The July 2022 e-mail sent out to Cardone Capital investors in Equity Fund XVIII stated “This month’s distribution was impacted by a $67k increase in interest expense due to rising interest rates…” Our source tells us the distribution was cut from 6% to 4%. That is a whopping 33% hit on your distribution. Scroll down to read the e-mails sent to us by one of our sources.
Update: New data shows that Grant Cardone’s previous claims of using 10 year 3.75% interest only loans are no longer valid on new projects and he has begun using variable rate loans. As a consequence, Cardone Capital is incurring interest rate increases in servicing its loans. One e-mail issued by Cardone Capital stated that the firm is raising rents: “average rent increases of $509 per month, The property is currently 95.7% occupied, trending toward 98.0% occupied…”
Grant Cardone claimed that his multifamily deals were designed to cash flow at 85% occupancy. Now Cardone has had to reduce distributions based on 95.7% occupancy. What happens with further rate increases? Cardone is highly leveraged and this is where, even at a close to 100% occupancy, he has to raise rents due to increased interest rates.
The other factor at work is that not all Cardone tenants can afford a $509 a month rent increase. Everyone has been hit with sharp price increases on gas, food, and everything else. Thus, if a Cardone tenant living paycheck-to-paycheck designed their budget around $1800 a month rent, they cannot afford a 33% increase to $2309 per month. Accordingly, some percentages of Cardone’s tenants will vacate and find cheaper housing.
If Cardone Capital is cutting distributions by 33% and increasing rents by 33%, then this seems to be Grant Cardone’s plan to begin paying his investors the distributions they were promised. Again, Cardone claimed his deal were designed to cash flow and pay distributions at 85% occupancy. And yet he now has to cut distributions 33% and raise rents at 95.7% occupancy.
Given the competition, apartment owners with fixed rate loans can afford to keep their rents lower in order to attract Grant Cardone’s tenants. Likewise, apartments that are owned outright can afford to hold steady on rents to achieve 100% occupancy.
That Cardone has to increase rents by a significant percentage at close to 100% occupancy should give Cardone watchers pause. The old maxim may apply and we will have to watch and wait. The old maxim: It’s all leverage on the way up and debt on the way down. Blackstone and the other big investors should be keeping an eye on this to see if buying opportunities develops once Cardone Capital hits its pain threshold.
Regarding interest rate increases: In his livestream of February 21, 2021 Grant Cardone made the following prediction and got it massively wrong:
“So to be clear ladies and gentlemen, I predict that a year from now interest rates will be at or below where we are today, National mortgage rate today is 4.24. Feds fed expects to hire to raise 25 bps [basis points], or a quarter of a point at the next nine meetings, I suggest somewhere between now and the next nine meetings they’re unable to raise interest rates as they want to.
The Fed raised interest rates as they wanted to. A 30 year fixed loan is now 5.6% – 6.6% depending upon one’s credit score.
Listen to Grant get it wrong in February 2021. The video is cued to where he makes his wrong prediction. Grant Cardone says a lot of things in this video in which he is trying to say inflation is good.
In the July 2022 letter Grant Cardone admits to interest rate increases impacting the monthly distribution:
From: “IR Team” <invest@cardonecapital.com>Subject: Cardone Equity Fund XVIII DistributionDate: August 15, 2022 at <redacted>To: <redacted>Reply-To: “IR Team” <invest@cardonecapital.com>Thank you for investing in Cardone Equity Fund XVIII (CEF XVIII)! Your distribution has been sent and will arrive shortlyThis month’s distribution was impacted by a $67k increase in interest expense due to rising interest rates and an additional day of interest expense in July versus June. Despite a third payroll in July, net cash flow before interest expense increased by $78k primarily due to a $22k reversal in bad debt expense in July not appearing in June along with overall expense management. The property is currently 90.8% occupied, trending toward 95.6%, and achieving average rent increases of $509 per month.Your Cardone Equity Fund XVIII, LLC distribution is summarized below:
Offering Investing Entity Date Distributed Cardone Equity Fund XVIII, LLC <redacted> Aug 15, 2022 $<redacted> Investor Room
If your preferred method is direct deposit, please confirm receipt of the deposit with your bank, as posting cut-off times are bank-dependent and the actual date of fund availability to you may vary (Please allow 5 business days for processing with custodial accounts). If your preferred method of distribution is mail, your monthly distribution is being sent.
Quality service and security is a priority at Cardone Capital. If you have any questions regarding this transaction, please contact us immediately.
