[00:16:00]Right?

[00:16:00]>> All right. So, let's call it two Let's call it 2% just so people realize. So, you close a $100 million deal, you've done nothing yet, you make 2 million bucks for closing.

[00:16:09]>> Well, I'm going to push back on that because you've done a lot of work up to that point, and you you probably >> with the asset. But, >> No, done nothing with the asset, but you have put like your own funds at risk of not closing. You've done all the due diligence. So, the The justification for that is that there's been months and months of work that have gone into this, and you've put a lot of time and money at stake.

[00:16:26]>> All right. So, So, they they do get reimbursed at point of closing, okay.

[00:16:29]So, they're Now you Now you get to >> Yeah, plus like a fee for closing. So, you own it. Then, there are asset management fees.

[00:16:36]>> Okay. So, they're still one or two?

[00:16:38]>> Yeah, that's typically depends on how you structure your deal, either like uh you know, a percentage based on what you with the capital that you raise, sort of like a the way that a fund would ma- get an asset management fee, or a percentage of the rents, like more like a property management >> That's just to keep the operation going, right?

[00:16:57]>> Right. And that's That's not like a ton of money, but you know, big big deal, it could be money, but it's not like it's not typically like a ton of >> life-changing, no. That Cuz you got to pass. Okay.

[00:17:05]>> Yeah, people call it sort of like keep the lights on money, right? And so, and then the big payday And then there are other fee people might charge like a deal like a debt signing fee, and there can be some other fees. But typically there's your acquisitions fee, your asset management fee, and then the big payday comes when you close, and there you're getting you know, assuming that >> close, you mean the exit.

[00:17:26]>> I'm sorry, selling. Yeah, when you when you sell the deal, right? Then that's when the big payday comes, and you're getting you know, depending on how the deal is structured, between 20 and 40% of the profit on the sale. So after >> be very clear on this cuz I cuz I've had people ask me and I don't know the answer.

[00:17:44]>> Yeah.

[00:17:44]>> If somebody loses $15 million in investor capital, which means the investors aren't paid back, it's not like somehow you're seeing a windfall in this. So if if somebody sold something at a big loss, they're not seeing any profit from that cuz there is no profit. Is that reasonable?

[00:18:00]>> No, there's no profit. So but I mean, now there are some syndicators who charge what's called the disposition fee.

[00:18:07]>> Oh, >> So it's sort of like so it's sort of like charging it's like like getting another acquisition fee, but when you sell.

[00:18:12]>> Yeah.

[00:18:12]>> I you know, yeah, I in my view, you got to be pretty unscrupulous to take that ac- that disposition fee when you're selling at a loss. But I'm sure there's people out there who are doing who are doing it. Um >> Yeah, no idea. Okay. All right.

[00:18:25]>> But but yeah, so you're not making any money if you sell at a loss. Or if you sell just at break even. Like you're not making any money because of there's no profit, right? So um So that's you know, that's how the compensation works. So there are you know, there are some syndicators um who churn deals and made millions and millions and millions on their on their >> Sure.

[00:18:45]>> fees, right? Because they were doing numerous hundred million dollar deals.

[00:18:49]And I remember reading about people like in 2021, 2022 bragging about how they had closed like 12 deals that year. And I'm like, how do you find 12 deals worth doing? How do you find 12 deals worth bidding on?

[00:19:02]>> Yeah. Exactly, bidding. Not only closing, bidding.

[00:19:04]>> Yeah, like like >> The answer is overpay. Be stupid. That's what that's >> Like like ever. Even in a even in a more more of a like a buyer's market. Like how do you how do you close 12 deals?

[00:19:16]>> I remember them being all big shouldered and swaggy. I remember I remember going you guys are nuts.

[00:19:22]>> talking about like you know billion dollar hedge funds here, right? We're talking about syndicators raising money from you know mom and pop and it just you know >> Yeah. Well, I got we've got to start wrapping this. I wanted to ask this one last question.

[00:19:38]So Ken McElroy is out there pretty publicly now saying that just in Dallas Texas I don't know if you've heard this.

[00:19:46]There's a thousand multi-family properties in trouble.

[00:19:50]A thousand just in Dallas.

[00:19:51]>> I wouldn't be surprised. I mean so many of those properties traded multiple times during the run up, right? They they So in that sort of 10 year 15 how long was it about >> Dallas you think Texas will be the epicenter of this? Is like is Texas the Okay, so Texas is >> Texas is definitely the epicenter, but the other places that are going to be really crushed are Phoenix, Atlanta Charlotte to some extent um Las Vegas. Like I mean it's going to hurt everywhere, but those markets the markets where that that have the best demographic story but also happen to be and and these things are also related the easiest to build in >> Yeah, cuz they just break ground. Yeah.

[00:20:35]>> Right. And the thing is and those like why is the population moving to these places? Because housing is cheaper. Why is it cheaper? Cuz it's there's open land there's open land. There's cheap land, right? You can buy cheap land. You can buy it's easy to to to build. So you know all these things are sort of connected to each other. Um but those are going to be the places that are that are hurt the most. The places that have a bit more of a moat you know the places that got poo-pooed before in New York City, San Francisco, Los Angeles, Chicago, Miami, like places that where there's no land left to build on, those places will be uh will be less hurt by this, yeah.

[00:21:14]>> Very cool. Well, let's close it out.

[00:21:16]Where can people find you? Cuz this is this Well, you and I've been kind of talking about this for years, but you and I think I think you're going to get really busy over the next 24 months.

[00:21:23]That's my guess.

[00:21:25]>> [laughter] >> So, yeah, well, come to my school group, right there on the screen, school.com/aic.

[00:21:31]We'll chat about these things over there.

[00:21:33]>> Very cool, Jonathan. You're amazing.

[00:21:35]Take care. Have fun.

[00:21:36]>> Thanks, you too.