Grant Cardone is entering The Winter of His Discontent after a second law firm filed a class action lawsuit this week against Cardone Capital Equity Funds V and VI. The same allegations are made as in the first class action lawsuit: Cardone Capital is not delivering on its promised rates of return.
New York, New York–(Newsfile Corp. – September 21, 2020) – Rosen Law Firm, a global investor rights law firm, announces the filing of a class action lawsuit on behalf of persons or entities who acquired interests in Cardone Equity Fund V, LLC and/or Cardone Equity Fund VI, LLC pursuant to their public offerings (the “Class”).
To join the Cardone class action, go to http://www.rosenlegal.com/cases-register-1951.html or call Phillip Kim, Esq. toll-free at 866-767-3653 or email pkim@rosenlegal.com or cases@rosenlegal.com for information on the class action.
According to the lawsuit, defendants made materially false and misleading statements and omissions of material fact regarding, among other things, investors’ expected rates of return on their investment. The lawsuit seeks, among other things, an award of rescission or rescissory damages and prejudgment interest under the federal securities laws.
A class action lawsuit has already been filed. If you wish to serve as lead plaintiff, you must move the Court no later than November 20, 2020. A lead plaintiff is a representative party acting on behalf of other class members in directing the litigation. If you wish to join the litigation, go to http://www.rosenlegal.com/cases-register-1951.html or to discuss your rights or interests regarding this class action, please contact Phillip Kim, Esq. of Rosen Law Firm toll free at 866-767-3653 or via e-mail at pkim@rosenlegal.com or cases@rosenlegal.com.
During his erratic “Quarantined in Clearwater” period a few months back, Grant Cardone let slip his high-risk business model of ten year loans with interest-only payments for the first five years. The loans balloon massively at year six when principal and interest are due.
Cardone Capital claims to have $1.8 billion assets under management on 8275 apartment units for an average purchase price of $217,522 per unit. If we assume that Cardone is 80% leveraged on $1.8 billion, then he owes $1,440,000,000 in debt.
Below is a ten-year loan schedule for $1.44 billion dollars @ 3.75% interest with the first five years being interest only payments. We used the Calculate Stuff website to create the schedule. The loan begins October 2020 and runs for ten years until September 2030.
In October 2025, Cardone’s yearly interest-only payments jump from $54 million ($4,500,000 per month) to $119 million ($9,916,666 monthly). This happens because principal and interest are now due.
In 2026, Cardone’s annual principal and interest payment screams up to $316.2 million. This is $26,333,333 per month.
How does Cardone bring in enough cash to make the jump from $4.5 million a month in payments to $26.3 million a month? One answer is to refinance using the same ten year loans with five years of interest-only payments.
[Update based upon the discussion in the comments section: Any refi Cardone does could require a substantial down payment if a given property does not have 20% equity or more. This could happen in a real estate crash where multifamily units lose value like everything else. In a real estate crash, Cardone could have to put money down if a given property appraised and left Cardone in a equity position less than 20%.
Cardone could use mezzanine debt or other subordinated second position financing methods that carry a much higher interest rates. The point we make in comments below is that Cardone paid likely overpaid for his deals during the heady real estate boom of 2014-2019 where there seemed to be no end in sight to the strength of the US economy. Cardone may have well boxed himself into an unsustainable situation due to his assumptions Indeed, no one saw the pandemic or eviction moratoriums coming]
Another answer is for Cardone to buy more apartments at 20% down using zero interest loans to bring in more cash flow from rents. To this point, Cardone Capital announced that it just acquired $350 million in apartments. Is Cardone caught in a trap in which he must buy more and more apartments — and therefore incur increasingly greater amounts of debts–in hopes of remaining solvent?
How does Cardone pay his increasing debt load while still paying his investors? The two class action lawsuits to date suggest Cardone is not paying his investors as he promised in his sales literature.
