[Founder Jorge] Newbery was the President of Budget Real Estate Inc. from 1995 to 2008, where he brokered over 1,000 troubled Department of Housing and Urban Development and real estate owned properties and acquired, renovated and operated over 200 distressed multi-family, single-family and commercial properties.
By 2004, Mr. Newbery owned more than 4,000 apartment units nationwide. Then financial disaster struck in the form of an ice storm on Christmas Eve 2004 which devastated Mr. Newbery’s largest holding, the 1,100 unit Woodland Meadows complex in Columbus, Ohio. Mr. Newberry wound up in extended litigation with the insurer. Although the insurer eventually settled for $32 million, the settlement was too little, too late. Mr. Newbery lost everything and emerged $26 million in debt. The lessons learned from this experience formed the foundation for the establishment of AHP.
After switching from a non-profit to a for-profit entity, AHP then operated as an open-ended hedge fund from 2011-2013, and then began offering closed-end funds under Reg D (open only to accredited investors), then transitioned to offering investments under Reg A+, open to everyone, under the name “American Homeowner Preservation”, and has now shifted again to offering investments through a new entity, “AHP Servicing”. In this review I just refer to “AHP”, but prospective investors should note there are some complex entity relationships involved here.
Types of investments AHP Servicing offers
Investors are buying into a fund AHP uses to buy up pools of distressed mortgages at a discount, and then AHP initiates a renegotiation process with the homeowners. That results in one of four outcomes:
- Loan modification: either AHP accepts less than is owed by the homeowner to fully settle the loan (but still more than they paid for it) or a new payment amount and schedule is agreed upon, and then after several months of payments, the loan is re-sold to another lender
- The homeowner refinances the mortgage and remains in the home
- Deed-in-lieu: The homeowner accepts a cash incentive to hand over the property or cooperate with a short sale
- Foreclosure: AHP initiates the formal legal foreclosure process to either provoke the homeowner to act on one of the other options, or to eventually repossess (and sell) the home.
What do you get when investing with AHP Servicing?
A recurring theme among the investment platforms covered on this site is innovation, not just from the perspective of technology, but (perhaps more importantly) the investments themselves. While at first glance a 10% fixed return based on an underlying loan sounds like a debt investment, in this case is actually an equity investment in an LLC.
That model is not uncommon among real estate investment crowdfunding platforms, though typically the investor receives some form of promissory note backed by a mortgage; in this case there is no corresponding note. Bottom line is that investors have less security than typically seen with a preferred equity investment, while also having less upside potential than a straight equity investment. (That’s not to say it’s a good or a bad thing! That that will depend on your specific preferences and situation, but does set AHP investments apart from most of the other real estate investment crowdfunding platforms).
Investors receive “Class A” shares in an LLC, which do not have any voting rights, but are entitled to receive a 10% preferred return and full return of their principal before AHP receives any share of the profits (though as noted in the next section, AHP still earns revenue along the way through various fees).
How does AHP Servicing make money?
There are no direct fees for investors, but the way the various entities are structured, AHP (or its related entities) earn revenue from various fees associated with buying, selling, and servicing the mortgages or properties.
AHP lists the following as their primary sources of revenue:
- Success fees for achieving resolutions;
- Borrower fees (e.g. late charges, charges for checks returned for insufficient funds);
- Lender fees (e.g. boarding, de-boarding and other ancillary fees);
- Reimbursements for certain approved costs and expenses.
Previous AHP funds charged a 2% annual management fee, which the current offering does not include (but the preferred return was also higher, at 12% for previous funds).
Potential returns and cashflow
Investors are entitled to a 10% annual preferred return, as well as a full return of their principal, before AHP receives any of the profits (though investors’ return is capped at 10%).
Investors are told to expect to hold their investment for 5 years, though AHP also says their intention is to repay principal and the 10% annual return before the 5 years are up, which would effectively reduce the return (in other words, if you invest $100 and you receive $10/year for 4 years and then the full $100 back at the end of the 4 years, you would not receive any further payments).
Breadth of offerings on AHP Servicing
There is only one investment option at the time of this writing, which is to participate in the currently open fund (“AHP Servicing Offering”), offered under SEC Reg A+. AHP invests in loans in 48 states plus Puerto Rico.
Regulatory framework and due diligence expectations
AHP is offering the investment themselves, using Tier II of SEC Reg A+, which means that the offering has been reviewed by the SEC, and as required by Reg A+ “the company will be required to provide investors with additional information, including annual audited financial statements, annual reports filed on SEC Form 1-K, semiannual reports filed on SEC Form 1-SA, special financial reports filed on SEC Form 1-K, and current reports on SEC Form 1-U.”