A Yale Graduate Leaves a Trail of Ventures and Debts
nytimes.com
nytimes.com
D-
Thought this was worth shooting your way:
CrossFit NYC, which I started as a side project ten years back, has since grown into the largest CrossFit gym in the world (by a factor of three).
It's a big enough opportunity that I'm making CrossFit my main focus for the next 18-24 months, taking a leave from Outlier to essentially build up the Equinox of CrossFit.
We're raising a $5m growth round, and are pursuing both an equity roll-up strategy (we just acquired our smartest two competitors in NYC), and aggressively opening new spaces (we've locked deals for awesome 18,000sqft foot locations at 42nd & Lex, Broadway & Fulton, and Spring & 6th Ave, to open throughout 2015).
Given our traction / track record / unique position, this is coming together fast; we already have the first $2.5m locked down, and we should close out the rest within a couple weeks. Deck attached. Would love to have you in,
j
-- joshua bryce newman northstar crossfit www.northstar.nyc
Moreover, why are investors expecting loans to be paid back when given to such high risk endeavors? They were investing in startups, not real estate. Structuring those investments as a loan is an asinine decision on both sides. The borrower is personally liable in the event of default, and the lender gets no equity to capitalize on success. It's stupid.
There is probably much more to this story, specifically if you note the reference to "bridge loans." Josh Adler, the plaintiff, is head of a fund called b2rfinance, funded by bridgewater. B2r invests in "hard money lending," also called "landlord loans" or "bridge loans." I just learned about this investment yesterday, but I encourage everyone to read about it. Basically it's a high interest loan tied to the "after repair value" of any hard asset (houses, atm machines, vending machines, etc.), where the borrower puts the asset itself as collateral. The terms are generally extremely predatory and often result in ownership transferring mid loan to the lender, or high "prepayment" penalties. These are basically payday loans backed by assets instead of paychecks.
Some real estate guys I talked to described these loans as "subprime 2.0." The same mid level investors from subprime 1.0 are taking the loans, investing in flipping houses or renting them. Frequently the equity of one house bought via a hard money loan is leveraged into another loan for another house. You can see how this creates a house of cards. Now bridgewater and other PE firms are putting billions into this vehicle, presumably prepping to securitize into bonds and sell to IB's. Distance between borrower and source of funds is increasing rapidly and risk assessment quality is decreasing just as with subprime 1.0.
Again, I just learned about this type of loan yesterday and researched it for a couple of hours. I could be grossly misinformed but I think I get the gist. It sounds like an extremely dangerous investment vehicle that could spiral out of control the same way mortgage securities did in 2007. If I had the money and knowledge I would be investigating how to bet against this a la The Big Short.
Anyway, all the references to these bridge loans in the article makes me fairly suspicious of the whole thing. Reader beware.
My understanding suggests that the main time you, an individual, would do a bridge loan, is if you wanted to buy a house and use the home equity in the house you haven't sold yet as your down payment. If that's the case, you put the cash in the down payment, and aren't expected to pay it back if the house you've vacated is seized. Nothing about this process seems intrinsically unfair to anyone (yet) though the process is probably an expensive way to get that money.
I'm not sure why you'd put them into bonds. Besides being freakishly irregular loans, they're generally designed to be very short-term, which it seems would be an impediment to securitization -- doubly so when you're talking about a business bridge-loan instead of a real-estate one. Are you sure your presumption is accurate?
And, just for what it's worth, even payday loans can be very attractive if the alternative is worse (e.g. please give me a $500 payday loan so I can go pay my fine and retrieve my car from the impound lot so the city of SF stops charging me $65.75/day in fees. thanks.)
source- buddy who is banker for 25 years
Your examples make sense when the loans are targeted at individuals who live in the home the loan is paying for. In that case the incentives can frequently align to decrease overall risk.
However what I am hearing from mid level investors on the "ground level" is that most of these loans are not going to people living in the houses. They go to people renting or flipping the houses. This is creating misaligned incentives.
Because flippers/landlords work at scale (more than one house) they naturally treat the loan as an investment vehicle and therefore need to create positive ROI. A single homeowner doesn't care about high interest rates because presumably they were the best, or the only, option to buy a house. However flippers/landlords need to "cash out" of the loan for the high interest rates to be viable. They can also use the equity in one house financed with a loan as the collateral for a second loan.
A single default can have cascading consequences on multiple parties as it can lead to the foreclosure of multiple properties and a liquidity crunch for the lender who needs to then dump the properties. If suddenly twenty 3br houses within the same area foreclose and go up for sale, then the surplus of housing supply drives down the price.
The increased risk of lending to landlords creates an incentive to consolidate funds to cover a larger risk pool. That is why blackstone and other PE firms are investing in large funds. The problem is that by investing in many landlords, black stone cannot properly assess the risk of every loan. If this sounds familiar it's because the exact same thing happened in subprime mortgage.
Ultimately the problem is large funds are consolidating risk while decreasing the accuracy of risk measurement. This combines with the sudden influx of funding to create incentives for reckless lending.