How badly the pandemic has affected Cardone Capital remains to be seen. Grant Cardone claimed in a video he made a few months ago that he was communicating with his tenants and was collecting 93% of his rents. But how are Cardone’s rents coming in now as the pandemic stretches towards winter and there is a spike in infections?
The ban on evictions in most US states that began last spring has been extended until the end of 2020 by the US Center for Disease Control. How hard this financially impacts Grant Cardone and every other landlord in the US remains to be seen. Much of the rental income will never be recovered and mass evictions are feared.
But even with mass evictions what guarantee is there of replacement tenants unless landlords lower their rent prices to compete for paying tenants? Erosion of apartment rent prices are a consequence of supply and demand in which there are more apartments than qualified paying tenants.
Grant Cardone is caught in the same situation as all other landlords. Worse, his investors are now beginning to sue him.
Categories: The Scientology Money Project
Poor hamhock, looks like you’re in deep shit buddy.
This is entirely expected. These class action securities litigation firms will all rush to file suits so that a bunch of class actions are ultimately consolidated into one big suit. The firms whose suits are consolidated essentially get a split of the fees, though the lead counsel gets a disproportionate share. If you can round up a few “named plaintiffs” to join the suit you can generate a relatively significant amount of billings for very little of the actual work in litigating the case. It’s kind of a shady racket but there are a surprising number of law firms that specialize in this sort of thing.
My bet is that there will be on the order of 10-20 of these suits filed. Nothing will appear to happen for a long time, and eventually a settlement will be announced where Cardone admits no guilt but pays the class $10 or $15 million, of which the lawyers will gobble up 70%. The remaining $3 million to $5 million gets split among tens of thousands of investors, with each investor pocketing $30 or $40.
Of course, the other scenario is that Cardone’s situation is sufficiently dire that he goes bankrupt and the class members get nothing.
Do you know if he has any apartments that hit the 5-year mark sooner? I’m assuming he’s been doing this a few years and has some purchased in the past few years? I doubt he has 5 years before it starts falling apart.
5 years interest-only with balloon payment at the end of the term? There’s nothing unusual about that in CRE. Before the 5 year mark you sell or refinance. I’ve seen many deals with interest only and balloon payments.
I’m wondering how the loan forebearance program plays out. If they extend the 5-yr term then that buys Cardone some time to work things out.
As JP Getty once quipped: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.”
Nate, the issue is not if 5 year interest only loans that balloon in year five are standard practice in CRE. The issue is that Grant Cardone did not disclose this to potential investors. BTW, Cardone is not in the CRE market. He is in multifamily market.
Getty’s quote does not apply here because Cardone’s investors will lose everything if Cardone can’t handle his debt load. As the lawsuits state, Cardone buys properties himself and then sells them to his captive funds. He adds a 6% interest on his loan. He then takes 1% on the other side as GP of the fund. This self-dealing leaves the fund holding the debt as Cardone has been made whole when he sold his property to his fund. Cardone is the middle man in his self-serving set up.
I don’t really get the 6 percent interest that he is charging .
When the fund purchases the property from grant , I am assuming the loan is due to the bank. Right ? So at that point, fund just pays the 20% of the property value and grant fronts the 20% and acts as the lender?
Or he sells to the fund continuing to hold the other mortgage with bank , paying them 3% interest ( or so), while charging the investors 6%?
Your question goes right to the core of the matter. We cited paragraphs 53 and 54 from the complaint:
Grant Cardone said he buys the deal with his own money and then sells it to investors via Cardone Capital’s Reg A and Reg D offerings. Cardone does not state how he purchases a deal with his own money. Does he put 20% down and borrow 80%? Whatever he does, he buys a particular deal and sells it to the investors in one of Cardone Capital’s Equity Funds. The Equity Funds pays Cardone his 6% interest and assumes the entire equity and the debt. Cardone has claimed in his videos that the debt belongs to him and this is misleading. What he should say is that the debt initially belongs to him until he sells the entire deal to the fund. At that point, the fund owns the deal and the investors are ultimately responsible for the debt. This is an assumption we have made because Grant Cardone is not a straight shooter. More of his lies and half-truths will be exposed.
