Yieldstreet is raising cash to shore up two Nashville deals it owns with Adam Neumann's new a16z-bac
- Adam Neumann's new startup partnered with crowdfunder Yieldstreet on two Nashville apartment deals.
- The deals have required an additional $10 million more in capital as costs rise.
- These deals are an example of the challenges facing commercial real estate right now.
Adam Neumann has been busy since leaving WeWork, the coworking company he founded, and then quit amid scrutiny over his leadership.
Since then, he's launched two separate startups: FlowCarbon, which promises to use crypto and carbon offsets to help fight climate change, and Flow, an apartment rental startup that promises to give tenants a better experience and a sense of ownership, through, among other things, plunging their own toilets.
Publicly launched in 2022 but built with assets from Neumann's own family office, Flow received the largest check Silicon Valley venture capital heavyweight A16z has ever written. The $350 million check valued the startup at over $1 billion.
Before launching Flow, Neumann's family office had purchased stakes in over $1 billion worth of apartment buildings across the country. Two of those deals, now sponsored by Flow, which is also the minority owner of both, are now in need of more funds. Both are in Nashville, Tennessee: Stacks on Main, a 268-unit apartment building at 535 Main Street, and 2010 West End, a 358-unit building.
Stacks on Main, which Neumann purchased in 2021 through an entity associated with his family office, is only generating enough revenue to cover 56% of the cost of the debt on the property as of June 2023, according to a Morningstar report.
A representative for Flow disputes this number, writing to Business Insider that the number for June 2023 is "north of" 80% when factoring in a financial instrument that reduces the amount of interest it has to pay on its debt.
Yieldstreet, a crowdfunding platform that has facilitated over $4 billion in alternative investments as of the end of 2023, has already pumped tens of millions of crowdfunded cash into the Nashville deals as the majority equity owner.
Now, the ventures are raising an additional $5 million in funding across both deals on Yieldstreet in order to pay for rising operating expenses and to purchase a financial instrument to lower its interest rate costs. This comes on top of an additional $6.5 million that Flow has lent to the projects over the past six months to cover costs.
"Yieldstreet, as the limited partner, funded a capital call for its share of capital needs for the properties," a Yieldstreet spokesperson wrote to BI.
These two properties are facing the same squeeze as many others in commercial real estate amid sky-high interest rates and inflationary pressures. Commercial real estate investors all over the country are being forced to provide more funding for the deals, which has driven a large increase in landlords turning to alternative lenders for capital.
The latest fundraising effort provides a rare look at how commercial real estate investors are dealing with the challenging environment. In this case, it's opening some of the books to two properties owned by one of the tech industry's biggest names (Neumann) with the help of another (A16z, which made its name as an early investor in Facebook, Twitter, and Coinbase, among many others).
It also underscores the current challenges of apartment landlords in Nashville as more new supply floods the market, hurting projected occupancy and rent growth for the pandemic-era favorite among real-estate investors. Of course, the pace of construction has been slowing, which means things could also turn around by 2025.
"As joint venture partners, Flow and Yield Street have invested in Nashville assets consistent with our joint investment strategy, which has included, among other things, upgrades, and capital improvements," a representative for Flow wrote to BI. "Both partners are funding as the JV agreement calls for and as happens in every standard real estate JV deal."
Below, we walk through the details of the deal based on documents obtained via a public records search and Yieldstreet's investment prospectuses. We explore how these buildings got here and what they could mean for Flow.
Nazare Capital, Neumann's family office which gave its assets to Flow, purchased the Stacks on Main property in July 2021 from CIM Group.
In 2021, Nazare Capital, Neumann's private family office, managed a portfolio of apartments worth approximately $2 billion. An entity controlled by Nazare purchased the Stacks on Main property in July 2021 from private equity giants CIM for $79 million, according to public documents, press releases, and the Yieldstreet prospectus.
Like most landlords, Nazare planned to make money by spending on amenities and other improvements that would allow it to increase occupancy and raise rents in what's known as a value-add strategy.
Nazare Capital then opened the deal to Yieldstreet, raising $18 million for the Stacks on Main Deal.
