CrowdStreet Faces Scrutiny Over Missing Funds and Failed Deals

Good morning,

CrowdStreet faces scrutiny over missing funds and failed deals, the collapse of America’s malls, and X HQ to stay in San Francisco despite incentives to move. Lets delve into today’s topics.

📈 Market Update

🤔 CrowdStreet Faces Scrutiny Over Missing Funds and Failed Deals

Crowdfunding platform CrowdStreet has raised over $4B from investors by promoting opportunities with attractive potential returns. However, an analysis by the WSJ found that over half of CrowdStreet’s 104 completed deals failed to meet their targeted returns. This resulted in losses totaling $34M across 19 deals, despite CrowdStreet vetting and endorsing the sponsors and deals.

Millions vanish in high profile Atlanta deal: One of CrowdStreet’s largest offerings involved developer Nightingale Properties raising $54 million for an Atlanta office building that projected a 28% return. However, Nightingale recently filed for bankruptcy and alleged the building was never purchased. Nearly all of the $63 million raised across two projects was transferred to other accounts, including some belonging to Nightingale’s CEO, with just $127,000 remaining. The bankruptcy trustee said transactions indicated fraud. CrowdStreet assessed and endorsed Nightingale as a top tier sponsor, despite some red flags. Nightingale omitted information about past failed deals from materials show to investors. Also, disputes would be handled by a rabbinical court per the operating agreement. CrowdStreet didn't protect funds in escrow and continued allowing investments even as some investors sought refunds.

Limited oversight and vetting: CrowdStreet's model let developers advertise deals after paying a fee, with limited oversight. CrowdStreet endorsed sponsors like MG Capital Management even after they lied about past returns. Lax controls also included allowing deals with unusual terms like rabbinical arbitration clauses. As problems emerge, CrowdStreet now plans to become a registered broker-dealer and use investor escrow accounts. However, past deals have already exposed the pitfalls of real estate crowdfunding with minimal guardrails.

🛒 The Collapse of America’s Malls

Regional malls across the U.S. have plunged in value as changing consumer habits and the rise of online shopping keeps shoppers away. For example, Connecticut's Crystal Mall was valued at $153 million in 2012 but recently sold for only $9.5 million in a foreclosure sale. According Green Street, older lower-end malls have fallen 50-70% in value from 2016 peaks. The pandemic accelerated declines as anchor stores like Macy's and Sears went bankrupt and closed locations.

Malls bleak future: Many distressed malls are being foreclosed on and sold to new owners at rock-bottom prices. However, most experts do not expect substantial reinvestment or redevelopment in these properties. For example, the new owner of Crystal Mall has indicated it will focus on attracting discount retailers rather than transforming the complex. As a result, the future remains very bleak for many lower-quality malls unable to reinvent themselves.

Debt compounds the problem: The loss in value also makes it difficult for malls to support heavy debt loads taken on during better times. Over $14 billion in loans backed by struggling malls will mature in the next year. But with lower valuations, many malls are severely underwater on their debts and can't refinance at affordable rates. For example, the $81 million mortgage on Crystal Mall is expected to recover only $11 million after foreclosure.

🐦️ X HQ to Stay in San Francisco Despite Incentives to Move

Elon Musk stated on X, aka Twitter, that he has no plans to relocate the company's headquarters out of San Francisco despite "rich incentives" offered by other cities hoping to lure the business. Musk said San Francisco is in a "doom spiral" as companies leave but that X will remain in the city. Tesla and The Boring Co. previously left the Bay Area for Austin, Texas, leading to speculation that X could follow.

High cost but access to tech talent: The San Francisco Bay Area has the most expensive costs for operating a hypothetical 500-person, 60,000 square foot tech office at $79 million per year according to CBRE. However, the region remains appealing for its dense concentration of tech talent. While remote work has decreased office needs by 20%, Musk made clear that X will keep its headquarters in San Francisco despite financial appeals to relocate.

📊 Chart of The Day

✍️ Further Reading

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• Biden Administrations Turns Up Some Heat on Renter Protections (GS)