October 2024 Newsletter

Welcome to the second edition of our weekly newsletter, with all the real estate crowdfunding gossip and scuttlebutt that’s fit to print.

A Real Estate Crowdfunding Platform Purchases Kanye West’s Gutted Malibu Mansion

The Wall Street Journal and MarketWatch are reporting that Belwood Investments, a small real estate crowdfunding platform, has entangled itself with a very infamous celebrity.

Belwood Investments’s founder Steven "Bo" Belmont, who served time in prison before founding the startup, purchased Kanye West's destroyed Malibu mansion for $21 million, a significant discount from Kanye West's 2021 purchase price of $57.3 million. The house, designed by the renowned Japanese architect Tadao Ando (winner of the Pritzker Prize, the “Nobel Prize of architecture”), was destroyed by West and left in disrepair. Belmont intends to restore the house to its original form, estimating renovation costs of $6-8 million. Belwood Investments has raised millions of dollars for the restoration.

Belwood uses a trust deed structure in order to reassure investors that their money is safe; notably, Belwood’s structure does not require it to register with the SEC, unlike many of the real estate crowdfunding platforms we've reviewed on this site. Belwood manages all project costs and loan payments during the investment period. Upon selling a property, the company follows a specific payout order: initially, investors receive their principal back, followed by the repayment of any existing mortgage. After that, Belwood recovers its operational expenses. Any remaining profits are then divided 50-50 between Belwood and its investors. The Wall Street Journal reported it was “unable to independently verify Belwood’s average investor returns or whether its investors have ever lost money.”

Due to the property's ownership history and architectural significance, Belmont’s plans have garnered significant media attention. He aims to erase the stigma associated with West's ownership, and potentially list the restored property for up to $40 million. Will he get a return on his investment? Only time will tell, but Malibu's luxury real estate market seems to be holding up fairly well despite challenges in the broader Los Angeles area.

Yieldstreet’s Getting Sued in a Class Action

A federal district court judge just allowed a lawsuit against Yieldstreet to proceed as a class action, according to a document that is publicly available on Justia.com (Tecku et al v. YieldStreet Inc. et al). Here are the key points:

1. The plaintiffs (Michael Tecku, David Finkelstein, and Lawrence Tjok) are investors who bought Borrower Payment Dependent Notes (BPDNs) from YieldStreet investment funds. BPDNs are basically loans that depend on how well other loans perform.

2. The lawsuit alleges several claims against YieldStreet, including fraudulent inducement, aiding and abetting fraud, violations of federal securities laws, breach of fiduciary duty, and negligent misrepresentation.

3. The main allegations center around YieldStreet's misrepresentations and omissions in their investment offerings, particularly regarding:
* The use of asset class experts to source and structure loans
* The diligence process for extending loans
* The claim that YieldStreet's offerings had "suffered no principal loss"

4. The plaintiffs wanted to represent a larger group of investors who bought BPDNs from specific YieldStreet offerings.

5. A judge recommended allowing class certification for some of these investors but left out certain funds and fiduciary duty claims.

6. YieldStreet objected to the class certification recommendation.

7. The court reviewed the objections and ultimately decided to:
* Approve class action status for claims of fraudulent inducement, aiding and abetting fraud, federal securities law violations, and negligent misrepresentation claims
* Limit the class to investors in three specific funds: Vessel Deconstruction I, Vessel Deconstruction Fund III, and Louisiana Oil & Gas Fund
* Exclude claims related to fiduciary duties from the class action

8. The court found that common issues were more important than individual ones, making a class action the best way to handle the case.

9. Even though the court didn’t assume investors relied on missing information for the securities claims, they still allowed the class action for other reasons.

10. This decision means the lawsuit can move forward as a class action for certain claims, potentially impacting many YieldStreet investors. If successful, it could have major consequences for YieldStreet.

This is some pretty alarming stuff — we’ll see how far it goes, and keep you posted with any updates. If this lawsuit succeeds, it could potentially spell the end for Yieldstreet as we know it.

Fundrise and Yieldstreet React to the Rate Cut

As we stated in last month’s newsletter, the Federal Reserve has just cut interest rates by 50 basis points, marking the first reduction since 2020. This move prompted swift marketing responses from Fundrise and Yieldstreet, and each is adapting their content strategy to capitalize on the changing market dynamics.

Fundrise is encouraging investors to act now, pointing out that as interest rates drop, real estate prices are likely to rise. They've been actively preparing for this shift, investing approximately $1 billion since the start of 2023 when property values were depressed. Fundrise's pitch is straightforward: invest now to lock in lower prices, and hold for the long term to potentially outperform the market.

Yieldstreet is taking a slightly more nuanced approach. They're focusing on preserving yields in three key ways:

• Offering fixed-rate loans to lock in today's higher rates.
• Providing floating rate loans with floors, which offer a minimum yield while retaining upside potential.
• Exploring opportunities in asset-backed loan pools, particularly those originated in 2023 and 2024 when rates peaked.

Ted Yarbrough, Yieldstreet's President and Chief Investment Officer, sees significant potential in how this rate cut could reshape private markets. He's particularly interested in the commercial real estate sector, anticipating potential valuation recovery and refinancing opportunities as rates decline.

Both companies are eyeing the private equity market. They expect lower rates to stimulate more M&A and IPO activity, potentially benefiting existing investments. Yieldstreet notes that private equity firms have amassed significant "dry powder" during the high-rate environment, which they expect to be deployed as conditions improve.

The Federal Reserve is projecting another 50 basis point cut before the end of the year, with market expectations of rates falling below 3% by early 2026. This outlook is shaping the strategies of both Fundrise and Yieldstreet as they position themselves and their investors for what they hope will be a favorable market shift.

See You Next Month

Thanks for reading. Stay tuned for more gossip, slander, and scuttlebutt.