I appreciate your confidence in me and if you have any questions, please feel free to contact
Investor Relations Team
phone number: 833-822-7435
email: invest@cardonecapital.com
Thank you for your participation in the Fund, we look forward to a long and prosperous investment relationship! Also, our newest fund, Cardone Equity Fund 20, is open for business and the response has been amazing. We would love to have you involved in it as well. For more information visit CardoneCapital.com
Sincerely,
Nothing contained herein shall constitute an offer to sell or solicitation of an offer. Any such offer will be made only to qualified investors pursuant to an offering document. This material has been prepared for the intended recipient and is for informational purposes only. Past performance is not an indication of future results. Investing involves risk and may result in partial or total loss. Prospective investors should consider carefully investment objectives, risks, charges and expenses, and should consult with a tax or legal adviser before making any investment decision. For additional information, visit http://www.cardonecapital.com/disclosures.
Cardone Capital Equity Fund 20:
From: “IR Team” <invest@cardonecapital.com>Subject: Cardone Equity Fund 20 DistributionDate: July 16, 2022 at <redacted>To: <redacted>Reply-To: “IR Team” <invest@cardonecapital.com>Thank you for investing Cardone Equity Fund 20 (CEF 20)!
Your Cardone Equity Fund 20, LLC distribution is summarized as follow:This month’s distribution was impacted by higher interest expenses from rising interest rates. The property is currently 95.7% occupied, trending toward 98.0% occupied, and achieving an average of $598 rent increase per month on all new leases.<>Investor Room
Offering Investing Entity Date Distributed Cardone Equity Fund 20, LLC <redacted> Jul 15, 2022 <redacted>
If your preferred method is direct deposit, please confirm receipt of the deposit with your bank, as posting cut-off times are bank dependent. The actual date that the funds are available to you may vary (Please allow 5 business days for processing with custodial accounts). If your preferred method of distribution is mail, your monthly distribution is being sent.
Quality service and security is a priority at Cardone Capital. If you have any questions regarding this transaction, please contact us immediately.
I appreciate your confidence in me and if you have any questions, please feel free to contact
Investor Relations Team
phone number: 833-822-7435
email: invest@cardonecapital.com
Thank you for your participation in the Fund, we look forward to a long and prosperous investment relationship! Also, our newest fund, Cardone Equity Fund 21, is open for business and the response has been amazing. We would love to have you involved in it as well. For more information visit cardonecapital.com
Sincerely,
Nothing contained herein shall constitute an offer to sell or solicitation of an offer. Any such offer will be made only to qualified investors pursuant to an offering document. This material has been prepared for the intended recipient and is for informational purposes only. Past performance is not an indication of future results. Investing involves risk and may result in partial or total loss. Prospective investors should consider carefully investment objectives, risks, charges and expenses, and should consult with a tax or legal adviser before making any investment decision. For additional information, visit http://www.cardonecapital.com/disclosures.
April 9, 2020: Cardone Capital had to suspend distributions for three months due to what it said were economic factors. We recommend this video which was made at that time: Cardone Capital Investor Shares his Frustration with Grant Cardone Email.
Categories: Grant Cardone
Jeffrey why has the US Govt or Angry Investors or somebody else stopped this guy? Why am I afraid he is just one of all kinds of these hucksters and they only reason I know about him is the Scientology connection? He recently posted a job opening for a video editor. It would be hilarious if he hired me! 🙂
I can’t wait to see how this plays out.
He said on clubhouse his loans were on variable rates – not fixed 😳 so just wanted to confirm that !
When he did say it on his clubhouse? Please post a date and a link. And what Grant said on Clubhouse does not matter in any case because the real question is this: Did he disclose his use of ARM’s in the prospectus for each fund?
Distributions were derailed by one whopping third because:
a. Interest rates are going up; a long universally expected development. (They had no other place to go.) Apparently, one that Grant failed to prepare for, given how rapid the impact on his liquidity.
b. An additional day of debt service due to a 31-day month. Given that such a month rolls around without fail 6 times a year, every year, (or 50%), Grant’s vulnerability on that account is as puzzling as it is troubling.
c. An extra payroll. It happens every six months; so again, what’s the surprise?
One thing is readily apparent: Grant is operating with a perilous business model. A model designed such that the first to get hit are his investors. (The same happened during covid when distributions to investors were suspended entirely while Grant was collecting PPL funds for himself). The immediacy of the interest rate impact suggests an exceedingly fragile business model.
It is equally puzzling that Grant can implement $500 rent increases at the drop of a hat. First off, there’s clearly a limit to what the rental market will bear. Second, existing rental agreements (and in some cases, local ordinances) limit the ability to raise rents. Third, the magnitude of the increases makes one wonder how well the apartments were managed in the first place. Does this mean that he was renting out significantly below market value all this time? Given that they are paying him to manage the properties, his investors should find that alarming!
