Articles Posted in Non-Traded REITs

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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.

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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

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https://i2.wp.com/www.investorlawyers.net/blog/wp-content/uploads/2017/10/15.2.17-piggybank-in-a-cage.jpg?resize=290%2C300&ssl=1On 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).

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Building Demolished On October 24, 2017, the New Jersey Bureau of Securities (the “Bureau”) entered into a Consent Order (“Order”) with Boston-based brokerage firm LPL Financial, LLC (CRD# 6413) (“LPL”), in connection with LPL’s sales of certain non-traded investment products to residents of New Jersey.  Specifically, the Order encapsulated findings of fact that LPL agents sold to New Jersey clients various non-traded financial products, including non-traded real estate investment trusts (“REITs”), as well as non-traded business development companies (“BDCs”) and other non-traded investments such as closed-end and interval funds, hedge funds, and managed futures.

In particular, the Bureau focused on LPL’s sales of non-traded REITs (some 7,823 transactions) and non-traded BDCs (some 2,120 transactions).   Non-traded REITs and BDCs carry considerable risks, chief among them their illiquid nature (often, investors are not fully aware at the time of purchase that exiting the investment could be problematic).  As stated in the Bureau’s Order: “Non-traded REITs and non-traded BDCs are generally illiquid as they have no public trading market and a liquidity event typically occurs within five to seven years of an offering’s inception.”

Aside from liquidity concerns, there are numerous additional risks associated with non-traded financial products, including but not limited to characteristically high up-front fees charged investors (commissions to brokers and their firm run as high as 10%, as well as certain due diligence and administrative fees that can range up to 3%), as well as the fact that many non-traded REITs and BDCs pay distributions from investor capital (return of capital).  This return of capital may confuse some investors who believe that the investment’s yield is based on positive earnings and cash flows.

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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%.

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Building ExplodesInvestors in certain REITs based in Las Vegas may have arbitration claims against brokers or financial advisors if a FINRA-registered broker dealer that recommended the investment did not live up to its obligations under applicable rules.   As members and associated persons of FINRA, brokerage firms and their financial advisors must ensure that adequate due diligence is performed on any investment that is recommended to investors.  Further, firms and their brokers must ensure that investors are informed of the risks associated with an investment, and must conduct a suitability analysis to determine if an investment meets an investor’s stated investment objectives and risk profile.  Either an unsuitable recommendation to purchase an investment or a misrepresentation concerning the nature and characteristics of the investment may give rise to a claim against a stockbroker or financial advisor.

Vestin Realty Mortgage I (Previously Vestin Fund I and DM Mortgage Investors)

Vestin Realty Mortgage I (VRM I) was formerly known as DM Mortgage Investors. On March 17, 2000, DM Mortgage Investors registered up to 100,000,000 shares with the Securities and Exchange Commission (SEC) at $1 per share.  This registration was later amended to cover the issuance of up to 10,000,000 shares at $10 per share.  On June 29, 2001, DM Mortgage Investors changed its name to Vestin Fund I, and later changed its name to Vestin Realty Mortgage I (VRM I) and began trading on the Nasdaq Capital Market on June 1, 2006.  In March 2012, VRM I ceased being a REIT, but continued trading on the Nasdaq.

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Hospitality Investors Trust Inc. (formerly known as ARC Hospitality Trust, Inc.) is a non-traded real estate investment trust (REIT) focused on ownership of hotels and other lodging properties in the United States.  As a publicly registered non-traded REIT, Hospitality Investors Trust was permitted to sell shares to the investing public at large, oftentimes upon the recommendation of a broker or financial advisor.  The REIT sold shares to the public for $25.00/share.  Some investors may not have been properly informed by their financial advisor or broker of the complexities and risks associated with investing in non-traded REITs.

According to reports, Hospitality Investors Trust has terminated redemptions, and the company no longer pays a dividend.  The company must get approval from Class C units before doing future redemptions, and according to SEC filings it “no longer pays distributions.” The NAV of Hospitality Investors Trust has reportedly decreased by 47% since initial issuance to just $13.20, down from the $25 initial purchase price.  Thus, investors who bought shares at the $25.00 offering price have experienced a loss of nearly half of their principal.

On October 23, 2017, MacKenzie Realty Capital, Inc. reportedly extended a tender offer to purchase shares of Hospitality Investors Trust Inc. for $5.53 a share- suggesting that shares may be worth even less than the REIT’s reported NAV.

