REITs

CNL Lifestyle Properties REIT Dips in Value, May Sell Ski Resorts

Published on: March 16, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Even though the commercial real estate industry has recently rallied, shares of the nontraded real estate investment trust CNL Lifestyle Properties Inc. continue to plummet. According to the nontraded REIT’s filing with the SEC, as of the end of 2014 its board of directors approved a $5.20/share valuation—that’s a 24% decline from a year before when the share valuation had been modified to $6.85/share. Launched more than 10 years ago, CNL Lifestyle Properties original price was $10/per share.

Now the nontraded REIT has retained investment bank Jefferies LLC (JEF) to look at whether it makes sense to sell more of its properties or list on an exchange. Already, CNL Lifestyle Properties reached a deal in December to sell its senior housing assets portfolio to the Senior Housing Properties Trust for $790M. Proceeds from the sale will go toward paying debt, and possibly to shareholder distributions or strategic costs for enhancing properties in the CNL Lifestyle Properties portfolio.

The nontraded REIT is also considering whether to sell over a dozen ski resorts located all over the United States. Collectively, the properties are worth hundreds of millions of dollars. CNL Financial Group’s senior managing director, quoted on ABCNews.com, has said that the company is also looking at its theme parks and marinas as it explores its options.

Nontraded REIT Inland American Reduces Its NAV After Asset Sale

Published on: February 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Inland American Real Estate Trust Inc. (IARE) has lowered its estimated share value by 42.4%, because the company sold or spun off different assets over the last year. Among these were its hotel portfolios, now a listed real estate investment trust known as Xenia Hotels & Resorts Incorporated.

Inland American submitted a filing with the U.S. Securities and Exchange Commission, stating that $4 was its most current estimated share value. Prior to that, concluding 2013, the nontraded REIT said that its most recent valuation was at $6.94/per share value. Inland American Real Estate Trust Inc. said it was reducing its yearly distribution from 50 cents to 13 cents.

Inland American president and chief executive Thomas P. McGuinness noted that Xenia constituted a significant chunk of its assets, with each stockholder getting one share of Xenia common stock for every eight Inland American common stock shares held at end of business on January 20. That was the spin-off date. Because of this, stockholders of Inland American now own common stock shares in both Xenia and Inland.

Another Institutional Investor Fraud Lawsuit Accuses American Realty Capital Properties Of Violating Securities Laws

Published on: January 26, 2015 | by Shepherd Smith Edwards & Kantas, LLP

The New York City Retirement Systems and TIAA-CREF have joined other institutional investors in suing . They contend that the real estate investment trust violated federal securities laws when it allegedly made misleading and false statements that misrepresented the company’s business, as well as took part in a scam to fool the market and artificially inflate American Realty securities prices.

The securities laws claims are related to a $23 million accounting error that REIT made during last year’s first stated quarters, misstating the company’s adjusted operation funds. While ARCP eventually disclosed the mistakes, the plaintiffs claim that the company’s senior executives did not at first correct the error when it was discovered. The institutional investors believe that this was because executives wanted to get class members to buy American Realty securities at inflated prices.

TIAA-CREF and the $158.7 billion pension fund are seeking lead plaintiff class action securities status for their institutional investor fraud lawsuit.

Moody’s Reduces American Realty Capital Properties Credit Rating to Junk Status, REIT’s Founder Nicholas Schorsch Steps Down

Published on: December 16, 2014 | by Shepherd Smith Edwards & Kantas, LLP

American Realty Capital Properties’ (ARCP) credit rating was just downgraded to junk status by Moody’s Investors Service (MCO). The credit rater is now rating the real estate investment trust with a Ba1, which is just under investment grade. Moody’s has also given ARCP a negative outlook. The downgrade comes following this week’s management shakeup at the REIT and its disclosure several weeks ago of massive accounting irregularities that were covered up.

This week, American Reality Capital Properties’ chairman and founder Nicholas Schorsch stepped down, as did COO Lisa Beeson and chief executive David Kay. In October, ARCP’s chief accounting officer and CFO also resigned after an $23 million accounting mistake was announced.

The change in management comes weeks after the REIT disclosed that it misstated financial results in 2014’s first quarter and purposely concealed the error by misrepresenting second quarter results. After the REIT revealed the $23 million accounting error, a number of firms suspended trading in nontraded real estate investment trusts that were run and backed by companies under Schorsch. The firms included Fidelity, Charles Schwab (SCHW), Pershing, LPL Financial (LPLA), AIG Advisor Group, National Planning Holding, Securities America, and even Schorsch’s Cetera Financial Group broker-dealer network.

SEC Claims Fraud Involving a REIT and Bogus Senior Resident Occupants

Published on: December 3, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission claims that two ex-executives at Assisted Living Concepts Inc. committed fraud by listing bogus occupants at certain senior residences to satisfy the lease requirements to run the facilities. The regulator is accusing former CFO John Buono and previous CEO Laurie Bebo of coming up with a scam that included bogus disclosures and manipulation of records and books when it started to look as if Wisconsin-based assisted living provider was going to default on covenants in a lease agreement with Ventas Inc., which is a real estate investment trust.

Per the covenants, ALC was obligated to keep up minimum occupancy rates and coverage rations while running the facilities or otherwise default on the lease. A default would have obligated the company to pay whatever rent was due for the lease’s remainder of term, which would have been tens of millions of dollars.

According to the SEC Enforcement Division, to meet covenant requirements Buono and Bebo told accounting personnel to work out coverage ratios and occupancy rates by factoring in phony occupants. These nonexistent occupants included Bebo’s relatives and friends, in addition to previous and former ALC employees (including some who had been fired and who hadn’t yet been officially hired), as well as a seven-year-old “senior resident.” Without this false information, contends the agency, ALC would have not met convenant requirements by substantial margins for several quarters in a row.

