Non-Traded REITs

Published on: December 18, 2017

Summit Healthcare REIT Shares May Be Worth Less Than $2 A Share

Money Bags Investors with losses in Summit Healthcare REIT (“Summit”), a non-traded real estate investment trust (Non-Traded REIT), may have arbitration claims if a broker or advisor made a recommendation to purchase the shares without a reasonable basis or misled the customer as to the nature of the investment. Summit, headquartered in Lake Forest, California, invests in a diversified, income-producing portfolio of assets in the healthcare sector, focusing its investments on operators of senior housing facilities in the United States. Summit acquires, leases, and manages healthcare real estate and invests in the healthcare sector and diversifies by property type, location, and tenant. Publicly-available information suggests that shares of Summit have significantly decreased in value and are now worth less than $2 a share.

MacKenzie Realty Capital has reportedly offered to purchase up to 330,000 shares of Summit for only $1.34 per share in a tender offer – which would leave investors who sold facing a significant loss on the original purchase price. Secondary market providers that allow investors to bid and sell illiquid products such as Non-Traded REITs value Summit shares at between $1.50 and $1.56, and the sponsor estimates their value at $2.53 a share.

Unfortunately for many investors in Summit, it would appear that any attempt to exit their illiquid investment will incur a substantial loss. Aside from their illiquid nature, non-traded REITs also present significant additional risks. One of these risks has to do with their high cost. In most instances, non-traded REITs are sold through a network of independent broker-dealers and associated financial advisors, who earn steep commissions (ranging up to 10%) on sales of non-traded REITs to investors. In addition to the sales commission charged, non-traded REITs typically charge other expenses, including certain due diligence and administrative fees (that can range anywhere from 1-3%).

Published on: December 15, 2017

Investors in CNL Lifestyle Properties, Inc. May Have Arbitration Claims

by InvestorLawyers

Apartment Building CNL Lifestyle Properties, Inc. (“CNL Lifestyle”) is a publicly registered non-traded real estate investment trust (“REIT”) that is based in Orlando, FL. Because CNL Lifestyle is registered with the SEC, the non-traded REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager.

Non-traded REITs pose many risks that may not be immediately apparent to investors (or adequately explained by financial advisors and stockbrokers who sell them). To begin, one of the more readily apparent risks associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10%. In addition, non-traded REITs like CNL Lifestyle generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%. These fees act as an immediate ‘drag’ on any investment and can serve to compound losses.

Another significant risk associated with non-traded REITs has to do with their liquidity. Unlike traditional stocks and publicly traded REITs, non-traded REITs do not trade on a national securities exchange. Therefore, many investors in non-traded REITs who were uninformed of their liquidity issues have come to learn that they can only redeem shares of the investment directly with the sponsor (and only then on a limited basis, and often at a disadvantageous price), or alternatively, sell the shares through a limited and fragmented secondary market. Finally, most non-traded REITs are structured to experience a future ‘liquidity event’ – which might entail listing the shares on an exchange or liquidating the entire portfolio – although such an event will typically only occur after a number of years (e.g., 5-7 years).

Published on: November 30, 2017

SII Investments Non-Traded REIT Sales Subject of Massachusetts Complaint

by InvestorLawyers

Apartment Building As recently reported, on September 20, 2017, the Enforcement Section of the Massachusetts Securities Division (the “Division”) filed an Administrative Complaint (“Complaint”) against SII Investments, Inc. (“SII”) (CRD# 2225) in connection with the brokerage firm’s marketing and sales of non-traded REITs to certain Massachusetts investors. SII is an independent broker-dealer within National Planning Holdings, which was recently acquired by Boston-based LPL Financial.

The Complaint essentially alleges that for the past several years, SII has engaged in “[d]ishonest and unethical conduct and failed to supervise its agents by allowing systemic inflation of its clients’ liquid net worth while maintaining contradictory and unclear rules related to the purchase of non-traded real estate investment trusts… .” Of significance, Massachusetts securities regulations mandate that “[n]o more than 10% of a client’s liquid net worth can be concentrated in one specific non-traded REIT and no more than 20% of a client’s liquid net worth can be concentrated in non-traded REITs in general.”

According to the Complaint, SII’s own internal policies and procedures also would also appear to have been violated by some of SII’s alleged conduct. For example, on SII’s own suitability and disclosure forms used for the sales of non-traded REITs, the full value of variable annuity products was listed as part of a client’s liquid net worth. However, as referenced in the Complaint, SII’s own “[C]ompliance Guide states ‘There must not be any representation or implication that variable annuities are short-term, liquid investments. Presentations regarding liquidity or ease of access to investment values must be balanced by clear language describing the negative impact of early redemptions.’”