Given the “me-first” way he has it structured, the only kind of investors that Grant’s scheme can attract are strictly small-time and low-experience (*) . The kind that want to drop casually in a bar that they are “real estate investors” and “partnering” with a “billionaire.” The kind that forego higher returns and control over their funds for the peace of mind that an “expert” is in charge and that returns may be small but dependable. They expect leadership and delivery on promises through good times as well as bad. Like his hero elron, Grant does not seem up to the task that he is taking all of those big fees and commissions for.
(*) It was puzzling when Grant was hinting a while ago that Bob Duggan had written him a check for $5 m to invest. Clearly, a billionaire with actually competent advisers can achieve far better and safer returns on $5 m without ever lifting a finger. The only explanation that occurred to me at the time was that Bob, whose stock in the cult appears to have ben sinking, was trying to curry favor with miscavige (and/or his former bestie) by throwing what amounts for him to play money Grant’s way. Even so, the deal fell apart shortly thereafter during due diligence.
For whatever it’s worth, here’s my Grant anecdote: During a recent hotel stay in Palm Beach, FL (an exceedingly hot–but also vulnerable–real estate market at the moment) , I got into a conversation with a guy who clearly was (or wanted to be) a man on the make. He told me that he was “into listening to Grant C.” I was a bit alarmed but, not wanting to be a know-it-all, held my tongue for the moment. A bit later, I inquired innocuously whether he had placed any money with Grant. His response was, “Hell no. I want nothing to do with the guy’s BS. To me he’s just a motivational speaker.”
Spoken like a true investor!
Thank you for your insightful comments Todd.
It is telling that Grant Cardone is blaming part of his problems on an extra payroll when, as you point out, it rolls around 2X a year.
Grant Cardone is all about 10X’ing everything. However, he cannot handle 1 extra day of interest in a 31 day month or two extra payrolls each year. And yet, as you say, he knows how the calendar works and he knows the word “accrual.”
As I mentioned in the article, Grant bragged his model was designed to cash flow and pay dividends at 85% occupancy and yet now he has to dramatically raise rents at >95% occupancy. Grant Cardone appears to be caught in yet another lie.
Thanks, Jeffrey. Yes, it is peculiar how a titan of industry, a “billionaire investor”, the “world’s #1 sales man) can’t handle these little things. (Boy, will he sh*t himself when he finds out that 2024 has even one more day to it.)
It reminds me of so much about the cult. You take a communications course… and then release communications that don’t even manage proper spelling? And “communicate” by lying, ad hominem and shouting over people? You spend good money to learn how to handle SP/PTS … and then you have to run and hide when one appears in the same zip code as you? You spend hundreds of thousands on training…but then end up paying for repairs, re-doing lowest-level actions and having to be sec checked? You set out on a journey of 15 grades, and the most you can hope for is to peter out at 8?
Call me a nit-picker if you want to. But when you’re laying claim to greatness–even more so, when you’re selling it as a high-priced commodity–shouldn’t you at least be able to handle the little stuff without breaking a sweat?
i found this as i was researching more, he created a REIT in july 2021, granted oct 2021. i wonder if this is his back up plan to not go under?
https://stock.us/sec/1882616/0001477932-21-007681
in terms of clubhouse – he just mentioned about a week ago he was using ARM. in his SEC filing for cardone fund V, they describe the type of financing they use, just a very broad description.
“Risks Related to Our Corporate Structure
We do not set aside funds in a sinking fund to pay distributions, so you must rely on our revenues from operations and other sources of funding for distributions. These sources may not be sufficient to meet these obligations.
We do not contribute funds on a regular basis to a separate account, commonly known as a sinking fund, to pay distributions on the Interests. Accordingly, you will have to rely on our cash from operations and other sources of liquidity, such as borrowed funds and proceeds from sale of the assets, for distribution payments. Our ability to generate revenues from operations in the future is subject to general economic, financial, competitive, legislative, statutory and other factors that are beyond our control. Moreover, we cannot assure you that we will have access to additional sources of liquidity if our cash from operations are not sufficient to fund distributions to you. Our need for such additional sources may come at undesirable times, such as during poor market or credit conditions when the costs of funds are high and/or other terms are not as favorable as they would be during good market or credit conditions. The cost of financing will directly impact our results of operations, and financing on less than favorable terms may hinder our ability to make a profit. Your right to receive distributions on your Interests is junior to the right of our general creditors to receive payments from us. If we do not have sufficient funds to meet our anticipated future operating expenditures and debt repayment obligations as they become due, then you could lose all or part of your investment. We currently do not have any revenues. ”
https://sec.report/Document/0001477932-18-003316/
“Your right to receive distributions on your Interests is junior to the right of our general creditors to receive payments from us. If we do not have sufficient funds to meet our anticipated future operating expenditures and debt repayment obligations as they become due, then you could lose all or part of your investment.”
