Articles Posted in REITs

There are different kinds of real estate investment trusts (REITS) in Chicago. Generally, a non-traded real estate investment trust (REIT) is a type of real estate investment that is designed to lower or eliminate taxes for the owner of the underlying real estate, while providing competitive, higher-yield income payments to investors. Non-traded REITS aren’t traded on securities exchanges. Some investors perceive non-traded REITs as less volatile than listed REITs. However, the extent to which real estate exposure is suitable for a particular investor depends on multiple factors including the investor’s tolerance for risk, high costs, and the illiquidity of the non-traded REIT.

According to investment bank Robert A. Stanger & Co. Inc., non-traded REITS sales were at all time high of $869 million in May. The year-to-date fundraising of $3.6 billion is more than double the same period 2018. It is projected that non-traded REITs will raise more than $7 billion this year, an increase over $4.6 billion last year.

In one survey, around $7.6 billion in alternative investments was raised through retail, and these alternative investments include publicly registered non-traded REITS, along with non-traded preferred stock of traded REITS, private placement offerings, non-traded business development companies, and others.

Stoltmann Law Offices is pursuing investment losses for investors in IGF Investment Grade Funds I, LP (“IGF Fund”). IGF Fund is a real estate private placement that invests in single-tenant, net leased commercial properties, with 75% of the portfolio being “investment grade rated tenants with the remainder being of quality private credit tenants or those trending to investment grade.” IGF Fund advertises that it pays 6% annual returns to investors, paid monthly, with two-thirds of the income being tax-deferred. On its website, IGF Fund solicits property owners and brokers for “single tenant triple net or double net leased assets…retail, office, restaurants, and C-stores, and leases backed by investment grade tenant credit of AAA or BBB-“. While IGF solicits properties from $1 million to $16 million, it raised less than $12 million as of August 2018. IGF Partners Realty LLC is the general partner of the IGF Fund and is headquartered in Santa Barbara, California. The IGF Fund is a Delaware limited partnership and a Regulation D private placement.

Generally, Regulation D private placements should only be sold to accredited investors, with some exceptions. Some of the criteria considered is the investor’s annual income, net worth, and sophistication and investment experience. In order to qualify as an “accredited investor”, an investor must have a $200,000 annual income, or $300,000 joint income for the past two years, or a net worth of $1 million (excluding their home). When considering the suitability of a real estate investment for a client, a broker must take into consideration the client’s current asset allocation. For most client’s, their home is already one of the largest pieces of their net worth, so investing in more real estate (and particularly illiquid real estate investments, like IGF Fund) simply does not make sense.

IGF Fund is desperate to raise cash. The initial offering of $60 million was made on March 29, 2016. As of August 21, 2018, the fund raised only $11,720,000. This means that over 80% was left to be sold two years after the initial offering. Because of this, IGF Fund notified investors in early 2019 that it was extending its offering period from December 31, 2018 to April 30, 2019. IGF Fund and brokers selling this investment have been wining and dining current and potential investors to convince them to invest more cash. The lack of capital raised limits IGF Fund’s ability to purchase properties, thus minimizing any potential return for investors. Moreover, extending the offering period also extends the time period before the Fund can be liquidated. The IGF Fund is still paying distributions to investors, however without sufficient funding to purchase assets it will run dry, leaving investors with nothing.

On June 10, 2019, the Illinois Securities Department, Massachusetts Securities Division, New Hampshire Bureau of Securities Regulation, and New Jersey Bureau of Securities each charged Glenn C. Mueller of West Chicago, Illinois, and his companies for selling unregistered securities. Mueller developed his scheme for over 40 years, building a web of at least 32 real estate development companies and selling at least $47 million of unregistered securities in the form of promissory notes in these companies to consumers. He referred to these promissory notes as “CD alternatives”, “CD IRAs”, or represented them as being real estate investment trusts (“REITs”). His companies include, but are not limited to, Northridge Holdings, Ltd., Eastridge Holdings, Ltd., Southridge Holdings, Ltd., Cornerstone II Limited Partnership,  Unity Investment Group I, 561 Deere Park Limited Partnership, 1200 Kings Circle Limited Partnership, & 106 Surrey Limited Partnership (collectively referred to as “Mueller Entities”). Mueller organized Northridge in North Dakota with the subsidiaries incorporated in Illinois.

Northridge, founded by Mueller in 1984, is the primary property management company through which Mueller ran his scheme and is the general partner of many of his other limited partnerships. Mueller, through Northridge and the Mueller Entities, owned properties through the Chicagoland area. Mueller set up a “CD Account” through the Northridge website for investors. Once Northridge received the funds, he solicited investors to use the funds in their Northridge CD Account to invest in his various companies.

The Illinois Securities Department filed a Temporary Order of Prohibition against Mueller, Northridge, and several of the Mueller Entities. Mueller solicited 140 Illinois residents to invest over $19 million through 244 promissory notes. Some of these investments were sold to clients in their IRAs.

