Category Archives: Non-traded REITs

For the second time in less than a week, another broker/dealer announced plans to suspend sales of American Realty Capital Trust V, or ARC V. As reported July 19 by Investment News, the broker/dealer, National Planning Corp., cited continuing due diligence as the reason for the halt in sales.

Last Friday, Securities America told its registered reps it was no longer offering ARC V because of a risk of overconcentration.

National Planning Corp. said that its concerns over ARC V stem to another American Realty Capital REIT, American Realty Capital Trust IV. In June, that REIT announced plans to purchase 986 properties from an affiliate of General Electric Capital Corp. for $1.45 billion. The majority of those properties are fast-food and casual-dining establishments.

“Due to concerns with style drift, deviations from the prospectus and growing pains, which all have implications for [ARC V], NPC decided to suspend sales” of the REIT, said an e-mail to NPC reps from the firm’s products group. The same e-mail noted that NPC was adding to its selling list another American Realty Capital REIT, the Phillips Edison – ARC Shopping Center REIT II Inc.

“Based upon the GE transaction, the portfolio for [ARC IV] does not match the [REIT’s] stated strategy in terms of the average credit rating of the portfolio,” according to the e-mail. “Additionally, [ARC IV] appears to deviate from the marketed strategy in terms of the types of tenants and adding value through aggregation.”

Citing a risk of over-concentration, a  top broker/dealer, Securities America, has announced that it will no longer sell the non-traded real estate investment trust American Reality Capital Trust V.

Also known as ARC V, the REIT is a big seller. Brokers sold $406.6 million of ARC V between its launch in April through June 30.

As reported by Investment News, an important risk management tactic being implemented by many broker/dealers, including Securities America, is maintaining certain thresholds that limit a firm’s total  investment in any one alternative product or sponsor.

In the past, Securities America has been burned by too many sales of certain illiquid, alternative investment deals. From 2003 to 2007, Securities America was the biggest seller of private placement notes issued by Medical Capital Holdings Inc., which was later revealed to be a $2 billion Ponzi scheme. Securities America brokers sold close to $700 million of the notes. The legal fallout from those sales ultimately resulted in Ameriprise Financial Inc. selling Securities America to Ladenburg Thalmann Financial Services in 2011.

In June, Securities America was one of five broker/dealers to announce settlements with Massachusetts Secretary of the Commonwealth William Galvin over improper sales of non-traded real estate investment trusts and agreed to pay at least $7 million in fines and restitution.

Earlier this week, Advisor Group, which is owned by American International Group, announced it was cutting its selling agreement with Cole Holdings Corp., another leading sponsor of net-lease non-traded REITs.

Last week, the Ohio Division of Securities State regulators issued a cease-and-desist order involving the non-traded real estate investment trust (REIT), Steadfast Income REIT Inc., for announcing price changes two months before they took effect.

As reported earlier by Investment News, Steadfast Income REIT disclosed its estimated value of $10.24 per share on July 12, 2012, but continued to sell the shares at a lower value of $10 per share until Sept. 10.

“Steadfast’s decision to publicly announce an offering price increase 59 days prior to implementation of the price increase created a sale period that may have artificially increased investor demand for its securities,” said the cease-and-desist order, which does not prohibit sales of the REIT in Ohio but calls a halt to the valuation practice.

The Steadfast Income REIT focuses on multifamily real estate and apartment houses, and has more than $690 million in total assets. The REIT was launched in 2009.

Announcing future valuation changes of a REIT can hurt shareholders because it undercuts the REIT’s current value, industry observers say.

“It creates a window for a discounted sales price,” according to Mark Heuerman, registration chief counsel for the Ohio Division of Securities. “It’s in the best interest of prior shareholders that the REIT sells shares for what it’s worth.”

Ohio does not have the authority to issue fines in such cases, and no restitution to investors was ordered.

Steadfast isn’t the first non-traded REIT to issue a new share valuation and then wait a period of time to change it. Earlier this year, real estate investor Tony Thompson attempted to ramp up sales for his TNP Strategic Retail Trust by highlighting the REIT’s rising valuation and lower per-share price.

In a note to broker/dealers at the beginning of January, Thompson stated the REIT’s current net asset value as 6% higher than its share price. “As of Nov. 9, 2012, estimated NAV increased to $10.60. Shares continue to be offered at $10,” the note said.

In March, the REIT halted paying dividends to investors. Today, Thompson is under investigation by the Financial Industry Regulatory Authority (FINRA) for allegedly failing to turn over documents to the regulator.

Sales of non-traded real estate investment trusts (REITs) have once again come under the radar of securities regulators, with Massachusetts Secretary of the Commonwealth William Galvin announcing settlements with five leading independent broker/dealers that will pay at least $7 million in fines and restitution over improper sales of non-traded REITs.

The firms in the settlement include Ameriprise Financial Services, the broker/dealer arm of Ameriprise Financial Inc.; Commonwealth Financial Network; Royal Alliance Associates; Securities America; and Lincoln Financial Advisers Corp.

