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Articles Posted in REITs

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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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Strategic Realty Trust (“SRT,” formerly known as TNP Strategic Retail) is a San Mateo, CA based non-traded real estate investment trust (“REIT”) that invests in and manages a portfolio of income-producing real properties including various shopping centers located primarily in the Western United States.

Market Analyze.

Over the past several years, many retail investors were steered into investing in non-traded REITs such as SRT by their broker or money manager based on the investment’s income-producing potential.  Unfortunately, many investors were not informed of the complexities and risks associated with non-traded REITs, including the investment’s high fees and illiquid nature.  Currently, investors who wish to sell their shares of SRT may only do so through direct redemption with the issuer or by selling shares on an illiquid secondary market, such as Central Trade & Transfer.

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Investors in American Finance Trust and  Lightstone Value Plus REIT V may have viable arbitration claims before the Financial Industry Regulatory Authority (FINRA) if a stockbroker or investment advisor made an unsuitable recommendation to the investor to  purchase them, or made a misleading sales presentation in recommending them.
Publicly registered non-exchange traded REITs like American Finance Trust and Lightstone Value Plus REIT V are complex investment vehicles that carry substantial risk, including significant fees and lack of liquidity (often making redemption difficult for a shareholder seeking to exit an investment).  Many retail investors are steered into purchasing non-traded REITs upon the recommendation of their broker or financial advisor who will typically tout the investment’s income component to their clients seeking an income stream.  Unfortunately, many investors who purchase shares in non-traded REITs are not fully informed of the many complexities and risks associated with such an investment.

American Finance Trust (“AFT”) is a non-traded REIT that was formed in January 2013 and subsequently launched by American Financial Advisors, LLC.  More recently, in February 2017, AFT (with $2.1 billion in assets) and American Realty Capital-Retail Centers of America (with $1.25 billion in assets) announced shareholder approval for a merger of the two non-traded REITs.

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Non-traded real estate investment trusts (“REITs”), such as KBS REIT I (“KBS I”), unlike exchange traded REITs, are complex and risky investment vehicles that do not trade on a national securities exchange such as the NYSE or NASDAQ.  Unfortunately, retail investors are often uninformed by their broker or money manager of the illiquid nature of non-traded REITs, meaning that investors who wish to sell their shares can only do so through a direct redemption with the issuer or through a fragmented and illiquid secondary market.

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KBS I launched through its initial public offering (“IPO”) in early 2006 for issuance of up to 200 million shares.  Through its IPO at $10 per share, KBS I raised $1.7 billion prior to closing in May 2008.  The company’s portfolio includes nearly 200 properties, in addition to participation in various real estate loan receivables.

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For some time we have been blogging about non-traded REITS (and the real risks associated with investing in these complex investment vehicles.  Many investors are familiar with exchange traded Real Estate Investment Trusts (“REITs”).  Pursuant to federal law, these companies which own and typically operate income-producing real estate, are required to distribute at least 90% of their taxable income to investors in the form of dividends.  Because REITs pay out such a high percentage of their taxable income as dividends, these companies have attracted numerous retail investors (including pensioners and other retirees) seeking to augment their income stream.

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While an appropriate allocation of REITs in a retail investment portfolio may well be suitable and warranted in order to achieve diversification and earn decent income, non-traded REITs are an altogether different and often risky investment vehicle.  The primary risks associated with non-traded REITs include: (1) a lack of liquidity – non-traded REITs do not trade on an exchange, and therefore, any secondary market for resale will be restricted; (2) pricing inefficiency – in lockstep with their lack of liquidity, investors in non-traded REITs may find that the price offered for share redemption is substantially lower than the price at which shares were initially purchased;  (3) high up-front fees – compounding the risk with non-traded REITs are the often steep up-front fees charged investors (as high as 10% for selling compensation) simply to buy in and purchase shares; and (4) confusion over source of income – often, investors in non-traded REITs are unaware that dividend income may actually include return of capital (including possible the proceeds from sale of shares to other, later investors).