Published on: November 29, 2017

Investors in United Development Funding IV May Have Arbitration Claims

by InvestorLawyers

Building Demolished Investors who purchased shares in United Development Funding IV (“UDF IV”) upon the recommendation of their financial advisor – pursuant to a misleading sales presentation or if the recommendation to invest lacked a reasonable basis or was otherwise unsuitable – may be able to recover their losses in FINRA arbitration. UDF IV is one of a number of successive funds offered by the real estate finance limited partnership, United Development Funding (“UDF”), headquartered in Grapevine, TX. UDF IV was formed as a Maryland REIT in May 2008. By December 31, 2012, UDF IV had issued 17,642,839 common shares in exchange for gross proceeds of approximately $352.5 million.

Unlike other non-traded UDF funds, UDF IV is unique in that, while it was initially distributed as a non-traded REIT, in June 2014 UDF IV went public and listed its shares (NASDAQ: UDF, now OTC: UDFI). UDF IV operates as a real estate investment trust (“REIT”), focusing on originating, purchasing, participating in, and holding investment secured loans for the acquisition and development of parcels of real property as single-family residential lots, as well as the construction of new homes and the development of mixed-use master planned residential communities.

By late 2015, following allegations of misconduct by a Dallas hedge fund manager, UDF’s share price suffered a severe decline. The allegations raised concerned the overall UDF business model and called into question whether the UDF enterprise was propping up poorly performing investments in earlier funds with new investor capital raised from later fund vintages.

Published on: November 27, 2017

Texas Securities Regulators Bar Former VSR Broker Mickey Long From Selling Alternative Investments

by InvestorLawyers

https://i0.wp.com/www.investorlawyers.net/blog/wp-content/uploads/2017/10/15.2.24-oil-rigs-at-sunset.jpg?resize=300%2C218&ssl=1

Oil field at sunset.

On October 4, 2016, the Texas State Securities Board (the “Board”) entered a Disciplinary Order (“Order”) against Respondents Calton & Associates, Inc. (CRD# 20999) (“Calton”) and stockbroker M. F. Long II (CRD# 1778299) (“Mickey Long”). The Respondents consented to the entry of the Order and its associated findings of fact and conclusions of law.

The Order indicates that, from June 6, 2002 – June 30, 2016, Mickey Long was registered with the State of Texas as an agent of VSR Financial Services, Inc. (“VSR”). For the majority of that time frame, Mickey Long was registered as an investment adviser representative of VSR. On June 30, 2016, Mickey Long applied for registration with the State of Texas as an agent of Calton.

Published on: November 21, 2017

Investors in United Development Funding III May Have FINRA Arbitration Claims

by InvestorLawyers

Building Demolished Investors who purchased shares in the publicly registered non-traded REIT United Development Funding III (“UDF III”) upon the recommendation of their stockbroker or financial advisor may be able to recover their losses in FINRA arbitration if the recommendation to purchase shares lacked a reasonable basis or the nature and characteristics of the investment were misrepresented. UDF III is one of a number of successive funds offered by the real estate finance limited partnership, United Development Funding (“UDF”), headquartered in Grapevine, TX. Formed as a Delaware limited partnership in June 2005, UDF III, according to its publicly filed Registration Statement, was “… formed primarily to generate current interest income by investing in mortgage loans.” By April 2009, UDF III had completed its securities offering, having raised net proceeds of approximately $290.7 million.

Following allegations of misconduct by a Dallas hedge fund manager, the share price of UDF III suffered severe decline in late 2015. These allegations by the hedge fund manager concerned UDF and its various funds, including UDF III, allegedly exhibiting potential signs of a Ponzi scheme, including propping up poorly performing investments in earlier funds with new investor capital raised from later fund vintages. By November 30, 2015, UDF III filed an involuntary bankruptcy petition in the U.S. Bankruptcy Court for the Western District of Texas against UDF III’s largest non-affiliated borrower.

Many investors in UDF III have come to learn of the many risks inherent in investing in a non-traded REIT. To begin, a non-traded REIT is generally a very illiquid investment vehicle, given the fact that its shares do not trade on a national exchange. As such, when investors seek to exit their position, they may only do so by redeeming their shares directly with the issuer (often such redemptions are limited in terms of when they may occur, and in what amount), or through attempting to sell shares on a limited and fragmented secondary market.