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Money In WindInvestors in American Realty Capital Healthcare Trust III Inc. (“ARC HT III”) may be able to recover losses on their investment in FINRA arbitration.  ARC HT III is a publicly registered non-traded real estate investment trust (“REIT”) sponsored by AR Global and based in New York, NY.  As its name suggests, this non-traded REIT is focused primarily on investing in healthcare-related assets including medical office buildings, seniors housing and other healthcare-related facilities.  ARC HT III currently owns a portfolio of 19 properties purchased for a total of $128.3 million.

ARC HT III raised approximately $168 million in investor equity prior to cancellation of its securities offering, due in large part to a series of ARC related scandals.  On July 19, 2017, ARC HT III announced an estimated net asset value (“NAV”) per share of $17.64.  Investors who participated in the offering bought in at $25 per share.  Additionally, on July 18, 2017, the ARC HT III Board determined that it would cease paying distributions beginning in August 2017.  One of the risks associated with investing in non-traded REITs concerns the viability of the distribution payment.  At its discretion, the board of a non-traded REIT may well decide to substantially reduce, or altogether suspend, payments of distributions to investors.  This is troubling, particularly because many investors are advised to purchase non-traded REITs as a means of earning enhanced income.

On December 21, 2017, ARC HT III shareholders will vote at the annual meeting to be held at 4pm at The Core Club in New York, NY, on an important proposal.  Specifically, shareholders will be asked to vote on a plan of liquidation and dissolution of the company.  Pursuant to the proposed plan of liquidation, ARC HT III shareholders will receive $17.67 – $17.81 per share of stock held.  As part of the contemplated liquidation, the non-traded REIT anticipates paying an initial liquidation distribution of $15.75 per share, expected to be paid within two weeks of closing the asset sale.  In connection with the transaction, ARC HT III will sell its underlying property portfolio for $120 million to the affiliated entity – Healthcare Trust Inc.  In order for the plan of liquidation to become effective, shareholders must vote to approve both the contemplated purchase of ARC HT III by Healthcare Trust Inc., as well as the proposal to liquidate the company.

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Summit Healthcare REIT Inc. (“Summit”), a publicly registered non-traded real estate investment trust, has recommended to shareholders that they reject a third-party tender offer by MacKenzie Realty Capital to purchase shares for $1.34 a share.  The REIT estimates its net asset value per share as $2.53, and therefore says that the $1.34 a share offer is lower than fair value.  Summit’s most recent estimated net asset value per share is $2.53, as of December 31, 2016.

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As a publicly registered non-traded real estate investment trust (“REIT”), Summit was permitted to sell securities to the investing public at large, including numerous unsophisticated investors who bought shares   upon the recommendation of a broker or financial advisor.  Unfortunately for many non-traded REIT investors, they may not have been properly informed by their financial advisor or broker of the complexities and risks associated with investing in non-traded REITs.

One of the more readily-apparent investment risks with non-traded REITs are their high up-front commissions (usually at least 7-10%), in addition to certain due diligence and administrative fees (that can range anywhere from 1-3%).  These fees act as an immediate ‘drag’ on any investment and can compound losses.  Further, another significant and less readily-apparent risk associated with non-traded REITs has to do with liquidity.  Unlike traditional stocks and certain publicly- traded REITs, non-traded REITs do not trade on a national securities exchange, leaving investors with limited options if they wish to sell their shares after the initial purchase- especially if the issuer is not redeeming shares.

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CNL Growth Properties, Inc. (“CNL Growth”) is a publicly registered non-traded real estate investment trust (“REIT”) based in Orlando, FL.  Because CNL Growth 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 financial advisor.  Unfortunately for many CNL Growth investors, they may not have been properly informed by their financial advisor or broker of the complexities and risks associated with investing in non-traded REITs.

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One of the more readily apparent investment risks with non-traded REITs are their high up-front commissions (usually at least 7-10%), in addition to certain due diligence and administrative fees (that can range anywhere from 1-3%).  These fees act as an immediate ‘drag’ on any investment and can compound losses.  Further, another significant and less readily apparent risk associated with non-traded REITs has to do with liquidity.  Unlike traditional stocks and certain publicly- traded REITs, non-traded REITs do not trade on a national securities exchange.  As a result, 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), sell the shares through a limited and fragmented secondary market, or alternatively, sit and wait for the occurrence of a future “liquidity event” such as listing on a national exchange, a merger, or liquidation.

CNL Growth, formerly known as Global Growth Trust, commenced its $1.5 billion IPO in October 2009.  By April 2013, CNL Growth had concluded its offering, priced at $10 per share, after a capital raise of approximately $94.2 million.  Shortly thereafter, in August 2013, CNL Growth initiated a follow-on offering and refined its investment strategy to focus on multifamily development projects in the Southeast and Sun Belt regions of the U.S.  These combined offerings raised approximately $208 million in investor capital.

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