Close Encounters of the Fraud Kind, Arbor's Ardor, Tech says "No Mas" to Miami & Trump Thump

Close Encounters of the Fraud Kind

Two Snapples: $9. Coffee: $4. Water: $2.50. Pack of smokes: $9. The final months of freedom before going away for a $165M mortgage fraud: Priceless.

Boruch “Barry” Drillman was spotted in Surfside (likely Cafe Vert), while the fallout from his fraud continues to reverberate nationally. In December, the real estate investor pleaded guilty to a multi-year conspiracy in which he duped lenders into issuing loans on the basis of artificially inflated purchase prices. To wit:

• Bought an Ohio apartment building for $70M. Showed lender and Fannie a purchase & sale contract for $96M

• Bought a Michigan office park for $43M. Showed lender a purchase & sale contract for $70M, plus a fake letter of intent (this one had even more gymnastics 🤸‍♀️, including a short-term $30M loan to demonstrate proof of 💵 )

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Drillman (cont.)

If Drillman acted in a vacuum, the industry would have moved on. But deals take a village: here, 2 prominent title cos. are named in the DOJ release; Madison Title performed the Ohio closings, both for the true sales price and the fugazi one, while Riverside Abstract performed the ones in Michigan. 

The backlash has been swift and severe. Riverside is said to be in talks to sell itself (such as it were) to nursing-home mogul Avery Eisenreich (first reported in The Promote), and there has been chatter of DUS lenders placing both firms on a no-fly list of sorts. 

On Friday, sources shared a Fannie dispatch in which the GSE said it will “not accept Delivery of any Mortgage Loan closed using Madison or Riverside in any capacity.” What this effectively means is that any new agency deals involving those two firms are dead in the water; sources said this has been the de facto case for a few weeks, and Friday’s dispatch merely formalizes things.

I couldn’t reach Riverside, but Madison sent along the following statement: “Madison Title has not been accused of any wrongdoing, and we are proud of our record of trustworthiness and integrity. We remain steadfast in our commitment to transparency, telling our story, and addressing any concerns.” 

There may be workarounds to the situation for the title firms, however. One investor speculated that they could go and acquire other untainted firms - “it takes longer to acquire a hot dog 🌭 stand than it does a title co.” – and route agency deals through those firms. As long as the agencies buy the loans, the DUS lenders could potentially go with it, the investor said.  

Aside: Remember that earlier last week, Fannie also put out comms in which it said that starting March 4, it would deny all loans brokered by Meridian Capital Group. (As I understand it, the Meridian and Drillman situations are completely unrelated, just noting here that Fannie is making moves.)

A Star is Torn

Speaking of Barrys… Office doom loop prophet Sternlicht is on the verge of losing an office building in El Segundo, TRD reports, after defaulting on an $85M MetLife loan. “There’s $1.2 trillion of losses spread somewhere - nobody knows exactly where it all is,” Sternlicht said late last month, in a v deliberate statement that the media fell all over. Well, at least some of “it” may be in El Segundo. 

Tech says “No Mas” to Miami

This is a Miami story masquerading as an SF story: WSJ reports that the great “move to Miami” experiment in tech is floundering and that the pendulum has swung back (if it ever swung at all) in favor of the Bay. Highlights:

• "Move to Miami" startups opening offices elsewhere or relocating entirely

• Keith Rabois (Miami’s answer to Guy Kawasaki) who claimed that SF was  “miserable on every dimension,” (side note: also claimed to know more about resi real estate than “probably any one person in the US”) was recently pushed out of Founders Fund and will now spend a week a month in SF as part of his new role at Vinod Khosla’s firm

•  VC startup $$ in Bay Area fell 12% YoY to $63B. Still, that overall number dwarfs any other market, and other hubs were rocked far harder: Austin’s overall funding volume fell 27%, LA’s 42%, and Miami’s 70% to just $2B. 

“The reality is that the brainpower is here” said SF-based VC  Max Gazor.

Sheep in Wolfe’s Clothing

I want to learn more about this company – the YouTube interviews are a doozy – but for now: Kenny Wolfe’s Wolfe Investments had bought a prominent Dallas building in April and eyed a 238-unit resi conversion. It all went awry impressively fast: A Dec. lawsuit claims Wolfe cheated a short-term lender (Priya Capital) in the course of financing the purchases, per DBJ. The property has now been sold at foreclosure auction for $8M ($42 a foot) to the lender (Thistle Creek Capital) that had issued a $13M+ loan to Wolfe on it. Thistle plans to continue with the conversion plan.  

Orange Theory

I’ve been hesitant to cover DJT mostly because I no longer think it’s a market story - The Trump Organization hasn’t been a real player for at least a decade. Still, worth checking out the NYT piece on Friday’s bombshell ruling in his civil fraud case - the tab once interest is added in will exceed $450M; Trump is banned from his NY business for 3Y, and his large adult sons face a 2Y ban plus fines of their own. 

(The Times has a side piece about how the Trump brand is now a liability for Manhattan condo owners, comparing sales premiums of comp product to those emblazoned with the Trump name, and also looking at how buildings that removed the Trump moniker did compared to those that stuck with it. I’m generally a bit dubious about these types of analyses but you can check it out here.)

Neither a Borrower Nor a Lender Be

Major multi lender Arbor reported Q4 earnings Friday: $92M net income, with CEO Ivan Kaufman describing ‘23 as “one of our best years as a public company, despite an extremely challenging environment." He acknowledged that now is a “period of peak stress” and predicted a couple of tough quarters ahead. He also addressed the Viceroy short (more on the short thesis here) as an example of cherry-picking data to “inject fear into the market for personal gain.”  

Some highlights from the call (with help 🙏 from Hunter)

1) Arbor: "In our balance sheet lending business, we continue to focus on working through our loan book and converting our multifamily bridge loans into agency product allowing us to recapture a substantial amount of our invested capital and produce significant long-dated income streams.” In Q4 Arbor produced $800M of balance sheet runoff, 58% of which was recaptured to new agency loan originations.

Commentary from Hunter: “The above is absolutely crucial for ABR to cut a path through, but the Agencies are guiding essentially flat origination volumes for 2024. Layer on the Meridian situation and you have a situation where ABR cannot recap these Bridge loans at the same cadence they were able to in 2023.”

2) Arbor on its non-performing loans: (also explored in Thursday WSJ story):  "With respect to us taking over the management of the assets, we do have the capability, but that's not what's taking place. In fact, the demand from our borrowers to step into some of these assets is so strong that we've had to set up an internal process to limit the number of actual borrowers that we have because we're getting inundated requests.” 

I found this example particularly interesting: “At one of our borrowers who didn't want to make this payment, and we're deep, deep in the money. And we have five sponsors who want to take over that asset. We're going to collect penalty interest all the way through foreclosure, transition that asset. We know ownership, get a reduction in the loan amount, got a nice performing loan and then produce for agency loans in the next nine months when the asset gets restabilized, that's a great situation."

Fly Away With Me

Readers of The Promote might dig a dive into “Learn to Fly Private,” a newish newsletter from Preston Holland, the CCO at Flying Finance. Lots of good, wonky deets on that strange world in the skies, with insider intel on costs, operators and more.

Unquotable Quotes

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