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With increasing frequency, given the current low interest rate environment, retail investors are steered into investing in products appearing to offer more advantageous yields than are available in traditional interest-bearing investments such as money market funds and CDs.  One example is the publicly registered non-exchange traded real estate investment trust (“REIT”) or “non-traded REIT.”  While non-traded REITS share certain similarities with their exchange-traded brethren, they differ in a number of key respects.


To begin, a non-traded REIT is not listed for trading on a securities exchange.  Consequently, the secondary market for non-traded REITs is typically very limited in nature.  Furthermore, while some of an investor’s shares may be eligible for redemption after a certain passage of time (e.g., one year), and, even then, on a limited basis subject to certain restrictions, such redemption offers may well be priced below the purchase price or current price of the non-traded REIT.  Thus, lack of liquidity and pricing inefficiency are two disadvantages to non-traded REITs, as opposed to REITs that trade on an exchange (e.g., NYSE: BXP – Boston Properties).

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On October 27, 2015, Vanguard Funds (Vanguard) filed suit against VEREIT, Inc. (VEREIT), VEREIT Operating Partnership, AR Capital, ARC Properties Advisors, RCAP Holdings, RCS Capital Corporation, and five company executives in Arizona federal court.

15.10.21 building explodesVEREIT (formerly known as American Realty Capital Properties)  is one of the largest real estate investment trusts (REITs) in the world.  VEREIT was founded in 2010 and is based in Phoenix, Arizona.

In the complaint Vanguard alleges that VEREIT cost investors billions of dollars in a multiyear accounting fraud.  From February 2013 to July 2014 VEREIT implemented an “acquisition strategy”  purchasing seven major real estate companies at an average of $3 billion.  VEREIT’s assets grew from $132 million to $21.3 billion in 2014.  During this growth VEREIT allegedly  assured investors that its internal controls “were effective” and that the company financial statements “were accurate and could be trusted.”

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Securities Litigation Consulting Group of Fairfax, Virginia has estimated that shareholders of non-traded REITs are about $50 billion worse off for having put money into non-traded REITs rather than exchange-traded REITs. The estimate is based on the difference between the performance of more than 80 non-traded REITs and the performance of a diversified portfolio of publicly-traded REITs over a period of twenty years. According to research by the consultancy, the difference in performance between the two asset groups is largely due to the relatively high up-front expenses associated with non-traded REITs.

15.6.15 money whirlpoolNon-traded real estate investment trusts (REITs) are investments that pose a significant risk that the investor will lose some or all of his initial investment. Non-traded REITs are not listed on a national securities exchange, limiting investors’ ability to sell them after the initial purchase. Such illiquid and risky investments are often better suited for sophisticated and institutional investors, rather than retail investors such as retirees who do not wish to have their money tied up for years, or risk losing a significant portion of their investment. Non-traded REITs usually have higher fees for investors than publicly-traded REITs and can be harder to sell.

A partial list of non-traded REITs is as follows (not all of the REITs listed have performed poorly):

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Douglas William Finlay, Jr., a stockbroker formerly associated with Cadaret, Grant & Co., has entered into a  Letter of Acceptance Waiver and Consent (AWC) with the Financial Industry Regulatory Authority (FINRA) to settle a case in which FINRA alleged that Finlay over-concentrated a customer’s assets in an unsuitable illiquid real estate investment trust (REIT).

15.6.10 money in a cageIn the AWC, in which Finlay neither admitted nor denied the FINRA charges, FINRA found that Finlay failed to adequately disclose information to the customer about the REIT and also allegedly falsified a firm document that misrepresented the customer’s net worth and income.

As a result of the charges, Finlay’s license was suspended for 18 months.  FINRA also fined Finlay $15,000 and ordered him to pay disgorgement of $6,639.  The case is FINRA Disciplinary Proceeding No. 2013035576601

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