Fidelity, Schwab, and Pershing Suspend Trading of Schorsch Nontraded Real Estate Investment Trusts

Published on: November 13, 2014 | by Shepherd Smith Edwards & Kantas, LLP

Three more firms have decided to suspend trades of nontraded real estate investment trusts managed and backed by companies under Nicholas Schorsch’s control. The suspension comes following news of a $23 million accounting error involving American Realty Capital Properties Inc. (ARCP) which is Schorsch’s publicly treated REIT. ARCP owns Cole Capital Advisors Inc. and Cole Capital Partners.

The mistake was disclosed at the end of the month. ARCP revealed that the error occurred during the first half of the year and then was purposely left uncorrected. The latest firms to announce suspensions are Charles Schwab (SCHW), Pershing and Fidelity.

Schwab said it would suspend sales of Cole and American Realty Capital nontraded real estate investment trusts. Fidelity noted that it was going to stop facilitating subscriptions for certain Cole and Realty Capital Securities-affiliated nontraded REITs. Pershing told broker-dealers that use its clearing services that it would stop facilitating purchases of Cole Capital-sponsored investment products. More than thirty of the leading independent brokerage firms have clearing deals with Pershing.

AIG Advisor Group, Securities America, LPL Financial, Cambridge, And Even Schorsch’s Broker-Dealer Stops Selling His REITs

Published on: November 7, 2014 | by Shepherd Smith Edwards & Kantas, LLP

More broker-dealers are suspending their sale of Nicholas Schorsch-affiliated nontraded real estate investment trusts. The suspensions are coming in the wake of the announcement of a $23 million accounting error involving American Reality Capital Properties Inc., which is the traded REIT under Schorsch’s control. Even after the error was found it was purportedly purposely left unfixed.

Now, LPL Financial Holdings Inc. (LPLA), the biggest independent broker-dealer in the country, has said that it has put a stop for now to the sale of products sponsored Schorsch’s RCS Capital Corporations, American Realty Capital Properties Inc., and their affiliates. LPL has almost 14,000 advisers.

Another brokerage network, AIG Advisor Group, which has four broker dealers and 6,000 registered representatives and advisers, said it was suspending its sale of two Schorsch-related nontraded REITS: the Phillips Edison-ARC Grocery Center REIT II and the American Realty Capital New York City REIT Inc.

National Planning Holding Temporarily Stops Selling American Reality Capital Properties’ Nontraded REIT sales After Disclosure of $23M Accounting Error

Published on: October 31, 2014 | by Shepherd Smith Edwards & Kantas, LLP

National Planning Holding, a broker-dealer network, says that it has temporarily stopped offering American Realty Capital Properties Inc.’s (ARCP) non-traded real estate investment trusts for sale. The move comes after the real estate investment trust, run by Nicholas Schorsch, disclosed a $23 million accounting mistake. American Realty Capital is the top sponsor of nontraded REITs. Schorsch is its chairman.

The National Planning Holding suspension impacts just one Schorsch product, the Phillips Edison – ARC Grocery Center REIT II. This is a new REIT with about $207 million in total assets.

The four brokerage firms who are temporarily suspending sponsorship and distribution of the nontraded REITs by American Realty Capital Properties and its affiliates are SII Investments Inc., National Planning Corp, Investment Centers of America Inc., and INVEST Financial Corp. They are asking for Realty Capital Securities, the wholesaling broker-dealer for ARC products, to return unprocessed sales orders from INVEST advisers. They don’t want the brokerage firm to process related new business.

Ex-LPL Financial Adviser, James Bashaw from Texas, Lands at New Brokerage Firm

Published on: October 30, 2014 | by Shepherd Smith Edwards & Kantas, LLP

James “Jeb” Bashaw, the former star financial adviser at LPL Financial (LPLA) from Texas is now registered with International Assets Advisory, a small brokerage firm. LPL Financial fired Bashaw last month over allegations involving selling away. Then, for a while this month, he was with Wunderlich Securities Inc.

Selling away typically involves engaging in private securities transactions sans the required written disclosure or brokerage firm approval. It can also include borrowing from a client, as well as engaging in a transaction that is a potential conflict interest, again without the required disclosure in writing or firm approval.

Responding to the selling away allegations, Bashaw noted that he was “home supervised” and underwent more than a dozen perfect audits while affiliated with LPL. After his firing, Wunderlich took steps to hire Bashaw but there was a delay in transferring his license to the firm. In the end, the broker-dealer and Bashaw reportedly decided not to pursue a working relationship.

SEC Approves Regulations Involving REIT Prices and Arbitration Fraud Intervention

Published on: October 18, 2014 | by Shepherd Smith Edwards & Kantas, LLP

The U.S. Securities and Exchange Commission has approved a Financial Industry Regulatory Authority-proposed rule that would create greater transparency of Nontraded real estate investment trusts. Under the new rule, investors will have to be provided with more information about the costs involved in buying shares of nontraded REITs.

With the existing practice, brokerage firms can list nontraded REITS as having $10/share price. The new rule would obligate broker broker-dealers to include a per share estimated value for an REIT or unlisted direct participation program on customer statements and make other disclosures.

Firms would calculate an REIT or DPP per share estimated value by either using the appraised value methodology or the net investment methodology. The appraised value method involves using the liabilities and assets of the REIT or DPP to determine the valuation upon which the share value would be based. The valuations would have to be conducted at least once a year by a third-party valuation expert. The net investment method involves brokerage firms articulating in customer statements that a portion of return of capital is included in a distribution and that this return lowers the estimated per share value listed on the statement.