Claro. Whenever you take money from a bank their interests supersede your own. They get to take every last penny before you get a shot at preserving even a part of your own investment. That’s how come banks own big shiny buildings in the high-rent district while their clients get to scrounge for what’s available in less desirable parts of town.
However, Grant’s investors’ interests are also subordinate to “anticipated future operating expenditures.” This may be a good time to remember one of the major operating expenses. And that is Grant himself, and the multitude of services he provides and gets paid for. They come first, even if they are merely “anticipated future.” In other words, he can turn off distributions if he fears that he may not get paid in the future or may be unable to conduct business in the style he’s become accustomed to.
Remember “his” private jet, fanboys and fangirls? The one that drew you to him as a real macher? Guess what, it’s not his. It’s yours. You’re paying for it. And you will continue to, long after your own distributions will have dried up.
Or when he was fending off the early stages of a class action not so long ago? If you think he paid for that, think again. If this things ever unravels he can still pay himself and his legal expenses for years to come before investors get their turn at the trough. (Unless a court puts a stop to it which it can do only to a limited degree even if blatant fraud is alleged as is the case with GPB).
John P. Capitalist’s observations and comment:
I took a quick look at the numbers in this post.
If Cardone got hit with an extra $67,000 interest bill for a single month, that’s almost $800,000 in additional interest per year. That’s on $31 million of funds raised as of the 2022-04-05 Form D filing. In other words, his rates got jacked up by about 0.75% points if he put all that money to work immediately at 20% down (i.e., he has $120 million in debt and $150 million in properties). If he’s got any less fully invested, then the interest rate jump is higher than 0.75%.
I agree that Cardone putting a $500 rent increase through for marginal clients in second-tier markets is going to up his vacancy rate. But rents in many metros are up 20% in the last two years, sometimes more. So if he’s raising it $500 on $1,800 average per unit, he’s slightly above the national average. $500 on $1,200 average per unit is extremely aggressive, however. He may be thinking that he has pricing power if he’s 95.7%-plus occupied. He may be right, or he may be spectacularly wrong. I suspect that the people doing the most aggressive price increases will overshoot the market. Too early to tell, however. BTW, it will take a while for a rent increase to ripple through all the existing tenants as leases roll over. If he has 24 month leases, that’ll be a long time. Those seem to be increasingly common but I don’t know what % of units nationally are on leases longer than one year.
In one view, inflation is good for companies over the short term when an inflationary cycle begins. That’s because companies can jack up prices for essential goods and services (of which rent is perhaps #1) and consumers will pull in their spending on discretionary items first (restaurants, vacations, etc.). This is why we’re seeing significant increases in grocery prices and soaring profits at grocery-only retailers (i.e., not Walmart or Target).
A lot of people look at the piles of cash that upper-middle consumers have accumulated during the pandemic and figure that money can go to paying higher prices for essentials. They are, of course, missing the fact that lower-income consumers (potentially in second-tier markets where Cardone targets for investment) don’t have the cash cushion that wealthier households did — people on hourly got their hours cut massively during the pandemic and haven’t recovered).
There are also a lot of households that were paying most of a second income in child care but one partner quit to stay home with the kids, so they’re not going to participate in wage growth with both incomes any longer; they’ll only get one income’s worth of raises. So any wage gains that percolate through the system (which always happens slower than inflation, BTW) will not benefit them.
Cardone’s aggressive strategy to hike rents will work in the short term but it’s not yet clear whether it will backfire. If it does, it will backfire spectacularly, but it may take longer than people expect. I think his business model is not resilient enough to deal with unanticipated structural changes in the environment, and that he is in trouble, but I caution (based on long experience with failed predictions of corporate or national economic collapse which almost always overestimate the speed of a meltdown) that Cardone may last longer than the current situation may make it seem.
I do believe that Cardone is way too aggressive for what is likely to be an extremely choppy market going forward over the next five years, and I think it is too risky to have significant exposure to interest rates if he has ARMs on his properties. But I don’t think this is yet a signal that he’s going over the cliff this year.
Remember: thousands of Western political analysts knew for decades that the Soviet Union was unsustainable (they spent 50% of GDP on defense and couldn’t feed their own people). But nobody predicted either the date that it would collapse or the catalyst that would bring it about. And nobody predicted that the whole thing would implode without a shot being fired. So if Cardone blows up, nobody will predict it accurately. But it will be fun to watch.
I think this post is so informative and thank you John P ! I get a sense that even though it may take awhile Cardone’s model and method of doing business will implode on him. 💛 Jeffrey.