Basic Summary of Axiom Realty Capital and its Business Model
Axiom Realty Capital is a Utah based LLC that was involved in providing opportunities for people to ‘partner’ with it in the purchase of pre-construction phase condominiums.
The real estate deals were typically structured to provide a ‘below market’ price, typically fifteen percent below market, on a condominium. Axiom Realty Capital was able to obtain this attractive discount by contracting to purchase multiple units - in concert with its joint venture partners (individual people that participated in the transactions one at a time). What Axiom Realty Capital brought to the table was the ability to purchase 50 to 100 condos in just one or two months. This was attractive to a developer, who made less on the sales of the initial units to Axiom Realty Capital and its buyers, but could demonstrate a successful project to his funding sources on the one hand, and prospective buyers of the rest of the units in his development on the other.
Axiom Realty Capital’s joint venture partners (individuals that placed a ((typically)) ten percent deposit in an escrow account and signed a real estate purchase contract) were excited about the straight forward proposition of acquiring the real estate at a discount, with the intent to re-sell the unit for its ‘true’ value and make a profit.
The transactions also contained safety features to decrease the risk to the purchaser. Some of these protections, in the form of an addendum that was added to the real estate purchase contract (and was signed by the developer), included:
* Deposits were held in a third part escrow account.
* The developer was not allowed to use the deposits for construction purposes.
* The developer frequently had to ‘re-sell’ or help remarket or promise to put in priority the Axiom Realty Capital units before he could sell his developer units.
* In the case of a downturn in the price of the units, the developer was required to lower the original purchase price to ‘match’ the downturn in the market.
* The contracts were assignable, so the condo units could be sold, at the current retail price, to another buyer (without waiting for the project’s construction to be completed.)
The business model, shared by several other companies in the U S (most of which were based in Florida, and most of which were started around the same time as Axiom Realty Capital – about 2004/2005), was fairly straight forward: Purchase real estate at a discount of fifteen percent. Use a ten percent deposit, and then sell the real estate over the next one to two years at its current value (fifteen percent more than the price it was acquired for.) The effect of leveraging the ten percent deposit would create a profit of 150%, when the unit was sold at its current value. This business model had already been proven with the pioneer bulk acquisition firm making substantial profits during the South Florida building boom. The new competitors, including Axiom, entered the business with the belief that either similar profit opportunities would continue or, even better, the market would begin to slow somewhat, thereby making developers even more motivated to offer attractive concessions.
This profit was typically split sixty percent to the purchaser, and forty percent to Axiom Realty Capital. Axiom Realty Capital also charged an administrative fee to enter in to the deal, so the real effect of the split was closer to fifty / fifty after taking Axiom Realty Capital’s initial fee in to account. (Other competitors either charged a higher ‘split’ or a higher back end administrative fee, such that the anticipated returns for a buyer was lower or approximately equal to an Axiom buyer’s profit assuming an identical purchase opportunity).
In theory, half of 150% is 75%, and even over 18 to 24 months, still worked out to be around 35 to 45% per year return on the initial deposit.
Of course, all of this was based on re-selling the unit.
During 2005 and 2006, it appeared that re-selling the unit would not be ‘any big deal.’
Prices on various projects had only been going up for years, demand in most markets was strong and constant, and from 2000 through the time that the projects were offered by Axiom Realty Capital, most real estate markets had been appreciating at historic rates. More importantly, the developers, whose business and expertise was in building and selling real estate, promised to remarket or assist in the resell of Axiom’s units ahead of other units.
At the beginning, the due diligence on the transactions was consistent with other companies in the industry: 1) verify that the developer was experienced, with other projects in his portfolio; 2) that full business plan, financing plans, permits, approvals, building renderings, engineering, etc. was completed and 3) representation by outside, local realtors were in place and 4) that a 2-3 page addendum to the developer’s standard purchase and sale agreement was appended setting forth the ‘special terms’ which the Axiom buyer was granted.
Overtime, this due diligence process continued to evolve and included an entire array of additional procedures and processes. These ranged from financial penalties for dilatory reporting by the developer, to outside feasibility studies, bank commitment letters, personal guarantees from individual developers (including public companies), 10 to 14 page agreement with developers, etc. etc.
To Axiom’s chagrin, and as explained further blow, neither the original, industry standard ‘developer friendly’ agreement, nor the more legalistic processes made much difference to the outcome.
