This is The Debrief - a post-game analysis for LPs. Breaking down the plan, the reality, the result, and key takeaways of actual real estate syndication investments to better understand risk and invest accordingly.
To respect the confidentiality of private investment vehicles, all names, specific locations, and exact proprietary figures have been anonymized or rounded.This is a very public case, so this time names are not anonymized. However, the purpose here is to recognize the warning signs - not to rehash what happened after the deal closed and the subsequent storm of fraud and legal battles. You can google that.
The analysis provided is for educational purposes to illustrate market mechanics and risk management.
Do you know how to spot the risk of theft or fraud in a private investment offering?
What would you look for?
A shady character plotting and scheming?
or
An award-winning, recognized leader with a long track record?
The thing about fraud is that it’s sneaky, and may not even be the intention of the perpetrator. But desperate times can drive desperate behavior. And where most fraud starts - an otherwise reputable person who starts digging a hole of bad decisions, convinced they can dig their way out.
This is the story of the lauded leader who fell from grace right into prison. But not before buying fancy watches, fine art, and a $7M condo with stolen money.
The Plan
A value-add, opportunistic investment in the Atlanta Financial Center, an iconic Class A office complex acquired at a steep discount.
The deal offered the potential for outsized returns driven by a multi-million-dollar renovation program and a strategic lease-up of vacancies.
The sponsor, Nightingale, and its principal, Elie Schwartz, have a long, distinguished track record and have received multiple industry awards.
The Reality
The deal was real, but the funds never made it to their intended destination.
Investor funds were used by Mr. Schwartz as a personal piggy bank - to float several of his distressed deals, fund margin calls on equities (that went badly), and purchase a number of personal luxury items.
Mr. Schwartz’s deception was discovered in mid-2023, and a criminal investigation and legal proceedings ensued.
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The Result
Hundreds of investors lost the majority of their investment.
As for Mr. Schwartz, he was convicted and sentenced to 87 months in prison and ordered to pay $45M in restitution to his victims.
Did Mr. Schwartz intend to commit fraud, and what drove him to upend an otherwise distinguished career with such flagrant misuse of funds? We may never know.
Flaws Apparent in the Pitch Deck
Although the business plan is aggressive, there were no warning signs readily apparent before 2023 using standard due diligence. By then, the funds were gone.
The past offers only the subtlest of signs:
No third-party escrow account.
The loss of Mr. Schwartz’s business partner in 2021.
Unusually long delay to close the purchase after collection of investor funds.
All of these situations are fairly common, and would not necessarily be cause for alarm, but are worth further consideration.
Third-party escrow accounts are not common in private real estate syndications, which means this risk is real and effectively unavoidable. LPs typically wire funds directly to a GP-controlled account created exclusively for the deal. This direct transfer of funds from LP to GP is a major point of trust, which makes the next two points critical.
Loss of key staff is always a risk, and perhaps this point should have been explored. Why did the partner leave? What skills, expertise, and relationships did he take with him? How was this loss filled within the organization? At the time of the offering, the company’s track record was based on the operations being guided by two principals. This offering was led by one. The loss of key staff is a valid point of operational risk that should be carefully considered before investing, but is not necessarily indicative of fraud. However, if the GP's account had required dual authorization for withdrawals, the risk of fraud may have been reduced or negated.
Closing delays of 30 to 60 days are common due to lender administrative procedures; however these should be reported by the GP immediately and with a very clear explanation. In addition, an experienced GP should plan for these delays - which would make them expected by the LP - and reporting between the time of collecting investor funds and closing on the property should be clear and provided promptly.
In this case, the GP sought a 6-month closing delay after collecting investor funds to seek better financing terms and renegotiate with the seller. While these seem like prudent actions, it is highly unusual for this type of deal modification to occur after the collection of investor funds. A more prudent investor would have requested the return of funds due to 1) the unusually long delay; and 2) the potentially significant change to the deal structure due to the new and unknown debt and purchase terms.
A note on due diligence and public records:
Nightingale was experiencing significant financial distress across multiple properties during the capital raise period - including missed debt payments, a deed-in-lieu of foreclosure, and undisclosed losses on its track record. Most formal foreclosure proceedings were filed after the raise closed. What was available during the raise was largely confined to industry trade press and CMBS servicer databases - sources not typically accessible to retail LPs conducting standard due diligence. The ethics of and access to GP background checks by LPs is an on-going discussion point within the world of private investments.
Key Takeaways
This deal had the subtlest of warning signs that were only apparent to the most skeptical and vigilant of observers. While this was a shocking loss for me, it provided some very important lessons:
People change. Do not let a long track record or relationship fool you.
Fraud is not what you think it is. It is oftentimes committed as a desperate act by people thinking they can get ahead and get away with it.
Diversify. The future is uncertain.
READ YOUR REPORTS. The most tell-tale clue to fraud in this deal happened after the collection of investor funds.
Don’t let your reports go unread.
Bottom Line
Fraud and theft don’t arrive the way you expect. It’s often subtle, unassuming, and unexpected. A slow burn. And surprisingly boring. This storyline is actually very boring, isn’t it?
Successful businessman gets in over his head, desperate to make up for losses he gambles investors’ money, digs hole deeper, gets caught, goes to jail. The end.
It’s the generic deals that end up with the drama:
There is no checklist that catches an Elie Schwartz before he becomes a fraud. What there is: position sizing, diversification, and the discipline to treat every private investment - regardless of the track record attached to it - as if you could lose it all. Because sometimes, you can.