Monthly Archives: July 2013

Non-Traded REITs Still a Popular Choice Among High Commissioned Brokers

Blau & Malmfeldt has tracked the performance of every public, non-traded real estate investment trust (“REIT”) for the period 2006 through the present as reported in these companies’ filings with the Securities and Exchange Commission (“SEC”).  What we have learned through our research is that there have been very few success stories and many failures, notably Behringer Harvard REIT I, Inc.KBS REIT I, Inc., NetREIT, Inc., CNL Lifestyle Properties, Inc., Dividend Capital REIT, Inc., and Inland American Real Estate Trust, Inc.

Given the fundamental problems inherent to the non-traded REIT industry, the multitude of failures should come as no surprise.  Investors typically pay up-front commissions of between 10-15% on their purchase of the securities.  The forfeiture of 10-15% of the initial investment results in a substantial impairment to the REIT.  Non-traded REITs typically pay annual dividends between 6-10%.  Even under the best real estate market conditions, it is virtually impossible to acquire real estate to support these returns given the 10-15% up-front fees and the other fees associated with the investment.

To sustain “dividends” of 6-10%, the REIT’s manager will typically return capital that has been raised from new shareholders back to the shareholders in the form of dividends.  In other cases, the REIT manager raises money through the sale of notes to retail investors in order to raise cash to pay the dividends to shareholders.  So, the “dividends” that non-traded REITs pay are often not profits but are rather borrowings or proceeds from new investors.

As a result of the obvious problems inherent to this industry, Forbes recently dubbed non-traded REITs as an “unnecessary niche.”

Despite all of these past failures, many high commissioned brokerage firms continue to push these investments upon unsuspecting retail customers.  A recent article in the Wall Street Journal describes that one non-traded REIT, American Realty Capital Trust IV, Inc. (“ARCT IV”) has managed to raise $3.6 Billion in the first half of 2013 through the sale of common stock.  The non-traded REIT industry as a whole is on pace to raise $17 Billion in 2013.  

It appears that ARCT IV has been unable to invest all of the capital that it has raised prudently — it has resorted to filling its new property acquisitions with tenants of low credit quality.  ARCT IV’s incentive is to raise as much capital as possible — its sponsor receives an up-front commission on the sale of every share of stock — regardless of whether all of this capital can be invested prudently and regardless of whether it makes sense for existing shareholders.

Blau & Malmfeldt is representing numerous investors in disputes against broker-dealer firms relating to their sale of non-traded REITs.  If your broker misrepresented non-traded REITs to you, concealed its commissions from you, or recommended that you concentrate your savings in real estate investments, please call us at 312-443-1600 or email Paul Malmfeldt at pmalmfeldt@blau-malmfeldt.com for a free consultation.

  

 

Investigation of Hrycyk Financial LLC and Gramercy Securities, Inc.

Blau & Malmfeldt is investigating the sales practices of Hrycyk Financial, LLC (“Hrycyk”), based in Amarillo, Texas, and its principal Stephanie Hrycyk.  Ms. Hrycyk is registered with FINRA through Gramercy Securities, Inc. (“Gramercy”), a broker-dealer firm headquartered in Rhode Island.

It appears that Hrycyk Financial concentrated many of its customers in risky and illiquid real estate investments.  Included among these investments were Odyssey Diversified IX, LLC (“Odyssey IX”) notes and Inland American Real Estate Trust, Inc. (“Inland American”) stock.   There was never any public market for the Odyssey IX or Inland American securities.  Ms. Hrycyk and Gramercy received very large commissions for selling these securities.  It appears that Ms. Hrycyk and Gramercy often ignored their customers’ welfare in pursuit of large commissions.

Odyssey IX was an entity through which funds were raised for real estate investments in Florida. Odyssey IX filed for bankruptcy in 2012; its note holders have lost the majority of their principal.

Inland American is a non-traded real estate investment trust (“REIT”).  Inland American has decreased the estimated value of its stock from $10/share to less than $7 per share.  Inland American suffered massive losses between 2008 and 2012.  In order to give itself the appearance of viability, Inland American used the proceeds from new investors to pay large dividends to existing investors during this period. The book value of Inland REIT’s stock is presently less than $5 per share.  Inland REIT’s stock has recently traded on private, secondary markets at prices in the vicinity of its book value.

FINRA rules require Gramercy to perform due diligence on non-traded securities before recommending and selling these securities to their retail brokerage customers.  In addition, FINRA rules require Gramercy and Ms. Hrycyk to ensure that their investment recommendations are suitable for their customers in light of their investment objectives, net worth, age, and investment experience.  It appears that Gramercy and Ms. Hrycyk may have violated FINRA rules when they concentrated their customers’ savings in non-traded real estate securities.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership, and shareholder rights disputes.  Please call us at 312-443-1600 or email Paul Malmfeldt at pmalmfeldt@blau-malmfeldt.com to learn more about the services we offer.