Storm Clouds on the Horizon
People will differ on the exact time that the real estate bubble burst, but for the vast majority of the joint venture partners (i.e., the people that “JVd” with Axiom Realty Capital to purchase real estate at a discount), the bubble burst at some point prior to the re-sale of their unit.
Early projects were built, but developers could not find buyers for the condos. In these cases, the protections in the addendum typically lead to a solid basis for litigating against developers for a return of the deposits. Axiom Realty Capital assisted in a variety of projects to line up law firms to litigate these matters; many of these suits are ongoing. In other cases Axiom Realty Capital was successful in getting the developer to honor his agreement and return the deposits without resorting to litigation.
In later projects, construction was never started, because financing fell through before construction commenced. Again, in most of these cases, either through negotiation with the developer, or the threat of legal action, the deposits were returned.
Each project had its own ‘issues.’ Any one of three events could prevent a successful deal. (A) Developer indicates to Axiom Realty Capital that he has financing in place, and he does, but the bank fails to complete the financing they committed to (due to the market tanking in the middle of completing construction financing.) This scenario usually ends with the J V Partner receiving their deposit back, but losing the value of the administrative fee paid to Axiom Realty Capital. (B) The developer obtains the loan, but can’t re-sell the units per the terms of addendum. This scenario usually ends in litigation, with the developer claiming that the buyer is required to close, and the buyer pointing out that the developer failed to follow the terms of the addendum relating to the re-sale of the unit. (C) The developer is ‘a month away’ from closing on his construction financing. Every month for X months he is ‘a month away.’ (This can go on for a year or more.) JV partners leave their deposit in place hoping that the next month financing will complete and the project will be built. This scenario doesn’t have an end… it remains in limbo. Three of Axiom’s projects are currently in this boat.
The only scenario that didn’t occur, based on the fact that the great majority of the deals / projects were entered in to during the two years that preceded the real estate bubble bursting, is the one where the ultimate retail buyers showed up to purchase the condominium units that had been built (because financing was in place and demand existed for the condos once construction was completed.) In other words, the entire point of the business model rested on the assumption that there would be buyers for the condos (at least in the projects that got built.)
At this point, then, the lion’s share of all projects that Axiom Realty Capital introduced to it J V Partners have ended in either refunds of the deposits to the purchasers (roughly fifty percent), or litigation to get the deposits returned (roughly twenty five percent), or projects that may still get built and ‘end well’. (Based on the current state of the market, it may be argued that it’s unlikely that these will end well, but if it happens it represents the other twenty five percent.) Needless to say, customer satisfaction ratings at Axiom Realty Capital are not good. Moreover, despite the fact that Axiom had up to 3 full time customer service representatives, Axiom did not win many customer service points when asked for status updates about projects. Many customers complained that Axiom would not update them regarding the status of their project. Little did Axiom know that the developer’s contractual obligation to provide Axiom ‘periodic updates’ would be so systematically disregarded (due in retrospect to the developer’s having very little good news to report); it was not until late 2007 that Axiom was compelled to put ‘teeth’ into this simple goodwill provision, to force developer’s to update Axiom (and in turn the buyers), by placing financial penalties on developers that failed to respond adequately.
In general, very few people, at this point, have anything good to say about Axiom Realty Capital. Even the people that got their deposit back (that would have lost hundreds of thousands if they had bought a unit outright before the market tanked) are upset because of their ‘lost’ administrative fee of ten to twelve thousand dollars. This is perfectly understandable, as the ideal scenario for anyone that got involved in these projects is that they received 100 percent of their money back when the market tanked. Unfortunately, the administrative fee that Axiom Realty Capital charged was used to cover the month to month costs of operating the company, and paying a variety of intermediaries (that referred prospective clients to Axiom Realty Capital), so the company was unable to ‘return’ the administrative fee. Of course, none of the agreements with the J V Partners had ever indicated that the administrative fee was refundable in the event a project wasn’t successful, but it goes without saying that Axiom would have done it anyway, as a matter of ‘goodwill’, if it would have been financially possible to do so.
Axiom’s Perspective
A vocal minority has come to the conclusion that the entire company was a scam, designed to defraud people, and that the people running it, and some of the people that worked there, were conducting a scam.