I’m not a particular fan of GC’s investment strategy (bringing unsophisticated investors into difficult investments), but the thing about 5 year i/o and 10 year notes is extremely standard in commercial multifamily. Like incredibly common.
He didn’t ‘let slip’ that he uses one of the most common types of financing multifamily real estate, you’re putting a pejorative connotation on his description of his strategy. 5 year i/o at 3.75% with a 10 year balloon is an amazing loan.
Where did you get that a refinance at year 5 requires him to put another 20% down? He is buying the properties with equity. Commercial lenders have very strict DSCR and LTV ratios, so he has to have at least 20% equity to get the first loan. He’ll have to cover refi fees when he refinances, but he will be walking into those loans with at least 20% equity. Most likely far more, since he is doing value add.
You also state that fund investors are promised returns in the offering documents. That is almost certainly false. If it is true, then his attorneys screwed up royally. These types of investments *never* have promised returns and always allow the manager to suspend distributions if needed. The Covid recession and eviction moratoriums are very, very good reasons to suspend distributions. Investors don’t like it, but nobody likes recessions.
Sorry man but this hit job just screams of someone unfamiliar with commercial multifamily investing. You have an axe to grind but don’t really know what you’re talking about. I’m not a Scientologist (big time atheist), I don’t have any business or personal relationship with Grant or his companies, but I do like truth. And you got a lot wrong in this article, largely due to ignorance of commercial multifamily investing strategies.
Thank you for your comment. Here are some of the assumptions we’re operating from relative to Grant Cardone and Cardone Capital that we did not raise in this particular article but have discussed elsewhere. We post these assumptions here to clarify and hopefully address your criticisms. Given that we did not state our assumptions in the article, your criticisms deserve to be addressed.
1. The big question in multifamily: What happens when Federal stimulus payments, expanded unemployment benefits, and eviction moratoriums stop? The CDC Federal Moratorium ends on December 31, 2020.
2. 22 million lost US jobs due the pandemic. Only 40% of those jobs have been recovered. Going forward from 2020, Cardone Capital — and all other multifamily owners — have no short or long term guarantee of appreciation on their properties or even of rent increases. Rents will drop in some parts of the US as a function of competition for tenants with jobs. We are already seeing this in overpriced markets. San Francisco has been hammered by a 31% downturn in rents. The October 2020 US apartment rental average price chart from Zumper:
3. Grant Cardone purchased the bulk of his real estate portfolio in second tier markets during the real estate boom years of the last decade. He did so with zero interest loans for the first five years on ten year loans. One of the key questions: Did Cardone overpay for the deals he purchased? Cardone Capital does not disclose purchase prices. Sometimes one can estimate the prices based upon Cardone’s press releases. In any case, Cardone has no guarantee that he can refi on his terms or that his equity position will increase when it could in fact decrease. He has no guarantee that the second tier cities he is in will not be harder hit by job losses that force him to cut rent prices to keep occupancy rates up. To hear Cardone sell his deals, it all sounds like he wants to sell these people a piece of blue sky.
4. One of Grant Cardone’s mistakes was to think that the economy would remain strong indefinitely and that millennials did not want to buy their own homes. Cardone self-servingly trashed home ownership as pure financial stupidity. This is to be expected of a disingenuous landlord like Cardone. The pandemic changed all all that. With low interest rates on the horizon through at least 2023 and more millennials than ever working from home, home ownership in affordable suburbs is becoming ever more attractive. Why invest in multifamily with Cardone (or anyone else) when one can put down as little as 5% on an FHA loan and have the tax write off and appreciation that come with owning their own home? Why pay a landlord rent for your entire life? That makes them rich and leaves you with nothing except the promise of regular rent increases.