Behringer Harvard REIT I Investors Face Losses

Blau & Malmfeldt is presently representing Behringer Harvard REIT I, Inc. (“Behringer Harvard”) investors in FINRA arbitration proceedings against various broker-dealer firms that sold this investment.  Behringer Harvard changed its name to TIER REIT, Inc. (“TIER REIT”) in June 2013.

Behringer Harvard/TIER REIT is a non-traded REIT.  What this means is that its stock does not trade on any formal stock exchange.  The absence of a formal exchange for the stock has caused severe liquidity problems for investors.

In March 2013, Behringer Harvard announced a devaluation of its shares to $4.01 per share.  Behringer Harvard stock was originally sold for $10 per share.

Investors should keep in mind that Behringer Harvard/TIER REIT’s self-reported valuation does not accurately reflect the current value of the shares.  As of June 2013, the shares were trading for approximately $1.70/share on private, secondary markets.  According to an operator of one of the secondary markets who we spoke with recently, Behringer Harvard/TIER REIT is a “failed company” and as a result, there are very few prospective buyers for its stock.  The book value of the shares – the company’s remaining equity divided by the number of shares outstanding – was approximately $2.60/share at the close of 2012.  Given the company’s downward spiral in recent years, it is questionable whether investors will ever have the ability to liquidate their shares at the present book value.

There are fundamental problems inherent to non-traded REITs and these entities have come under a great deal of scrutiny in recent years.  These products have extremely high commissions: investors typically pay up-front commissions of between 10-15% on their purchase.  The forfeiture of 10-15% of the initial investment results in a substantial impairment to the REIT.

Non-traded REITs typically pay annual dividends between 6-10%.  Even under the best real estate market conditions, it is virtually impossible to acquire real estate to support these returns given the 10-15% up-front fees and the other fees associated with the investment.

To sustain “dividends” of 6-10%, the REIT’s manager will typically return capital that has been raised from new shareholders back to the shareholders in the form of dividends.  In other cases, the REIT manager raises money through the sale of notes to retail investors in order to raise cash to pay the dividends to shareholders.

Non-traded public REITs are designed to be enormously profitable for their sponsors, who direct the sale of stock, the REITs’ managers, and the broker-dealer firms who sell the stock to their retail brokerage customers.  For unsuspecting investors, however, they are poor investments with a great likelihood of failure.  Over the course of this multi-billion dollar industry’s history, there have been few success stories.

Many brokerage firms misrepresented the risks and liquidity of Behringer Harvard and other non-traded REITs, and concentrated their customers’ savings in these poor investments.  If your broker sold you an investment in a non-traded REIT and you would like to explore your recovery options, please contact Blau & Malmfeldt at 312-443-1600 or email Paul Malmfeldt at pmalmfeldt@blau-malmfeldt.com.

Detroit Memorial Partners, LLC Investigation

Blau & Malmfeldt is investigating Detroit Memorial Partners, LLC (“DMP”) and is currently representing DMP investors in litigation.  DMP is an investment company that was formed for the purpose of investing in cemeteries in the Midwest.  It appears that DMP issued approximately $19M in promissory notes and $4.5M in equity interests.

In June 2013, the Securities and Exchange Commission (“SEC”) brought a lawsuit against DMP and its managing member, Mark Morrow, in federal court in Georgia.  According to the SEC’s complaint, DMP and Mr. Morrow made numerous false representations in connection with the sales of these securities.  Specifically, the SEC alleges that contrary to the defendants’ representations, DMP did not own real estate directly and the promissory notes were not secured.  Rather, it appears that DMP’s primary asset was stock in another entity, Midwest Memorial Group, LLC.  In addition, the SEC has alleged that Mr. Morrow converted a substantial portion of the proceeds from the sale of the promissory notes from DMP and used these funds to increase his personal equity interest in DMP.

Mr. Morrow is the defendant in another lawsuit brought by other members of DMP in state court in Delaware.  These members claim that Mr. Morrow issued the promissory notes without their knowledge and breached fiduciary duties owed to them when he converted the proceeds from the promissory notes.

The SEC previously brought a lawsuit against Summit Capital, the investment advisory through which the DMP securities were sold, and Angelo Allacea, Summit Capital’s principal, in federal court in Georgia.  The SEC has alleged fraud in connection with sale of DMP securities and has also alleged that Summit Capital and Mr. Allacea operated a Ponzi scheme.  Summit Capital is presently in receivership.

Blau & Malmfeldt is a law firm that represents investors across the United States in securities, commodity futures, partnership, and shareholder rights disputes.  If you would like to discuss your investment in DMP with us, please call us at 312-443-1600 or email Paul Malmfeldt at pmalmfeldt@blau-malmfeldt.com.