It’s extremely unfortunate that when the market crashed, the majority of the projects crashed too. And it’s unfortunate that there is an assumption that since the crash wasn’t predicted two years in advance by Axiom Realty Capital that the only other alternative is that the company had to be a ‘scam.’ But the truth is that everyone that worked at the company, from executives on down, thought that they were offering an opportunity for people to purchase real estate at a discount, and that they would make a nice profit. (Of course, Axiom wanted the deal to ‘work’ so it could earn its profit to.) We understand and empathize with this view, however, since for a time, Axiom began to feel the same way about some of its developers that failed to live up to their obligations to Axiom and Axiom buyers. The reality, Axiom came to learn, was that everyone got squeezed; from the banks, down to the developers, down to the real estate buyers. While it was satisfying for a while for Axiom to demonize developers for arbitrarily failing to abide by the written and verbal representations they had made, in the end, the majority of developers were probably constrained by an ‘impossibility to perform’. This had the domino effect which resulted in failed projects and the payment (and spending) of origination fees.
Axiom operated along several other, very legitimate businesses that were essentially doing the same thing (The Formula, Bridgepoint, Madison Venture Partners, and Canyon Acquisitions). These companies not only started at the same time Axiom did (they were all more a less within a year of each other as far as when they opened their doors), they also ‘ended’ active operations at more or less the same time Axiom did. It’s a stretch of the imagination (and is untrue) that all of these companies were all scams / frauds, just as it stretches the imagination (and is untrue) that Axiom Realty Capital was in the same business as these other companies, but that they were all ‘legitimate’ and Axiom wasn’t. The truth is that all these companies, including Axiom, were legitimate, all used more or less the same business model (to buy condominiums at a discount based on a bulk purchase), and in one project, four of these companies participated in offering the same deal to their buyers (the Pinnacle project in Las Vegas.) Even now, some people continue to be bullish about the business model, including Axiom’s former CEO, several strategic partners and former customers who in recent months have established a new company based largely on the same model.
Axiom Realty Capital was convinced that the business model was, if not perfect, very close to it. The deposits, which represented the ‘principal’ put in to purchase the real estate, were not, according to the terms of the contract, at risk.
If the project didn’t get built, the deposit was returned. (In most cases of projects that weren’t built, this is exactly what happened.) If the project did get built and the developer didn’t re-sell the units according to the terms of the addendum, the buyers weren’t required to close. (This worked the way it was supposed to most, but not all, of the time.) And finally, assuming the project did get built and the units were resold at the retail price, both parties (the J V Partner and Axiom Realty Capital) would get their respective profits. (Again, based on the timing of these projects, by the time the units were made available for sale – in the projects that got built – the real estate bubble had burst and no one was buying.) The assumption was that if there was a bubble – it was certainly known to both Axiom on the one hand and its J V Partners that were purchasing the real estate on the other that this was a possibility… the developer would be forced to lower their prices, and the units would still get sold, just at a lower price. The addendums took this in to account, allowing for a lower original purchase price to ‘kick in’ if the developer sold units at a discount.
What no one thought of is that even with lower prices, a dramatic enough meltdown in the market would lead to inventory piling up, nor that there would be a general housing and credit crash of the magnitude we have experienced (see link on this site / list of other real estate and financial firms that were taken by surprise). In this scenario, a project ‘fails’ in the sense that the building is built, but even at lower prices there are no buyers, based on too much inventory. The assumption on the part of Axiom (and presumably the J V Partners as well) was that if there was a bubble, it would simply mean that prices would drop. With the protection in place for ‘what happens if the unit is sold for a lower price’ this was not seen to be fatal.
The summary of all of this is that some of the best and brightest real estate investors in the country reviewed this model to acquire real estate and did so, both from Axiom and the other firms in the same business. These were people that had dedicated their careers, one way or the other, to real estate, and had more or less seen it all.
By the same token, many, if not most, of the people that acquired real estate under this model were simply ‘average folks’ that were hoping to make a nice return on the deposit money. They assumed that the people they were talking to at Axiom Realty Capital knew what they were doing, and the people at Axiom Realty Capital also assumed they knew what they were doing.
