Adam Neumann’s new apartment venture, Flow, looks to have encountered financial difficulties with its earliest acquisitions.
Despite Flow’s website still announcing “coming soon,” two Nashville properties acquired by Neumann’s Nazare Capital and later transferred to Flow, are experiencing a cash flow deficit, according to The Real Deal (TRD).
To address this, two funds have been launched on the crowdfunding platform Yieldstreet, aiming to gather investments to manage interest rate caps and operating shortfalls at Stacks on Main in East Nashville and 2010 West End Avenue in downtown Nashville.
The funds are necessitated by rising interest rates impacting both properties.
For Stacks on Main, which carries a $60 million floating-rate mortgage, cash flow was just about sufficient to cover half of the monthly loan payments as of June.
The loan, originated by Rialto Capital, has been under close watch since August.
A Flow spokesperson told TRD that the debt service coverage ratio in June was above 0.8, considering the rate cap, though a figure below one per cent indicates insufficient revenue to cover debt service.
On the other hand, the West End building is under a $121 million mortgage from CIM Group, but no public data on its performance is available.
While Flow is the general partner in both deals, a Yieldstreet-managed fund holds a majority equity stake as a limited partner.
Yieldstreet, not Flow, initiated the new funds.
“As joint venture partners, Flow and Yieldstreet have invested in Nashville assets consistent with our joint investment strategy, which has included, among other things, upgrades and capital improvements,” a Flow spokesperson said in a statement.
“Both partners are funding as the JV agreement calls for,” the statement added.
Flow and Yieldstreet have collaborated as joint venture partners on these Nashville assets, investing in upgrades and capital improvements, as stated in a Flow spokesperson’s statement.
Yieldstreet documents reveal that Flow has already invested in a rate cap and operating expenses.
The Yieldstreet fund involved with Stacks on Main had previously met a capital call for the property, and the new fund is expected to reimburse the limited partnership.
Yieldstreet acknowledges the “short-term pain” in the commercial real estate sector, attributing it to high interest rates, but remains committed to multifamily investments.
Flow, initiated by Neumann and substantially supported by Andreessen Horowitz, aims to “revolutionise” residential real estate.
With $2 billion in assets and 4000 units under management, Flow’s business strategy remains somewhat unclear, though it appears to follow the typical value-add approach used by many multifamily syndicators.
Stacks on Main, bought by Nazare Capital for $79 million in 2021, has seen about $18 million in investment from Yieldstreet investors and $4.5 million from Nazare.
Despite initially performing well, with net operating income exceeding expectations and significant rent increases, the property is now struggling.
Operating income has fallen 26 per cent below budget, and the joint venture requires additional funding for an interest rate cap purchased by Flow.
Interest rate caps, which protect borrowers from exceeding a specified interest threshold, have become increasingly expensive due to rising rates.
This trend is exemplified by Ashcroft Capital’s recent decision to halt investor distributions to afford an exorbitantly higher rate cap cost.
For the Nashville properties, Flow’s strategy relies on new funding.
The fund for 2010 West End is allocated for replacing an expiring cap and operational expenses.
The fund for Stacks on Main aims to cover the cost of a one-year interest rate cap bought in the previous quarter and other operating deficits.