Articles Tagged with ARC REITs

Chicago-based Stoltmann Law Offices continues to see a surge of complaints from investors who bought unlisted or non-traded Real Estate Investment Trusts (REITs). For most investors, the prospect of getting a higher yield on any investment has been alluring. With rates near zero, it’s been hard to earn a return that beats inflation. Enter REITs and funds that invest in them. These are special vehicles that bundle real estate properties into one investment: You can invest in everything from apartment buildings to storage units.

Many REITs are listed and traded on stock exchanges, but some are not, which are called “private” or “unlisted” REITs. In their heyday, REITs routinely paid double-digit yields. Unlisted or “non-traded” REITs have been a consistent sore spot for investors in recent years. Many are loaded with fees and commissions, which dramatically lower investors’ net returns. They even may be money losers, even though they are sold with the promise that 90% of the income generated by properties they hold must be paid to investors. Middleman expenses, which can be as high as 15%, eat up returns in most cases.

Disclosure of the actual financial condition of these vehicles has also been troublesome. It’s hard for investors to know the true value of the properties within these vehicles, which have been aggressively sold by broker-dealers, who make high commissions selling them. When the COVID-19 crisis wracked the economy earlier this year – at first hitting commercial real estate developers and owners particularly hard – REITs that specialized in retail and office properties got clobbered. Retail and Hotel REITs were down 48% and 53%, respectively (as of April 15), according to Deloitte. Investors in these funds, of course, may be still experiencing large losses.

Chicago-based securities law firm Stoltmann Law Offices continues to investigate nationwide claims involving American Realty Capital (“ARC”) New York City REIT.  New York City REIT, Inc. is a non-traded real estate investment trust that owns a portfolio of high-quality commercial real estate located within the five boroughs of New York City, particularly Manhattan.  In order to induce clients to invest in the ARC New York City REIT, brokers pitched the REIT as maximizing total shareholder returns through appreciation and current income, maintaining a low loan to value rate, targeting liquidity events, acquiring high-quality New York City real estate and as having a diversified group of tenants. Stoltmann Law Offices is investigating claims against stockbrokers and investment advisors who recommended this complex high commission based product to investors.

Brokers sold the ARC New York City REIT to customers as having primary objectives of preservation and protection of capital and capital appreciation.  Unfortunately, the ARC New York City REIT ceased paying distributions on March 1, 2018.  Furthermore, the ARC New York City REIT paid substantial fees to advisors.  No public market existed for the ARC New York City REIT and the investment is illiquid pending its IPO.  As of December 31, 2017, ARC New York City REIT owned only six properties and therefore had limited diversification.  The value of the shares of ARC New York City REIT have declined substantially leaving investors stuck with the illiquid investment and a principal loss.

The New York City REIT is a “non-traded” REIT, which means it falls into a subset of the broader REIT investment class. REITs generally speaking are trusts designed to provide tax incentives to the owners of the underlying property. In order to maintain their status as a REIT, the REIT managers have to ensure that at least 90% of all taxable income generated by the REIT trickles down to the investors via dividends. REITs are concentrated investments in income producing property and are basically by definition non-diversified. The real issues investors have traditionally had with REITs are the liquidity and conflicts problems in the non-traded variety, of which the ARC New York REIT was a member.

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.

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