Dial M for Mortgage Fraud

Dial M for Mortgage Fraud

“There are also unknown unknowns—the ones we don't know we don't know.” - Donald Rumsfeld

When Joseph Chetrit was jonesing for multifamily, his firm came across a Florida complex owned by Roco Real Estate that seemed a lucrative target for acquisition: it spit off $644K in profits before mortgage payments in ‘18, according to Roco. Chetrit bought the property and thousands of other units from Roco for $570M+ in ‘19, and financed the megadeal w/ a 84% LTV loan from JPMorgan (later securitized). Based on Roco’s numbers, the bank valued that Florida complex at about $5.8M.

Alas, an unknown unknown: The building’s NOI wasn’t actually $644K, but $296K, i.e. less than half that. Roco had got to that rosy figure by including rent that wasn’t actually collected 👏 , and neglecting to factor in tenant concessions such as free rent, per FHFA special agent testimony cited by WSJ. Everyone went w/ the fantasyland figures, and by ‘22, the property was in default.

Prosecutors have finally had enough of the whole sordid CRE mortgage mess, and are cracking down hard on shady practices, putting the entire CRE industry on blast. Late last year, Roco co-CEO Tyler Ross pleaded guilty to multi-year mortgage fraud. A couple months later, Barry Drillman copped to his own scheme, and the dominoes keep falling: Aron Puretz, Jacob Deutsch, the blacklisting of title firm Riverside Abstract, appraiser BBG and Meridian Capital Group.

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Mortgage Fraud (cont.)

To get things moving, the Feds are now working in cahoots w/ investigators at the FHFA, per WSJ. The problem is widespread: in a study last year of nearly 40K CRE mortgages that were later securitized, nearly 1/3 were underwritten w/ NOIs that exceeded actual NOIs by at least 5%. Most of the jiggery-pokery happens w/ T-12s, statements of a building’s income and expenses. What makes mortgage fraud a particularly tricky beast is that all parties sometimes play along: Appraisers need to come back with numbers sponsors are happy with, and lenders have little incentive to challenge those numbers: the bigger the loan, the more fees they can juice 🧃 when they securitize it.

“This space is littered with conflicts of interest,” UT finance prof John Griffin, who co-authored the mortgage study, told WSJ.

From the conversations The Promote has been having w/ lenders, mortgage brokers and sponsors, everyone’s spooked 👻 : Fannie and Freddie are screaming bloody murder, brokerages are examining sketchy practices and doing away with their cowboy cultures, and lenders are promising far more rigorous underwriting. The big Q is whether this crackdown will usher in a lasting era of better behavior, or whether this is a temporary timeout until Uncle Sam gets busy w/ other stuff.

Behind Blackstone Cub’s $1.25B Haul

In this “winner take most” era of institutional fundraising, the new guy who everyone seems to be talking about is Tyler Henritze. The Blackstone vet and founder of Town Lane raised a whopping $1.25B (oversubscribed, natch) for his debut fund, and it’s the pace he did it at that has his peers weak in the knees: The avg. time in market for closed-end RE funds is up this year, to 22 months, but Henritze raked in his cash in just 9. PERE has some new deets on the quest: the first close was held in March at $700M, then a second of $450-475M in April, and a $100M sweetener in late May. University endowments, charities, FOs and pensions all kicked in. Notably, no IR team or placement agents were in the mix - a dagger to the heart for the middlemen 🗡️ 

The fund is US-focused, w/ an eye on eastern US and Sun Belt markets, mostly on the equity side. Town Lane is a family affair: Henritze’s sister, Parker Morse, who was an investor at Sycamore Partners, is COO.

At Blackstone, Henritze was a big part of some of the firm’s biggest “secular tailwinds” plays, from the acquisition of data center operator QTS to the 🐐 ‘d Hilton deal. Having come up under Jon Gray, he is of course fluent in Blackstonespeak, telling the publication that “now the real work begins to thoughtfully invest our partners’ capital in a dynamic and competitive investment environment.” 👏 

King Shit

“Let them eat cake, I’ll have my foie gras” is the easiest way to understand the current state of the ultra-luxury market. While the plebes pore over market reports and talk about softening and a resurgence and whatnot, those with the truly top-shelf product keep finding buyers. The latest specimen is Vlad Doronin’s Crown Building (also known as Aman New York), which has scored the city’s priciest deal of the year w/ a $135M sale of an unfinished 5-story PH for $10,800 a foot 😮‍💨. (The same pad was once in contract for $180M, but that price was for a fully built-out unit, and the deal never closed.)

The 22-unit project is now fully spoken for, according to Doronin’s OKO. 5 pads sold for $50M+, and the penthouse sale bests the $115M ($9K+/foot) Gary Barnett scored at his Central Park Tower in January. 

This phenomenon - where the ultra-luxury market seems to float above the rest, oblivious to comps and economic conditions – isn’t just a Manhattan thing: It’s happening everywhere from Palm Beach to Dubai to Aspen, and as global superwealth disperses from traditional power centers and forms new clusters, it’s something worth paying attention to. We dove into the concept recently on Bloomberg’s delicious Odd Lots podcast – you can listen to the episode here or read the transcript here.

(Bonus: A juicy profile of Doronin here)

Quickies

• 🎥 Inside the Mormon CRE playbook: LPs may not be watching, but God is 😇 

• Biotech mogul buys FiDi tower in $300M distressed sale  

• After PacWest rescue, Banc of California selling $2B in resi loans

• FBI probing rape allegations against luxury brokers Alexander Bros. (catch up on the case and why it matters here)

• Desperate times…Downtowns hire jugglers to bring ppl back 🤹🤹🤹 

• Tishman Speyer launches new debt platform

• Pour one out for the podcasters 😗 … Worries of industrial oversupply hit DFW: 14M sf debuted in Q2, w/ 21M sf under construction ( 🦁’ s share are spec builds)

Battle of the Portals

Murdoch’s Move, parent to resi listings portal Realtor.com, has had it up to here w/ CoStar: It’s suing Andy Florance’s data giant (first CRE, and now resi too), alleging that a CoStar employee who formerly worked at Move stole trade secrets with the aim of giving CoStar’s Homes.com an unfair edge.

“There is nothing wrong with lawful — even intense — competition,” the complaint states, per HousingWire. “But competitors should never be allowed to cheat and steal to get ahead.” Move also reiterated previous claims that CoStar is juking the stats on Homes.com’s popularity: The listings site, Move claims, is a clear #4, not #2. CoStar’s general counsel, the aptly named Gene Boxer, characterized the suit as a “desperate attempt” to distract from Homes.com’s ascendance. CoStar did, however, pull 2 ads that made the traffic claims following the complaint.

An essential bit of context a lot of the press on this seems to have missed: CoStar was in talks to buy Move last year, but when things fell through, Florance mentioned that CoStar would start to monetize Homes.com 👀.

(More on CoStar’s plans to own the entire RE flywheel here.)

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