5. What happens in a refi when the appraisal comes in much lower than Cardone projected for year five? What happens in a real estate downturn when a property Cardone purchased at top dollar drops and he is suddenly in a 10% equity position or less? Multifamily is not immune to a real estate crash or investors fire-selling multifamily properties to shed debt or raise cash for their other more profitable businesses. Some investors will exit multifamily and there are plenty of investors looking for deals.
6. Some commercial lenders only offer 70% LTV loans. It is not inconceivable that Cardone has to put 15% down (or more) on a refi if there is a real estate crash or he overpaid for a deal. It is also possible that Grant Cardone has to pay a higher interest rate on a refi in a bad market. The lender will look at the risk, the property, and Cardone’s overall financials. Grant Cardone is highly leveraged. How does a lender look at that in terms of a refi?
7. Cardone has said many times that he designs his model around 85% occupancy and that he can be profitable with a 15% vacancy rate. But what happens if the economy goes south and Cardone can only get 70% (or less) occupancy rates? He has to cut rental prices or even consider Section 8 Housing — and Cardone has made it clear he will not do Section 8, student housing, or senior living. But what happens if he has to do so in order to remain solvent?
8. You can tell us if we’re wrong, but Cardone’s entire model seems to work on five year zero interest only loans, an 85% occupancy rate, and refinancing before year six kicks in. That is what we see when we do back of the envelope calculations. Drop the occupancy rate to 70% and his model falls apart. Cardone seems to operating be on razor’s edge. Cardone suspended distributions for a few months; cut staff pay; laid 42 people off; and took PPP loans.
9. One past case to consider when a firm like Cardone Capital has a large debt load on projects purchased in boom years is The Peter Cooper Village and Stuyvesant Town apartment complex financial collapse in 2010. Tishman Speyer Properties and BlackRock Realty paid $5.4 billion for that deal in 2006 at the height of the 00’s real estate boom. In the 2010 crash, the properties were valued at less than $2.0 billion. Tishman Speyer Properties and BlackRock Realty filed bankruptcy on the property. At what point do lenders view Cardone Capital as being overextended? It could happen in the perfect storm of a new COVID surge and a renewed lock down; a financial downturn; and an occupancy plunge in Cardone’s units due to people moving to cheaper places; moving back in with family; and Cardone having to evict non-paying tenants in order to cut costs.
Note: We are careful to distinguish between multifamily as a market and Cardone Capital as one company within this sector. Has Cardone done a good job in multifamily or is his an Empire of Debt built upon the Sand of Social Media?
10. Some negatives on Cardone: His fake bankruptcy video he did as a PR stunt was a massive breach of fiduciary duty which would have gotten him fired were he the CEO of a publicly traded company. Investors shouldn’t trust someone who engages in such irresponsible and inexcusable conduct. Many of his investors panicked. Who does something that cruel and stupid to their own investors? Cardone’s “cash flow” is dependent upon his taking investor money and keeping those investors illiquid for ten years. The money rolls in for Grant and his investors may or may not get monthly distributions he promised them. Cardone is not a financial advisor and yet he tries to come off as one when he is in fact selling his me-too multifamily product with promises of distributions he can cancel at any time. He does not disclose that in his online selling and this has become evidence against him in the class action lawsuits.
There’s a lot here.
1) I own over 400 units and the vast majority of tenants have continued to pay. There have been a handful who have not, and most of those have not been willing to do the small amount of work to qualify for the CDC’s eviction moratorium. Contrary to popular belief, the CDC did not say “nobody has to pay rent for the rest of the year.” They put requirements on property owners and tenants. We fill our end of the requirements, but have found that most tenants are not willing to do the small amount of work to qualify for the moratorium’s protections. Judges see that and grant the eviction.
