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Articles Tagged with Non-Traded REITs

Published on: Healthcare Income, Inc. (“NorthStar Healthcare”) is a public, non-traded REIT formed in October 2010 as a Maryland corporation.  NorthStar Healthcare is in the business of acquiring a geographically diverse portfolio of various healthcare real estate assets, including equity and debt investments (including various joint ventures with other non-traded REITs) in the mid-acuity senior housing sector, as well as in memory care, skilled nursing, and independent living facilities.  Pursuant to its initial offering, which closed on February 2, 2015, the non-traded REIT raised gross proceeds of $1.1 billion (subsequently, NorthStar Healthcare conducted a Follow-on Primary offering, raising total gross proceeds of $1.9 billion through March 22, 2017).

As a publicly registered, non-traded REIT, numerous retail investors were solicited by a financial advisor to invest in NorthStar Healthcare.  Unfortunately, customers who purchased shares through the IPO upon the recommendation of a broker may, in some instances, have been uninformed of the complex nature of the investment, including its high upfront commissions and fees (as set forth in its prospectus, NorthStar Healthcare charged investors a selling commission of up to 7% of gross offering proceeds, a dealer-manager fee of up to 3%, and an acquisition fee of 2.25% for properties acquired by the REIT).

Furthermore, as a non-traded REIT, NorthStar Healthcare is illiquid in nature.  Investors seeking liquidity have limited options at their disposal in the event that they wish to exit their investment position in the near term.  Briefly, investors seeking liquidity may: (i) seek to redeem their shares directly with the sponsor (it is worth noting that NorthStar is “not obligated to repurchase shares” under its Share Repurchase Program), or (ii) be presented with limited, market-driven opportunities to tender their shares to a third party professional investment firm (typically at a disadvantageous price), or finally, (iii) seek to sell their shares on a limited secondary market specializing in creating a market for illiquid securities.

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investing in real estate through a limited partnershipAs recently announced, the board of directors of Hines Real Estate Investment Trust, Inc. (“Hines REIT” or the “Company”) — one of three publicly registered non-traded REITs sponsored by Hines — has unanimously voted for approval of a plan of liquidation and dissolution of the Company (“Liquidation Plan”).  Under the Liquidation Plan, which calls for  shareholder approval, the Company will sell seven of its West Coast office building assets in a cash transaction valued at $1.162 billion to an affiliate of Blackstone Real Estate Partners VIII.  In addition, Hines REIT also seeks to liquidate the remainder of its portfolio, including Chase Tower in Dallas, TX, 321 North Clark in Chicago, and a grocery-anchored retail portfolio located in the Southeastern U.S.

Pursuant to the Liquidation Plan, Hines REIT shareholders will receive $0.08 per share, to be paid on or about July 31, 2018.  Specifically, the Liquidation Plan entails a final distribution of $0.07 per share, as well as an additional $0.01 per share stemming from a recent class action settlement.  The class action settlement involves a lawsuit filed by Baltimore City in the Circuit Court of Maryland, alleging breach of fiduciary duty, waste of corporate assets, and misappropriation of assets surrounding certain payments made in connection with the Liquidation Plan.

Hines REIT shareholders previously approved the Liquidation Plan in November 2016; subsequent to shareholder approval, the Company declared an initial liquidating distribution of $6.20 per share in December 2016, as well as a $0.30 per share liquidating distribution in April 2017.  Following the final distribution of $0.08 per share, Hines REIT investors will have received total special and liquidating distributions of approximately $7.59 per share, in addition to regular annual distributions.  Shares were originally sold for $10 each.

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Building DemolishedAs recently reported, third party real estate investment firms Everest REIT Investors I LLC and Everest REIT Investors III LLC, two private affiliated entities, commenced an unsolicited tender offer to purchase approximately 8.8 million shares of CNL Healthcare Properties, Inc. (“CNL Healthcare”) common stock for $7.50 each.  Unless amended, this unsolicited tender offer will expire on August 31, 2018.  As of December 31, 2017, CNL Healthcare reported a net asset value (NAV) of $10.32 per share.  Thus, the recent tender offer pricing represents an approximate 27% discount on CNL’s recent NAV pricing and suggests that investors may have incurred principal losses on their investments.

Headquartered in Orlando, FL, CNL Healthcare is a Maryland REIT incorporated in June 2010 for the purpose of acquiring a portfolio of geographically diverse healthcare real estate real estate-related assets, including certain senior housing communities, medical office buildings, and acute care hospitals.

Investors in CNL Healthcare may have claims to bring in FINRA arbitration, if the investment was recommended by a broker or financial advisor who lacked a reasonable basis for the recommendation, or if the financial advisor misrepresented the nature of the investment, including its risk components.

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Building DemolishedInvestors in Griffin Capital Essential Asset REIT, Inc. (“Griffin Essential”), may have substantial losses based on a tender offer to purchase shares for $6.89 a share — or $3.11 a share less than the offering price of $10 a share.  As recently reported, on December 1, 2017, third-party real estate investment firm MacKenzie Capital Management (“MacKenzie”) made an unsolicited tender offer for shares of Griffin Essential at $6.89 per share, in cash.  The Board of Directors of Griffin Essential has recommended that its shareholders reject the offer.  However, the Board also advised that, as of September 30, 2017, its share redemption program (“SRP”) for 2017 was fully subscribed, thus leaving investors seeking liquidity via redemption with little recourse.

