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Applesway Loses Fifth Apartment Complex To Foreclosure, Property Sold For $50M At Auction

A new foreclosure sale has bumped a $229M multifamily portfolio loss up to $294M.

Applesway Investment Group defaulted on a $65.2M loan backed by Cabo San Lucas, an apartment complex at 9220 Nathaniel St. in Houston, according to foreclosure documents. County records show the property was picked up at public auction last week for $50M, the fifth formerly Applesway-owned complex to hit the block in about four months.

Cabo San Lucas apartments in Houston

A subsidiary of investment firm Ellington Management Group issued the $65.2M loan to Applesway Investment Group, run by Jay Gajavelli, in December 2021 when borrowing terms were much more favorable. 

The public auction buyer was Cabo United LLC, which was incorporated in April. Ellington Management Group declined to comment on the sale or identify the purchaser behind the LLC.

Although Gajavelli hasn't spoken publicly, he appears to be a victim of floating-rate debt and the Federal Reserve's interest rate increases starting in early 2022. At one of the four properties lost through foreclosure earlier this year, the interest rate on Applesway’s loan rose from 3.4% to around 8%, The Wall Street Journal reported, citing Trepp data. 

The way multifamily properties are financed combined with nearly $1T in multifamily CMBS loans alone coming due over the next four years have the potential to create a “hydrogen-bomb scenario," experts have warned.

In Houston, apartment owners that utilized floating-rate debt could be in for a lot of trouble, Todd Marix, senior managing director of investment sales at Berkadia’s Houston office, previously told Bisnow. Serious distress is likely to be more prevalent for workforce or Class-C housing owners, he said.

“That’s usually the first shoe to fall within a deteriorating situation,” Marix said. “These buildings are older; they require more capital expenditure.”

That was the case for Applesway, which touted a portfolio of workforce housing with “value-add potential” on its website, which has been taken down for maintenance.

Cabo San Lucas is a Class-E complex built in 1974 with more than 1,000 units, according to Harris County property records. Some buildings were renovated in 2022, the records show. 

But the complex still had major issues at the end of 2022, racking up complaints from residents about mold, pests, and lack of water and power. Tenants told KPRC2 that their rents had increased by hundreds of dollars despite the conditions.

“Nobody should be treated the way we’re treated. I mean, it’s deplorable,” resident Peggy Sanders told the TV station. “They have no pest control, and these apartments are infested. I mean, they don’t even take the gumption to try to help solve anything.” 

In December 2022, a state senator visited the complex and distributed water bottles. 

At least one contractor said that he worked on the complex in 2022 but wasn’t paid for it. Evan Stamenov, on behalf of Westward Holdings, filed a lawsuit on Jan. 26 of this year, claiming Gajavelli failed to pay him for $1.6M in labor and materials for repairs and renovations. Westward worked on several foreclosed-upon Applesway properties, including the Heights at Post Oak, Redford Apartments, Timber Ridge Apartments and Cabo San Lucas Apartments, according to the lawsuit.

Gajavelli, also known as Koteswar Rao Gajavelli, filed an answer on March 20 denying the allegations. The lawsuit is set for a hearing on Sept. 19.

Applesway and Gajavelli also face a lawsuit from 123 investors who claim their $12.4M investment was shifted to a different, unsuccessful deal than the one they believed they were buying into and that Applesway then lied about it.

The lawsuit claims the investors gave Applesway the money expecting it would be used to purchase the 643-unit apartment complex Siena on Westheimer at 6263 Westheimer Road for $68M. Instead, funds were redirected to another property without the investors' knowledge.

Defendants include Gajavelli, Vijay Atti and an LLC they had created to purchase Siena on Westheimer, per the lawsuit. S3 Your Financial Future, an LLC owned and operated by Atti, is also named as a defendant in the suit.

Gajavelli and Atti have responded in court filings with general denials of the claims. 

Atti and S3 Your Financial Future also claim to be “victims of fraud by Applesway Investment Group,” stating in a July 17 filing they “were unaware of fraud and diversion of funds.” 

Related Topics: Applesway Investment Group