Key City Clowns

If you follow me on Twitter/X, you’ve likely seen me tweet about Key City Capital. For those who don’t, here is how I stumbled upon them: Key City Threads. They are the worst of the worst. Since my initial tweet, many of their investors have reached out to share stories of their incompetence. In this article, I’m going to share what I’ve learned.

Recent Foreclosures

As widely reported in various business publications, Key City has lost many multifamily properties to foreclosure. In September, Arbor foreclosed on its 6-property portfolio in Memphis. In August, lenders foreclosed on its 145-unit property in Bryan, Texas, called Canyon Village, and its 100-unit property in Joshua, Texas, called Joshua Landing. As I mentioned on Twitter, Key City’s lender on Meadows at Ferguson hasn’t foreclosed due to the condition of the property. Instead, they’ve elected to sue the Guarantors. The loan has been widely shopped. One of the guarantors even tried to buy it - see my thread. Multiple brokers have brought me the deal requesting note financing. Every time a new investor group gets involved, they run away. The property is a disaster. Here is a local news article.

Finally, per investor conversations, ~25% of Fund I assets and ~35% of Fund II assets have already been lost to foreclosure. Except for Joshua Landing, none of the properties listed above are in Fund I and II. Key City’s website, which now redirects to Lasater Capital, lists which fund owns each property. The Memphis assets were in Fund III, Canyon in Fund XI, and Meadows in Fund XII. The losses are astonishing.

Now, in an attempt to avoid additional foreclosures, Key City is issuing urgent capital calls. The following is based on emails and conversations with multiple investors.

Capital Call: Fund III

Key City’s 5-property portfolio in Montgomery, Alabama, is under threat of foreclosure. It is held in Fund III. The lender, Merchants Bank of Indiana, has already appointed a Receiver. Key City is now attempting to raise $5 million to exit receivership and stabilize the properties. What’s their rationale? The portfolio is worth $100 million once stabilized, and their all-in cost basis will be $75 million. Let’s look at the number. Here are the properties:

Based on the stated $100 million valuation, the per unit is $111,857. Now, I can’t say I’m a Montgomery multifamily expert. In fact, I’ve never been to Alabama (if and when I do go, it will be to Tuscaloosa for a Bama game). However, I am resourceful and found a current multifamily listing three minutes from Midtown Oaks. Matthews listed Governors Parc Apartments in February 2025. As of this writing, it still hasn’t sold.

The OM states that ~$6.5 million of capex has been spent to date, including new exteriors, roofs, stairways, mechanical, electrical, plumbing, windows, and parking lots. Plus, 60% of the interiors have been renovated. Here are the property rents:

Here are the T6 and Pro Forma Numbers:

Finally, here are the sales comps provided:

The Crexi listing states, “Year One offers a high 7% cap rate, with a clear pathway to achieving a fully stabilized 9% cap rate and double-digit yields by Year Two.” Based on the Pro Forma NOIs above, this suggests an asking price of ~$11.5 million or ~$50,000 per unit. Based on the sales comps, this seems reasonable.

Given Key City’s management history, I suspect their properties are in rough condition, but let’s assume they are in decent shape. Here is some back of the napkin math:

This is likely optimistic, but it paints a picture. If everything goes right and they stabilize the portfolio, NOI could be ~$4 million. This implies they are valuing the property at a ~4 cap. If you apply the asking cap on the Crexi listing, the value is ~$51 million or ~$57,000 per unit. This is at least defensible.

I quickly looked at the NOI under different rent and occupancy scenarios, holding the OPEX at 50% ):

The implied cap rate is based on their $100 million valuation. I have no idea where performance stands today, but I’m willing to bet it's closer to the upper left-hand corner than the bottom right-hand corner.

The portfolio won’t sell for anywhere close to $100 million. It won’t sell for anywhere close to their reported cost basis of $75 million. This will go back to the lender, who likely takes a large loss as well.

Key City is so desperate for cash that it is asking investors for $500,000 immediately while it attempts to raise the remaining $4.5 million. They are accepting checks as low as $5,000 and offering the following:

• Repayment priority over all Fund III equity (i.e., preferred)

• The greater of 50% ROI or 20% per year (not clear if this is measured as IRR or ARR)

Capital Call: Fund XI

Fund XI has also issued a capital call. Key City is seeking to raise $4.5 million to fund capex at three properties: The Hive Apartments in Dallas, Holleman Oaks, and The Dominik in College Station. They even provided investors with their new projected exit values:

I shouldn’t bother analyzing The Hive. While the original exit value was outrageous, the new expected exit is even more so. Let’s take a quick look anyway. Northmarq currently has a 212-unit, Class C multifamily property listed for sale, approximately 1.5 miles from The Hive. It’s been on the market since the end of July. Although it’s unpriced, it provides us with rental comps and a pro forma to work with. The stated market rent is ~$1,300 per month or $1.64 per SF. The comps have a unit mix of studios, one-bedroom units, and two-bedroom units. The Hive has some three-bedroom units, but this will not materially change the valuation. On Apartments.com, The Hive offers a wide range of prices for its units. For example, a 700 SF 1-bedroom unit has a price range of $1,240 to $2,220 or $1.77 to $3.17. The actual available units are listed at $1,240. This makes sense when compared to the comps. No one is renting a class C unit in Dallas for $3+ per SF.

Moreover, Northmarq has a pro forma year-one OPEX of 55% with a gradual reduction to 50% in year five. I’ll be optimistic and use rents of $1,400 per unit and 50% OPEX. Here is back of the napkin math:

Key City’s new valuation implies a ~3 cap. Again, let’s look at NOI under different rent and occupancy scenarios, holding OPEX constant at 50%:

Again, just completely unrealistic. To achieve a 6.5 cap, I must increase the rent to $2,500 per unit, set occupancy at 95%, and run OPEX at 45%.

Moving on to Holleman Oaks and The Dominik. College Station is home to Texas A&M University. There are a few sub 100-unit multifamily properties for sale in the area. I am also familiar with the market. Based on the current listings and my market knowledge, monthly rents per SF are $1 - $1.20. The total rentable SF at Holleman and Dominik is ~345K, and the total unit count is 438. Therefore, monthly unit rents should be between $780 - $945. Let’s run the same exercise as before, using rents of $945 per month, an occupancy rate of 95%, and OPEX at 50%.

Finally, rents and occupancy under different scenarios:

Obviously, unrealistic valuations.

Enough investor capital has been destroyed. No need to destroy anymore. It’s time to hand the keys back to the lenders and move on.

Fee Machine

One thing Key City has excelled at is enriching its owners, particularly the Lasatar bros. I’ve reviewed one of their funds’ operating agreements. Here is what investors were charged:

An investor told me they also charge a 10% construction management fee on all renovation work. To give you an idea of the fees generated, I reviewed the Memphis Portfolio investment deck.

I don’t have the final numbers, but this is what was presented to investors. The portfolio was 95% occupied at the time of acquisition. I assume they were able to collect at least one year of asset management fees before things went south.

The total equity required to close the deal was ~$12.6 million. Key City earned half that in fees!. They proceeded to lose all their investors’ capital.

By the way, they promoted this deal as having a 31% IRR with an average annual cash yield of 16%.

Closing Thoughts

There are many honest, hard-working multifamily GPs out there. Groups like Key City stain the industry. To move ahead, it is best to expose the bad actors.

I spent the entire article focusing on investor capital, but let’s not forget how many individuals and families were hurt by Key City’s incompetence. When you fail to repair properties, neglect to pay utility bills, and fail to provide a safe environment, you significantly impact the lives of others. Those who do not take that seriously do not deserve to be in this business.