Griffin Essential is a Maryland REIT incorporated in August 2008 for purposes of acquiring a portfolio of geographically diverse single tenant properties across a wide range of industries.  From 2009 – 2014, Griffin Essential conducted a series of offerings in connection with its capital raise.  In aggregate, the non-traded REIT issued 126,592,885 shares of common stock for gross proceeds of approximately $1.3 billion.  As a publicly registered non-traded REIT, Griffin Essential was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the IPO upon the recommendation of a broker or money manager.

Investors who purchased shares of Griffin Essential through the offering acquired their shares for approximately $10 per share.  Therefore, it would appear that investors who participated in the MacKenzie tender offer incurred substantial losses on their initial investment in excess of 30% (exclusive of commissions and distributions).

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Apartment BuildingInvestors in Benefit Street Partners Realty Trust, Inc. (“Benefit Street” or the “Company”) may have arbitration claims to be pursued before the Financial Industry Regulatory Authority (“FINRA”), if their investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the financial advisor.  Benefit Street was formerly known as Realty Finance Trust; however, in September 2016, Realty Finance appointed Benefit Street Partners (“BSP”) as its new advisor, replacing former sponsor AR Global Investments.

Benefit Street is a publicly registered, non-traded real estate investment trust (“REIT”) that originates, acquires and manages a diversified portfolio of commercial real estate debt secured by properties located in the United States.  Benefit Street is managed by BSP, a credit-focused alternative asset manager with over $20 billion of assets under management.  Benefit Street commenced its operations in November 2012, and raised $786 millions in investor equity prior to closing its offering in January 2016.  As of September 2016, the Company’s portfolio consisted of 73 loans and 7 CMBS investments.

In the years following the 2008 financial crisis, many retail investors were steered into investing in non-traded REITs such as Benefit Street by their broker or money manager based on the investment’s income-producing potential, in addition to the investment’s purported negative correlation to market volatility.  Unfortunately, however, many investors were not informed of the complexities and risks associated with non-traded REITs, including the investment’s high fees (as high as 15% of the initial capital investment in some instances) and illiquid nature.

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Building DemolishedInvestors in American Realty Capital New York City REIT (“ARC NYC REIT”), may have arbitration claims to be pursued before the Financial Industry Regulatory Authority (“FINRA”), if their ARC NYC REIT investment was recommended by a financial advisor who lacked a reasonable basis for the recommendation, or if the nature of the investment was misrepresented by the broker or financial advisor.  According to its website, ARC NYC REIT is structured to provide its investors with a combination of current income and capital appreciation through strategic investments in high-quality commercial real estate located throughout the five boroughs of New York City.

As recently reported, the Board of ARC NYC REIT has elected to suspend distributions, effective March 1, 2018.  According to the Board, the suspension of future distributions was made in order to enhance the non-traded REIT’s ability to execute on acquisitions, as well as conduct repositioning and leasing efforts related to its property portfolio.  As a publicly registered non-traded REIT, ARC NYC REIT was incorporated in December 2013 and is registered with the SEC.  Accordingly, ARC NYC REIT was permitted to sell securities to the investing public at large, including numerous unsophisticated retail investors who bought shares through the initial public offering (“IPO”) upon the recommendation of a broker or money manager at $25 per share.  Secondary market transactions in ARC NYC REIT shares have reportedly taken place at prices of between $13.75 and $14.25 a share (although the sponsor indicates the NAV of ARC NYC REIT shares is $20.26 a share).

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 like ARC NYC REIT, have limited options when it comes to exiting their investment position.  For example, investors in non-traded REITs typically can only redeem shares directly with the sponsor on a limited basis, and often at a disadvantageous price.  Or, investors may be able to sell shares through a limited and fragmented secondary market.  Finally, investors may be presented with limited market-driven opportunities — such as a tender offer — to sell their shares at a disadvantageous price.

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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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A FINRA arbitration panel awarded $1 million to an investor whose portfolio was over-concentrated in UBS Puerto Rico closed-end bond funds. The 66 year-old conservative investor reportedly “lost $737,000 of his nearly $1 million portfolio when the value of UBS’ Puerto Rico municipal bond funds collapsed in the fall of 2013.”

15.6.11 puerto rico flag mapWhen the client expressed his concern about his declining account, he was told “even a skinny cow could give milk.” The arbitration panel wrote that the investor’s portfolio was “clearly unsuitable” and provided a lengthy explanation for their award, which pointed the finger at UBS’s sales practices and alleged that brokers were under pressure to sell the closed-end funds and keep clients in them. The arbitration panel wrote that “Claimant’s lifetime pattern has been one of frugality, saving and employment of resulting capital and his own labor in business opportunities that he understands can earn a good return.”

UBS was ordered to pay $400,000 to buy back the investor’s portfolio and pay $600,000 in compensatory damages. The investor’s request for $1 million in punitive damages was reportedly denied by the arbitration panel. The FINRA award is accessible here ubs puerto rico.

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