Getting to the heart of the matter, there was a genuine reasonable belief on the part of everyone at Axiom Realty Capital, from the executives on down, that the business model these projects were acquired under was sound. That belief was passed along to people that participated, so their feeling that they were ‘convinced’ by Axiom Realty Capital to get involved in these transactions is accurate in that everyone was convinced of the viability of the business opportunity. In short, everyone in the company thought that the projects and the transactions were entirely legitimate; if they didn’t, they wouldn’t have worked there. By and large Axiom personnel were just straightforward, normal people that reviewed the business and the business model and decided that they would like to be involved in it. Up until the time that there were warning signs that the bubble was bursting, everyone continued to believe that the business and the business model was ‘solid.’
What Axiom Could Have Done Differently
The CEO of Bear Stearns was recently interviewed about what they should have done differently. He mentioned that even with 20/20 hindsight, he couldn’t have done any better; the firm was totally taken by surprise.
In some ways, Axiom found itself in the same boat as Bear Stearns and numerous other real estate and financial services firms. Axiom did not expect an unprecedentedly disastrous real estate and credit market.
Having said that, there are things that could have been done better to smooth out the process, although it is hard to say how the outcome would have been different. These primarily include what was perceived as a lack of communication from Axiom to its J V Partners. Axiom was frustrated in its attempts to ascertain clear and accurate information from developers. This created a situation where J V Partners assumed that they were just being ignored when weeks, or in some cases, months would go by with ‘no new information’ forthcoming about their project. In retrospect, Axiom should have simply communicated every month that it was not receiving any new and / or verifiable news from developers. In some cases developers pitted J V Partners against Axiom by implying that Axiom was ‘hard to reach’ or get in touch with. This was universally not the case; Axiom’s personnel logged untold numbers of phone calls and emails to developers who in some cases, once the sales were made, simply decided to quit communicating at all (this is the case, for instance, with the developer of the Verge project.)
One big issue is that in and around October / November of 2007, when the credit implosion was in full force, Axiom continued to count on ‘another project’ as the likely answer to maintaining goodwill with J V Partners. It was simply not registering that the odds of another successful project, after so many in a row had been caught up in the ‘great meltdown’ of mid to late 2007, was very, very minimal.
With no other options, instead of exploring solutions with J V Partners (the majority of whom simply wanted to couple a return of their deposit with a return of the origination fee paid to Axiom), Axiom continued to kick a dead horse. As the cold reality gradually set in that it would be very, very difficult to come up with new succesfful projects, and that the ‘party was over’, staff was laid off in a slip shod and unprofessional manner. An already demoralized staff (who got to see daily blogs about Axiom as a ‘scam’, and who got yelled at from time to time by angry J V Partners who didn’t want to hear about developers who hadn’t come through and markets melting down) was further ‘kicked’ by a company that was looking for a creative way to provide J V Partners with other projects to use their origination fee on, while at the same time recognizing that as a company it had no choice but to cut costs and slim down.
Needless to say, the lack of any positive news or direction did very little to improve ‘working conditions’, and through three rounds of layoffs Axiom as a company did very little to cushion the blow for its personnel. This resulted, from J V Partner’s perspective, in even more ‘lack of communication’, as one after another people they had been used to talking with were simply no longer there. The ex employees were less than pleased as well; in general, everyone had a reason to be upset at Axiom.
Currently
At this point, with sincere apologies to those that participated in projects that didn’t end well, Axiom is still continuing to look for new deals. In the last five months, none have been found that appear likely to meet the extremely stringent criteria that projects are screened through.
Axiom would hope that at some point, as the market stabilizes (in the next 12 to 24 months?) that projects in which 100% of Axiom’s profits are paid in to the trust (for the benefit of previous J V Partners), and administration fee credits can be utilized, will come in to the picture.
Axiom welcomes any of its JV Partners that have interesting projects to email the information for Axiom’s review (see email address on this site); at this point, any projects presented to the group of previous J V Partners would be for the sole benefit and purpose of providing an opportunity to utilize origination fee credits.
Axiom’s intent is to distribute any profits realized from successful projects (that are still in some stage of development) or damage awards from ongoing litigation against developers in to the trust created for the benefit of Axiom J V Partners. Information on the progress of that trust will be emailed out only as there is something significant to report, as the personnel no longer exist to do so on a regular basis.
Finally, again, our apologies to all who participated in these projects hoping for a better outcome, and to all the personnel at Axiom who did a very professional job in the face of an impossible market situation.
(For a list of real estate firms that "imploded" due to the real estate market meltdown, click here).