The securities fraud attorneys at Stoltmann Law Offices, P.C. continue to investigate investor claims against brokerage firms that sold their clients investments in various GPB Capital Holdings offerings.  On March 22, 2019, attorney Joe Wojciechowski announced the filing of a Statement of Claim with FINRA Dispute Resolution for an investor who was sold units in GPB Automotive Fund, L.P. The claim was filed against NewBridge Securities and also includes allegations in connection with various non-traded REITs issued by American Realty Capital (ARC). The claim is for a retail investor whose financial advisor recommended she invest nearly 100% of her accounts in alternative investments offered by GPB Capital and ARC.  The claim alleges misrepresentations and omissions of material facts in violation of the Securities Act of Washington, consumer fraud in violation of the Washington Consumer Protection Act, negligence for violating numerous regulatory rules including FINRA Rules 2111 (suitability) and 3110  (supervision), and breach of fiduciary duty. Our client seeks rescission of her GPB Automotive Fund investment and compensatory damages for her realized losses in the ARC REITs, plus attorneys fees, costs, interest, and punitive damages.

Investors who were solicited by financial advisors and brokers to invest in GPB Capital funds should consider their legal options to seek rescission of those investments.  Under the state securities laws (frequently referred to as the Blue Sky Laws), the primary remedy for investors is called rescission, which means the investor sues to force the brokerage firm to buy the investment back.  The rescission remedy seeks to put the investor back in the same place she was prior to purchasing the investment. This is important for investors who own alternative investments like GPB Capital Funds.  These are not liquid or tradable investments, meaning an investor cannot call their advisor and sell it and realize a gain or a loss. Essentially, the investor is stuck. Given the troubling news about GPB Capital over the last several months, something Stoltmann Law Offices has written about extensively, investors are correct to be wary and should consider an exit strategy. Unfortunately, because there is no way out of the GPB Funds, the only option for investors may be to pursue arbitration claims against the brokerage firm responsible for soliciting the investments in the first place.

In the last several years, as interest rates remained very low, it has been difficult for investors to find fixed income investments, like corporate and municipal bonds, that offered higher yields without exposing them to speculative risk. Likewise, due to the long term low interest rate environment, the principal value of the bonds begin to drop as interests rates have risen. The solution to these problems for brokerage firms has been to sell “alternative investments” that offer relatively high yields, but because they are non-traded and do not report any real market value, they have the appearance of a stable value for investors. The bonus for brokerage firms is that these alternative investments offer the advisors commissions they could never achieve by selling standard fixed income securities like corporate bonds or municipal bonds. Advisors sell the sizzle of a high yield and fixed prices and either gloss over or completely misrepresent the speculative risk being taken by investors who entrust their money to private entities like GPB Capital.

The investment fraud attorneys at Stoltmann Law Offices are evaluating recent reports that the NorthStar Healthcare Income, Inc. Real Estate Investment Trust (REIT) has announced it will completely stop making distributions to investors in order to retain cash. This most recent announcement follows up on the decision in April 2018 by the NorthStar Healthcare Income to suspend investor distributions. It should come as no surprise, that as the income component of this income investment was suspended, the purported value of the shares of this non-traded REIT has also plummeted.

According to HealthCare Income REIT, its NAV, or net-asset-value, is down to $7.10 per share, an almost 30% decline from its listing price of $10 per share. Importantly, shares of HealthCare Income REIT are not publicly traded, so investors cannot simply put in an order to sell their shares and have an exchange, like the NYSE, fill an order for the sale at a bid price. Because these non-traded REITs are illiquid, if investors want to sell their shares, this can only be facilitated through secondary market auctions.  According to  recent secondary market sales information,  shares of NorthStar Healthcare Income REIT were sold for only $4.76 per share on January 25, 2019 – a more than 50% decease from the offering price.  There have been no reported sales since, and the official announcement ending distributions is sure to drive the price of this REIT down even more.

Suspending distributions, ending distributions, freezing redemptions, and share prices that rarely reach the offering price are all too common storylines with non traded REITs. Non-Traded REITs have played a prominent role in our representation of investors since 2005. Financial Advisors commonly use non-traded REITs, like the NorthStar Healthcare REIT, as a piece of the fixed-income portion of an investor’s overall portfolio. They also use these non-traded REITs to fill the part of the diversification plot as exposure to the real estate sector. Neither of these reasons is sufficient to expose investors to a traditionally underperforming asset class. The fixed-income allure of these non-traded REITS really took hold after the dust settled from the financial crisis. Due to persistently low interest rates, investors just could not get any sort of yield from traditional fixed income securities. Financial advisors began to really push non-traded REITs offering distribution rates of more than 7%, all the while allegedly protecting the principal  investment with a portfolio of real estate. If this sales pitch sounds familiar and you have money stuck in the NorthStar Healthcare REIT, please call our Chicago-based securities attorneys at 312-332-4200 for a no-obligation free consultation.

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