Published on: November 14, 2017

Investors in Healthcare Trust, Inc. May Have Arbitration Claims

by InvestorLawyers

https://i0.wp.com/www.investorlawyers.net/blog/wp-content/uploads/2017/08/15.6.15-money-whirlpool-1.jpg?resize=300%2C300&ssl=1

Investors with losses in Healthcare Trust, Inc. a non-traded real estate investment trust (Non-Traded REIT) may have arbitration claims if a broker or advisor made a recommendation to purchase the shares without a reasonable basis or misled the customer as to the nature of the investment. Healthcare Trust is an investment trust which seeks to acquire a diversified portfolio of real estate properties focusing primarily on healthcare-related assets including medical office buildings, seniors housing, and other healthcare-related facilities.

According to secondary market providers that allow investors to bid and sell illiquid products such as Non-Traded REITs, shares in Healthcare Trust are selling for about $14.99 per share – which represents a significant principal loss compared with the offering price of $25.00.

Published on: November 7, 2017

American Finance Trust REIT Investors May Have Arbitration Claims

by InvestorLawyers

Money Maze Investors who have suffered losses in American Finance Trust, a non-traded real estate investment trust (REIT) may have arbitration claims if the REIT was recommended by a stockbroker or investment advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by a stockbroker or financial advisor. According to its website, American Finance Trust is designed to protect shareholder capital and produce stable cash distributions through the acquisition and management of diversified portfolio of commercial properties leased to investment grade tenants. The REIT reportedly invests in core retail properties such as power centers and lifestyle centers.

Secondary markets’ reported prices suggest that American Finance Trust shares may be selling for under $15.50 per share – which would mean a significant principal loss for the seller if he or she purchased shares at the offering price of $25.00.

Risks of Non-Traded REITs

Published on: November 1, 2017

American Capital Properties, Inc. CFO Convicted of Securities Fraud

by InvestorLawyers

On June 30, 2017, the former CFO of American Capital Properties Inc. (“ARCP”), Brian Block, was found guilty of securities fraud and related crimes in connection with reporting false numbers in quarterly filings with the Securities and Exchange Commission (“SEC”). The verdict was handed down following a nearly three-week trial held in the U.S. District Court for the Southern District of New York. A jury returned the verdict less than a day after closing arguments. Mr. Block was convicted of one count of securities fraud, two counts of filing false reports with the SEC, two counts of filing false certifications, and one count of conspiracy.

In 2014, ARCP was set to file its financial statement for the second quarter, when an employee informed Block and Chief Accounting Officer Lisa McAlister that there was a methodological error in some of the firm’s calculations and that its average funds from operations (or AFFO, a key financial metric for real estate investment trusts) was overstated by roughly $0.03 per share. Despite this guidance, no corrective action was taken to address the issue of overstated AFFO. On October 29, 2014, ARCP shares plunged as much as 37% — effectively wiping out roughly $4 billion in market value — after the company publicly stated that certain of its employees had concealed accounting errors.

Following the $23 million accounting scandal, ARCP, a non-traded REIT sponsor, changed its name to VEREIT (from the Latin word “veritas” for truth).

Published on: October 31, 2017

Investors in Hospitality Investors Trust, Inc. May Have Arbitration Claims

by InvestorLawyers

Apartment Building Investors who purchased shares in the publicly registered non-traded REIT Hospitality Investors Trust, Inc. (“HIT”) upon the recommendation of their financial advisor may be able to recover their losses in FINRA arbitration. HIT owns a portfolio of hotel properties throughout North America, including various Hilton-, Marriott- and Hyatt- branded hotels, within the select service and full-service markets. As of December 31, 2016, HIT owned 148 hotels; the company was founded in 2013 and is headquartered in New York, NY.

Recently, HIT commenced a defensive tender offer for up to 1 million shares of its common stock at a price of $6.50 per share. According to HIT’s board, the defensive tender was made in order to deter another recent tender offer, made by third-party MacKenzie Realty Capital (“MacKenzie”), a non-traded business development company. On October 23, 2017, MacKenzie notified HIT investors that it had commenced an unsolicited tender offer to purchase up to 300,000 shares of common stock for $5.53 per share. The MacKenzie tender offer is set to expire on December 8, 2017, whereas the more recent HIT tender offer is set to expire on December 11, 2017.

These recent tender offers by both MacKenzie and HIT illustrate one of the significant risks associated with investing in non-traded REITs. Specifically, an investment in a non-traded financial product is generally an illiquid investment that can only be sold through redemption to the sponsor, or in some instances, through a limited and fragmented secondary market. In this instance, the defensive offer to redeem being made by HIT is at $6.50 per share. For investors who purchased shares through the original offering, the shares were priced at $25. Therefore, even when factoring in any distributions paid on the investment, any shareholder who participates in the HIT tender offer will be absorbing a steep loss on their investment of approximately 70%.