“Our investigation into the sales of REITs, triggered by investor complaints, showed a pattern of impropriety on the sales of these popular but risky investments on the part of independent brokerage firms where supervision has historically been difficult to monitor,” Galvin said in a statement.

Ameriprise Financial Services will pay $2.6 million in restitution and a fine of $400,000; Commonwealth Financial Network will pay $2.1 million in restitution and a $300,000 fine; Royal Alliance Associates will pay $59,000 in restitution and a $25,000 fine; Securities America will pay $778,000 in restitution and a $150,000 fine; and Lincoln Financial Advisors will pay $504,000 in restitution and a $100,000 fine.

REITs are financial products that invest in commercial real estate, including hotels, malls and other commercial buildings. Non-traded REITs do not trade on securities exchanges and therefore can be illiquid and difficult to sell in secondary markets. They also typically carry higher fees.

Earlier this year, Massachusetts regulators settled a similar complaint involving non-traded REITs with LPL Financial Holdings, alleging it failed to properly supervise brokers who sold non-traded REIT products to investors.

In total, Galvin’s office has garnered more than $11 million in restitution for Massachusetts investors and levied $1.4 million in fines from independent broker/dealers so far this year.

Alternative investments like non-traded REITs and private placements have levied financial havoc on many investors in recent years. Now, facing pressure from regulators, some broker/dealers are making changes to how they sell these kinds of products.

Earlier this year, VSR Financial Services, Berthel Fisher & Co. Financial Services and the Cetera Financial Group Inc. announced revisions to their policy guidelines and procedures regarding sales of certain alternative investments.

As reported May 16 by Investment News, such action could lessen the amount of alternative investments that clients can hold in their accounts at any one time.

The changes particularly impact illiquid alternative investments. Because these types of investments are not traded on a national securities exchange, investors have little or no ability to sell their shares if they need immediate access to cash.

The changes that some B-Ds are making in regards to illiquid investments are not entirely unexpected. The Financial Industry Regulatory Authority (FINRA) has heightened its scrutiny of these products in recent years, issuing several bulletins warning investors about the hidden risks they may pose.

Recent news concerning alternative investments occurred in February 2013, when broker/dealer LPL Financial LLC agreed to pay restitution of $2 million to Massachusetts investors who bought seven non-traded REITs, as well as a $500,000 administrative fine. In December, Massachusetts Commonwealth Secretary William Galvin had charged LPL with failure to supervise registered representatives who sold the non-traded REITs in an alleged violation of both state limitations and the company’s rules.

For now, some broker/dealers, including VSR, are scaling back the amount of illiquid alternative investments that clients can hold in their accounts, particularly the elderly, said Don Beary, VSR chairman, in the Investment News article. “FINRA in the past year did a ‘senior sweep,’ and we’ve had guidance that we have to be careful about what seniors buy,” he said.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

Real estate powerhouse Tony Thompson and the independent directors of a non-traded real estate investment trust are going head to head over why the dividend of the TNP Strategic Retail Trust was cut last month and what the management of the REIT is going to be moving forward.

As reported April 12 by Investment News, Thompson is known among independent broker/dealers for his role as a leading seller of tenant in common 1031 exchanges before the real estate crash of 2007-08.

Earlier this year, Thompson and the broker/dealer manager of the TNP Strategic Retail Trust, TNP Securities LLC, found themselves at the center of an investigation by the Financial Industry Regulatory Authority (FINRA) for failing to deliver documents in a FINRA inquiry.

In a letter to investors dated March 27, Thompson, who is chairman and co-chief executive of the TNP Strategic Retail Trust, said the three independent directors on the board, Jeffrey Rogers, Phillip Levin and John Maier, “voted to not pay [first] quarter 2013 dividends. I opposed this decision and was not part of the board meeting.”

According to the Investment News article, Thompson stated in the letter – which was not filed with the Securities and Exchange Commission (SEC) – that the distribution cut was the result of the directors inflating expenses.

“I believe extraordinary expenses are one of the primary causes for the independent directors’ decision not to pay a current distribution,” Thompson wrote. “These expenses include attorney fees related to the independent directors’ ‘special committee’ activities, the special committee’s director fees, default interest” and other costs, including salaries of accountants.

The board has since filed a shareholder letter with the SEC refuting Thompson’s assessment and that his letter was riddled with errors, including the actual number of properties owned by the REIT.

The board also is trying to fire as the REIT’s manager another company controlled by Thompson, TNP Strategic Retail Advisers LLC, and find a new adviser.

It seems the bad news just keeps getting worse for longtime real estate dealer Tony Thompson. Now, Thompson’s non-traded REIT – the TNP Strategic Retail Trust – is cutting its dividend.

In a recent filing with the Securities and Exchange Commission (SEC), the REIT cited short-term liquidity issues, including an accelerated maturity date of loans, lender fees and the cost of potential litigation with lenders, as the cause behind the halt in distributions.

As reported March 19 by Investment News, the loan compliance issues with its lenders means the TNP Strategic Retail Trust will not pay a dividend in the first quarter of 2013 and may not pay any type of distribution for 2013.

“Although our board of directors will continue to evaluate our ability to resume paying distributions, given the uncertainties noted, stockholders should not assume a resumption of distribution payments during the remained of 2013,” the company said in the SEC filing.

