The drama between investment partners in $250 million worth of Texas multifamily assets is ratcheting up with a blistering countersuit.
Two months after Dallas-based syndicator WindMass Capital sued investment partner Fundamental Partners in Dallas County District Court, Fundamental hit back with a lawsuit that flips WindMass’ claims.
WindMass’ July suit claimed Fundamental was having cash flow issues and operated the partnership’s companies as “an organ donor” to its unrelated projects.
Fundamental claims the opposite happened.
Rather, WindMass’ mismanagement of the partnership’s properties resulted in a mountain of debt, unpaid bills to vendors, liens and maintenance costs, the countersuit alleges. Specifically, the partnership fielded $88 million in funding requests, it said.
Fundamental paid $83.4 million of the $88 million. The lawsuit said less than $4 million came from WindMass, although its ownership interest in the partnership’s companies ranged from 10 to 32 percent.
Fundamental claims WindMass contributed $8 million less than it should have.
The lawsuit goes on to detail why Fundamental removed WindMass from nine joint venture agreements — decisions WindMass says were made in bad faith. Fundamental claims it removed WindMass after its “repeated failures to meet their contractual obligations,” Fundamental said in a statement.
For each group of properties, WindMass contributed far less than its ownership stake required, the lawsuit said.
WindMass also violated the joint venture agreements by failing to complete the work outlined in business plans, going over budget, taking action without notifying Fundamental and violating non-compete agreements by purchasing nearby properties, the lawsuit states.
Per the agreements, these actions constitute “removal events,” and Fundamental is permitted to remove WindMass as administrative member (to Fundamental’s managing member) of the agreements, the lawsuit states.
For one group of properties, WindMass used 87 percent of the capital expenditure budget to renovate just 43 percent of units, and it spent an average of three times its estimate to renovate the units, the lawsuit alleges.
WindMass also borrowed $1 million from an affiliate — and provided a 10 percent return — allegedly without notifying Fundamental. It signed a seven-year contract with ADT (without approval from Fundamental) for smart home technology (that wasn’t included in the business plan), the lawsuit states. WindMass failed to timely notify its partner about the theft of $2.6 million in construction materials at one of the properties, it states.
Fundamental claims WindMass filed the original petition “in a desperate effort to bully” its partner.
Given both sides’ accusations that the other is insolvent, the lawsuit appears to be emblematic of the effect of multifamily distress on value-add investors.
These operators purchased older multifamily properties with floating rate loans when values were at their peak and interest rates were very low. Since rates jumped and values fell, these investors are stuck paying higher debt service while cashflow has shrunk.
Read more
Arbor forecloses on $229M portfolio
Small-time multifamily investors go belly-up
Multifamily guru Brad Sumrok slapped with fraud suit
WindMass accuses co-investor of conspiracy in bombshell suit