2) Real estate investors have known for a very, very long time that SF, NYC, and the other high-end blue markets will get wrecked during the next recession. Falling values on new rentals do not come as a surprise to anyone in real estate who has been paying attention.
3) He did not use zero interest loans. He used interest only loans. Those are very different. Investments carry risk. No big surprise. You can also find sale prices in public records in many states, if you really want to know. I found his Sunrise, FL property here on the Broward County FL Appraiser: https://web.bcpa.net/BcpaClient/#/Record-Search
That took less than 5 minutes to find the appraiser’s site and track down the property record for one of Cardone’s properties. The idea that his purchase prices are some kind of secret is just ridiculous and rather ignorant.
4) Go ahead and buy a single family. If you’re a millennial living in SF or LA, you almost certainly can’t afford it. If you live in another part of the country, inventories are way down because people have stopped moving unless they absolutely need to.
Your primary residence is not an investment, it is a liability. You bear the burden of paying the note. When we buy investment property, our rental incomes pay the note, generate cash flow for us (the owners) and our ownership creates tax advantages. You seem to have missed that the standard deduction has gone up considerably, so it is very unlikely that most millennial home buyers are using the mortgage interest tax deduction.
5) We commercial real estate investors do not sit around crossing our fingers that appraisals come in 15% higher than whatever. We know pretty much to a ‘t’ what our properties are worth, because our property is not valued based on comps. It is valued based on income. You seem to have missed this very critical and basic CRE fact. If he’s going to miss by 15%, he’ll know that well ahead of time. You are totally right that commercial real estate is not immune to recession.
6) There are many loan products available for commercial multifamily. I have an 80% i/o note on a commercial property. For reasons outlined above, he will know well ahead of time if he’s 15% in the hole. If that is happening en masse then get ready for Great Recession 2.0 as Wall Street collapses again due to CMBS defaults.
7) 85% occupancy is rather conservative. Occupancy risk is a part of real estate investing. He avoids markets that have high construction rates, limiting his competition. Unless his markets have massive job losses to other areas, he will most likely be able to remain occupied. He buys A-class properties, so he is not as exposed to the mass failure of the restaurant industry as most other property owners. Most of his tenants are professionally employed.
8) You are wrong, there are no zero interest commercial real estate loans. They are interest only.
You have also described a very common strategy in value add commercial multifamily. 85% occupancy is quite conservative as well. You didn’t really do a back of the envelope calculation, you just threw out a lower number and stated it would be bad. My guess is you don’t know how to underwrite commercial real estate and thus can’t do a back of the envelope calculation.
I’ll give you a little secret: all commercial multifamily investors took PPP, trimmed staff as much as possible, and stopped investor distributions. That was the right decision to make in the interest of his investors. We did not know how bad Covid was going to be back in March/April. He battened down the hatches and that was the right decision. Just like when your parents forced you to eat medicine that tasted bad when you were a kid. It tasted bad and was unpleasant, but it was best for you in the long run.
9) Comparing an 11,000 unit portfolio deal in New York City to Cardone’s properties is just flat incorrect. I get that you’re trying to demonstrate that multifamily can lose money, and that is true. But they’re just not the same. Cardone’s risk is spread out because his properties are in a variety of markets.
10 ) Agreed, that bankruptcy thing was in bad taste. However you have not demonstrated that his cash flow is dependent on bringing in new investor dollars (a la Bernie Madoff). In fact, you’ve given evidence of some of his conservative assumptions (85% occupancy being one of them).
You have pointed out some real risks with multifamily investing generally, but many of your logical missteps are due to lack of understanding of commercial real estate.
Real estate investments are illiquid. Investors are told many times they’re locked up for 10 years.
Most of your complains seem to stem from not really understanding how commercial multifamily investing works. It is not the same as buying a house for your family. The principles are very different. You’ve identified one main risk (occupancy) and that is almost certainly disclosed in his investment documents. It is also a risk that all multifamily real estate investments come with.