“Syndicator investors have few legal protections, said Joan MacLeod Heminway, a securities-law professor at the University of Tennessee in Knoxville. Unlike public companies, syndicators in many cases aren’t required to give regular updates on their buildings’ financial performance, she said. As limited partners, investors have no say over spending. Some who lost their investment never knew the properties were in trouble until they were near foreclosure.
Munzer Haque, a former IT professional in Plano, Texas, said he was Applesway’s largest individual investor in the company’s four foreclosed properties and in two others he described as in trouble. Haque said he and his wife, both in their 60s, lost millions of dollars, the majority of their life savings. Their two adult children also invested in Applesway and lost money, he said.
“When you trust the wrong person, that’s the highest risk,” Haque said, “because you give them everything.”
Syndicators generally invest little of their own money. They collect acquisition fees from investors that typically go from about 2% to as high as 5% of an apartment building’s purchase price. They also take management fees of 2% to 3% from the building’s gross income. Syndicators often profit even if the investment is a failure, which real-estate analysts say encourages excessive risk-taking at the expense of inexperienced investors.
During the pandemic, syndicators found it easier than ever to raise money. Sean Tate, a Dallas-based real-estate attorney who has worked with syndicators, said he was inundated with calls from people seeking help to syndicate rental-apartment deals.
Many of the callers learned about the chance to become a landlord from social-media ads, Tate said, and had little idea of what they were getting into. “You couldn’t get on Facebook without the algorithm saying ‘Deal! Deal! Buy multifamily!’” he said.
For most of 2022, Applesway sent brief updates to investors about the company’s various properties, as well as monthly cash disbursements based on the amount of their investment.
Sinha said the first big sign of trouble came this year in a late February email. Gajavelli asked investors for additional funds to shore up property finances at Reserve at Westwood, the Houston apartment complex he had invested in. “I want to let you know that things are not going well,” Gajavelli wrote.
Applesway was losing money because of higher mortgage costs, the result of much higher interest rates, the email said. Property taxes and insurance costs were up. And, as the company moved to raise rents, more tenants fell behind on their payments.
In March, Gajavelli told investors no money was needed after all. In early April, he sent investors letters telling them the buildings had gone into foreclosure. “Few things are more painful than having to notify investors of a failed business,” he wrote in one letter.
Gajavelli offered a silver lining. “We suggest that you contact your tax advisor to discuss how your investment loss can be recognized on your tax filings,” he wrote.”