Yieldstreet allows accredited investors to invest in real estate deals that would typically be reserved for private family office and institutional investors, writing checks that are more likely to be a few thousand dollars instead of a few million.
After Nazare purchased Stacks on Main, investors on Yieldstreet's platform put $18 million in equity into it, leaving Nazare Capital with $4.5 million in equity in the deal. The remainder of the deal was financed with a $62.1 million mortgage, documents say. As part of the mortgage, Nazare also purchased an interest rate cap, which is an insurance product that protects investors from rapid increases in interest rates.
Months after the deal closed, Flow was publicly launched, and Nazare Capital's real estate assets were transferred to Flow's ownership.
As of June 2023, the Stacks on Main deal was majorly underwater, according to Morningstar.
At first, things seemed to be going well at the property. Income rose as the company increased occupancy and reduced concessions to renters in the building, according to a report from debt analysts Morningstar.
However, operational costs continued to rise, as they have for all sorts of landlords during this time period. This cut into the increased income, and as debt on the property increased, it quickly lost its ability to cover its debt with its own operations. As of June 2023, according to Morningstar and the loan servicer, the property was only bringing in enough income to cover 56% of its debt repayment costs. This was down from 115% at the end of 2022. Flow disputes this number and claims that with the interest rate cap it purchased, the income covers more than 80% of the debt costs.
Interestingly, even though property management and branding are pillars of Flow's stated business plan, it is not the property manager for either of these properties. That job has been handled by the property management firm RPM Living. The buildings have also not been rebranded as Flow properties.
As Business Insider's Ben Bergman reported last month, Neumann and his team are taking their time to get the details right at Flow, which could explain why they haven't yet become Flow-branded buildings.
Yieldstreet is now raising $2 million from its investors to shore up their purchase of Stacks on Main.
Yieldstreet is now marketing a debt offering for investors on its platform to lend $2 million to cover both operational costs and the interest rate cap. According to the prospectus, Flow purchased a new interest rate cap in August 2023 for a one-year term, after its previous cap ran out, and has poured nearly a million dollars in loans into the property since this purchase.
The fact that Flow and Yieldstreet have had to go back to investors to raise more funds is not ideal for the building. When real estate investors underwrite a deal, they hope that they won't have to put more money into a property, reducing their yield.
But more and more landlords are finding themselves in this position with debt or interest rate caps they took out now coming due or expiring. They have to decide whether they believe added investments will pay off or be wasted.
This is the main reason we've seen so many real estate investment deals fall apart and why so many investors, even Blackstone, are giving buildings back to their lenders.
In this case, the deal partners appear to be sticking to their convictions and putting more money into the buildings, though Yieldstreet notes in its prospectuses that they anticipate both buildings to be sold in the next two years.
Nazare and Yieldstreet parnered on the $158.7 million purchase of the 2010 West End property.
An entity connected to both Nazare Capital and Yieldstreet purchased 2010 West End, in downtown Nashville, at the end of December 2021 for $158.7 million. Yieldstreet investors poured $32 million of equity into the building, while Flow put in $16 million, making Yieldstreet the majority equity shareholder. This asset was also transferred from Nazare to Flow.
In the case of both Nashville deals, Flow is the sponsor, which means it is the active manager of the operations and finance of the property. As in all limited partnerships, Yieldstreet also has decision-making powers, according to two people with knowledge of the deals.
Now Yieldstreeet is raising $3 million for the 2010 West End deal after Flow loaned the property $6.5 million.
Just as with Stacks on Main, 2010 West End is in need of a new interest rate cap and a way to cover increased operating expenses. Yieldstreet is now raising $3 million after Flow lent the deal $6.5 million of its own capital.
"The proceeds of the investment, along with the sponsor's contributions, will be used to cover the cost of the interest rate cap and provide working capital for operating shortfalls," the prospectus said.
Business Insider could not find public reporting of the debt service coverage ratio, but the issue doesn't appear to be tied to occupancy or rents. The property is 90% occupied with rents 11% higher than they were at acquisition, the prospectus said.
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