Put another way, multiple parties are making money without providing any service other than consolidating funds and passing risk tolerance onto the next lender. The system of banks > PE funds > brokers > landlords has too much exposure. Too many people lend the money without knowing the risk.
As for why black stone would securitize into bonds, it is the economically rational thing to do. Unfortunately in this system the loser is the one left holding the check when real estate plummets and interest rates rise.
There are many parallels to subprime 1.0, most notably the middle class lenders authorizing the loans with "someone else's money." Landlords are not funding the investment but they are assessing the risk.
(Sorry for long reply. I have been thinking about this a lot.Also p.s. My original comment was wrong about Josh Adler head of b2r. I mixed up two people with names josh and Adler.)
But one that's very relevant to HN readers is the bridge loans offered by VCs to startups.
Let me relate to you one experience. I experienced this directly. The startup was very profitably using consulting to support development of the product by making initial versions available to clients before productizing it. They had a consulting team and a product team. This method allowed them to have a product team larger than they would have had if they didn't have the consulting team-- effectively more than doubling the engineering investment in the product. They started talking to VCs and all the VCs insisted they shut down the consulting team and "focus" on the product. Of course this had the side effect of killing their income and making them completely dependent on investment. When one of these VCs got "serious" they actually too the advice and shut down the consulting business.... then the VC proceeded to delay closing the round for months. We had a term sheet, but three months went by, then 6 months. All the while the accounts receivable from the consulting clients are dwindling. Around 6 months we were out of money and the VC offered us a "bridge loan" until their investment would close. Of course this loan had really absurd terms, but by that point the founders backs were agains the wall and they had no choice. Ultimately the startup was a failure- they were a bit too early to market, and because they had shut down the consulting business they didn't have the revenue to keep the doors open for the extra 2 years -- about how long it took for the market (Which is many billions of dollars now) to show up. In the end they sold for a smallish amount to a large company that made great hay with the technology... and the founders were pretty much wiped out due to liquidation preferences and the bridge loan.
This is when I learned that "focusing" was nonsense. The product development slowed as a result of "focusing", it didn't get better, and the problem for the company was not lack of focus but being ahead of the market by a couple years.
The sad thing is, here we are years later and what's common in this industry is a technology that wasn't nearly as good as what the company developed. So VCs not only killed the company, but delayed technological advancement of the industry (in this part of it anyway.)
Part of the reason is that this superior technology is part of a large companies platform. If the startup were offering it, it could be widely distributed and adopted, but since this platform owns it, only a minority of people on the platform use it-- most have to support multiple platforms or are worried about lock in from the platform provider.
"the VCs insisted"
Blindly doing what the VCs say, when the founders know better is what cause the trouble.
Joshua Adler is not head of the fund nor has he ever been, Jason Hogg is. Joshua Adler is co-founder of LaKritz Adler, a real estate investment firm based in and focused on the Washington, DC area.
The minimum amount you can borrow from B2R is $5M (previously, it was $10M) -- so this isn't something your average homeowner is going to take out on their home.
And the article only has one reference to a 'bridge loan', and that's a $350K loan from a Brooklyn artist to Cyan.
B2R's end game is to acquire rental properties, with B2R being an abbreviation for "Buy to Rent".
Mixed up the names of Josh, Jason, and Adler. My mistake. I would edit if I could.
Regardless I was interested in the discussion of bridge loans.
I met him once at a party, we talked for a while, seemed like a pretty typical entrepreneur/hustler dude. Did not pick my pocket.
The story is the way that connections and credentials count for more in the world of American capital than a track record of success, or even honesty.
I'm wondering how this warranted a writeup like this. Someone starts a few ventures, a few people lost some money, its ambiguous as to whether or not there are valid claims to the lost money. Total amount "a few million dollars".
What makes this different?
And the examples given are of ventures that Josh worked for 8+ years in. Hardly the mark of a conman.
Many HN participants have left behind more failed ventures or lost more money than this Josh.
Goldstein (author) writes investigative pieces on the Clintona' hedge fund dealing among other big issues. What on earth possessed him to try and tar this guy?
That's the real story I'd love to read: how to buy or beg the favor of turning a nyt reporter into one's own hatchet man for nickel and dime vendettas. Sheesh.
Full disclosure: I probably have lots of 2nd degree connections to the subject of the article since we were in related schools at the same time, but I don't know him and have no dog in his fight(s).
Anyone who thinks $9m is 'low budget' is a sucker who didn't do their due diligence. Real film productions use an escrow account that releases when the film is fully funded or returns the investors' stake within a set period. Also raising $9m for a first film just smells to high heaven. 5% of that amount would be a lot of money for a first-time producer.
The guy must be a really smooth talker if the company still holds the rights for the original store. Usually options on literary properties run for only 3-5 years.
He almost uses the exact same words and tries to twist things around like "well I could have gone bankrupt but I decided to do the right thing and pay back people". Meanwhile all he's doing is paying back fractions away using new investor money while living his comfortable lifestyle.
Risky ventures and investors losing money aren't news, but I'm trying to understand if this story is unique because of the type of financing.
EDIT: ...other than, of course, the dishonesty.