It was only a few short months ago that Thompson was touting TNP’s rising value to potential investors. In January, Thompson sent a note to broker/dealers declaring that the net asset value of the TNP Strategic Retail Trust was 6% higher than its share price. That kind of discrepancy between a REIT’s selling price and its NAV could be dilutive to shareholders and provide brokers with a strong sales pitch to potential investors.

That’s not the only problem facing Thompson. In January, after raising money in 2008 and 2009 for Thompson National Properties LLC, the company defaulted on $21.5 million of the private notes from that offering. Last month, the Financial Industry Regulatory Authority (FINRA) announced it was investigating Thompson and his broker/dealer, TNP Securities LLC, for failing to turn over documents, thus potentially violating FINRA rules.

Suitability, misrepresentation and complex investment products like structured notes, non-traded REITs, and private placements played a key role for the increase in fines and disciplinary actions brought by the Financial Industry Regulatory Authority (FINRA) against firms and brokers in 2012. Last year saw 4% more disciplinary cases than in 2011, as well as an increase in fines by 15%.

A recent study conducted by Sutherland Asbill & Brennan LLP showed 2012 as the fourth consecutive year of growth in the number of cases filed by FINRA and the second consecutive year of growth for the amount of fines.

In total, FINRA filed 1,541 disciplinary actions in 2012 and assessed $78.2 million in fines, the study says.

In addition to the increase in fines, the study revealed that FINRA is becoming more aggressive when it comes to getting restitution for aggrieved investors. Last year, FINRA ordered firms and representatives to pay a record $34 million in restitution, up 80% from $19 million in 2011.

Leading the list of enforcement actions by FINRA in 2012 were suitability and due-diligence cases. A total of 117 suitability cases were brought by FINRA in 2012, a 10% increase from the 106 cases reported in 2011 and nearly double the amount in 2008 and 2009.

Of the 62 due-diligence cases filed in 2012, FINRA issued $12.8 million in fines.

Failed deals in non-traded real estate investment trusts (REITs) and private placements have plagued more investors in recent years, with problems ranging from suspension of share redemptions to inaccurate valuations to outright fraud. Such issues have garnered the attention of the Financial Industry Regulatory Authority (FINRA), which is now investigating real estate developer Tony Thompson and his broker/dealer, TNP Securities LLC, for allegedly failing to turn over certain documents to FINRA.

By failing to turn over documents about his business to FINRA, Thompson is in violation of industry rules that require firms and individuals to produce information when asked to do so by FINRA.

As reported March 12 by Investment News, FINRA initially made inquiries regarding the documents two months ago. At the time, Thompson was attempting to “goose sales for a non-traded real estate investment trust, the $272 million TNP Strategic Retail Trust Inc.”

During that same month, Thompson sent a note to broker/dealers hawking the TNP Strategic Retail Trust and proclaiming that its net asset value was 6% higher than its share price. Specifically, Thompson’s note read: “Closing Feb. 7, 2013! Necessity retail: Now is the time!”

As the Investment News article points out, discrepancies between a REIT’s selling price and its NAV could be dilutive to current shareholders and provide brokers with a pitch laden with urgency to sell.

That’s not the only problem on Thompson’s plate, however. He’s also dealing with huge financial troubles, including the default on $21.5 million of private notes that he sold in 2008 and 2009 to raise money for Thompson National Properties LLC.  Last year, that venture suspended interest payments to investors in a private placement – i.e. the TNP 12 Percent Notes Program – that was designed to raise capital for the firm. Many of the investors in the TNP 12 Percent Notes Program reportedly were elderly, retired or conservative investors living on fixed incomes.

According to a July 10, 2012, article by Investment News, 22 independent broker/dealers had agreements to sell the notes, which required a minimum investment of $50,000. Brokers earned a 7% commission on sales of the notes, according to a filing with the Securities and Exchange Commission (SEC).

If you invested and suffered financial losses with Tony Thompson, the TNP 12 Percent Notes Program, Thompson National Properties LLC, TNP Securities, or TNP Strategic Retail Trust, contact us to tell your story.

Non-traded real estate investments trusts, or REITs, have come back to bite brokers/dealers and investors alike in recent years. Most recently, LPL Financial announced that it would pay a multimillion-dollar settlement connected to allegations by Massachusetts’ securities regulator that it failed to supervise representatives who sold investments in the products.

Secretary of the Commonwealth William Galvin filed a complaint against LPL in December 2012. In the complaint, Galvin alleged that LPL was in violation of both state limitations and the company’s rules. The Securities Division also charged LPL with dishonest and unethical business practices.

The Massachusetts complaint focused on seven REITs: Inland American, Cole Credit Property Trust, II, Cole Credit Property Trust, III, Cole Credit Property 1031 Exchange, Wells REIT II, W.P. Carey Corporate Property Associates 17 and Dividend Capital Total Realty.

As part of the Massachusetts settlement, LPL will pay restitution of $2 million to Massachusetts investors who bought the seven non-traded REITs in question, as well as a $500,000 administrative fine.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.