Editor’s Note: New York Times business content is now included with your Finance & Commerce subscription. Not a subscriber? Start your subscription here.
Adelaida Martinez was drawn to the opportunity to invest and collect a monthly dividend check in Skyloft Austin, an upscale student housing complex near her alma mater, the University of Texas at Austin. James Parziale poured money into the same business because he was impressed by the shiny new skyscraper with its sun-drenched rooftop pool and door-to-door garbage collection service.
Now Martinez and Parziale are among the dozen of small investors who are suing. You have been picked up by a group of professional real estate investors who have raised tens of millions of dollars from people like you to help fund the dormitory purchase.
According to the lawsuits and investors, more than 200 lawyers, accountants, doctors, retirees and others invested $ 100,000 to $ 500,000 each in the deal in 2019. At least half of them are now suing the property management firm that promoted the deal, as well as a hedge fund that provided additional funding and later took control of the building before selling it. Investors are trying to recoup much of the $ 75 million they invested.
Such deals, known as private placements, are often awarded by brokers to selected groups of small investors. They involve selling stocks, real estate, or other assets, but the small deals that promise good returns can be risky because they’re not transparent. Private real estate placements like the Skyloft deal are also popular as they allow people to defer taxes on real estate sales.
According to court records in California, Texas, and Delaware and interviews with half a dozen investors and attorneys, Skyloft investors don’t know where the money is going or who the building actually belongs to today. Some court records said they were the victim of a “Ponzi-like” program in which promoter Patrick Nelson used the proceeds from the Skyloft deal to invest in other student housing projects and to get rich by transferring funds to offshore bank accounts . ”
Nelson’s company, Nelson Partners Student Housing, denied wrongdoing. In a statement to the New York Times and in court records, Nelson blamed the coronavirus pandemic for his company’s financial troubles. He also blamed Axonic Capital, the hedge fund that provided the funding and effectively sealed off the building.
Martinez, 82, who retired in 2006 after teaching for nearly 50 years at Texas A&M and the University of Nebraska, said, “I was very naive about my background in finance. I come from the world of literature. “She added,” You have given us no explanation. There is only silence. “
A risky endeavor
Private real estate placements have become popular with retail investors because they regularly pay dividends and promise attractive returns in a world with low interest rates. But as the hurricane of the Skyloft litigation shows, there are many risks involved. Such deals are often given directly to investors and there is often limited transparency or regulatory scrutiny. The fine print can be tricky to follow. Investors give up their money, which is often locked up for years, and they have little control over how a project is managed.
Martinez, who lives a short distance from the dormitory, said she invested just over $ 100,000 in the deal – money that came from the sale of a rental property. Like many Skyloft investors, she was looking for a way to defer paying any capital gains from the previous sale, and the private placement was marketed by brokers as a “1031 Exchange” deal that would keep the Internal Revenue Service in check.
A 1031 exchange deal, named after a section of federal tax law, allows an investor to defer payment of capital gains from the sale of real estate so long as the proceeds are invested in another property whose value equals the value sold or its equivalent. These deals are often criticized as tax breaks for the wealthy, but the deals have long piqued the interest of investors with more modest means.
Court files and interviews with investors explained how Skyloft project finance works. To secure the $ 124 million purchase of Skyloft, Nelson Partners received a $ 66 million mortgage and $ 75 million from ordinary investors from a UBS-led group of lenders. Axonic Capital, a New York City hedge fund specializing in commercial real estate transactions, received $ 35 million in short-term funding. The Axonic loan was used to complete the purchase while Nelson Partners raised money from investors.
Nelson Partners was supposed to repay Axonic’s bridging loan plus interest with funds from investors like Martinez. But Nelson’s company didn’t pay back the loan, according to court records. In February 2020, Axonic made Nelson Partners aware of this and in May last year informed them that Nelson Partners had declared default and had taken control of the building.
I feel cheated
“There has been a thread of secrecy through this whole thing,” said Parziale, 74, a retired attorney who also invested.
Parziale and his wife invested around $ 500,000 in the Skyloft deal. He said his brother-in-law invested another $ 500,000. Parziale said he accused Nelson of not letting investors know what was going on and left them helpless. “The sponsors of these deals are like cowboys,” said Parziale. “You can do what you want.”
Some investors said the 200-page private placement memorandum Nelson Partners shared with them did not clearly state that Axonic could take control of the building.
Mary Cunningham, president of the Chicago Deferred Exchange Co., which specializes in 1031 exchanges, said too many investors failed to read the private placement agreements to get all the details about the fees of a deal and the terms of a transaction.
Nelson said he was “betrayed by Axonic,” according to a New York Times statement. In the statement, he said Axonic led him to believe that this would increase the time it would take to pay back the loan – especially as he was addressing coronavirus-related issues on his company’s properties.
“I’m doing what I can by working with my attorneys to stop Axonic’s illegal and selfish efforts to wipe out property interests of investors,” Nelson said in the statement, who posted a letter to investors on May 7th which he posted her about a possible article in the New York Times.
Nelson and his lawyers, who had a conference call with investors on May 13 to discuss the situation, have refused to keep a full record of the money raised, some of the investors said. Of the $ 75 million raised by investors, Nelson Partners was to raise $ 2.2 million to sponsor the transaction and $ 3.6 million to act as a property manager. The firm, which manages 18 student dormitories in 11 states, also collected rental checks from students last year, according to legal proceedings.
Axonic said in court records that it was exercising its right to collect the money owed. In a statement, Axonic said of Nelson: “It is unfortunate that Pat hurt those who relied on him by defaulting on our loan and not paying it back.” However, Axonic said it has a “fiduciary responsibility” to its own investors. The $ 4 billion hedge fund is led by Clayton DeGiacinto, a former Goldman Sachs mortgage broker.
This article originally appeared in the New York Times.