SEC Charges KCAP Financial with Overvaluing Assets
(Nov 2012)
The SEC alleges that KCAP Financial, a publicly traded business development company (BDC), did not accurately report the fair value of its corporate debt and collateralized loan obligation (CLO) assets during the financial crisis, thereby misleading investors. According to the press release, KCAP valued some of their assets at cost, not at fair market value, overstating the net asset value by over 25% during the peak of the financial crisis.
BDCs are similar to REITs in that they hold...
FINRA Fines and Suspends David Lerner for Apple REIT Ten Misrepresentations
(Oct 2012)
Today, FINRA fined David Lerner Associates $14 million, including $12 million in restitution to investors, for charging excessive markups and misleading investors in a non-traded real estate investment trust (REIT) known as Apple REIT Ten. They also suspended David Lerner himself for one year from the securities industry and for two more years from acting as principal for a securities firm. From the news release:
As the sole distributor of the Apple REITs, DLA solicited thousands of...
Big Wall Street Firms Pressure Their Salesmen to Favor House-Brands
(Jul 2012)
Financial advisors and brokers are bound by ethical guidelines to analyze and recommend investment products that are suitable and appropriate for their clients' investment objectives and tolerance for risk. In general, they are obliged to put their clients' best interests ahead of their own.
The New York Times reported Monday on the recent admission from a former JPMorgan mutual fund advisor that he sold JPMorgan funds over similar offerings from outside JPMorgan for no other reason than to...
SEC Investigation into Largest Non-Traded REIT May Be A Sign of Things To Come
(May 2012)
As discussed in the financial press (see articles from InvestmentNews and Wall Street Journal) and the company's latest quarterly reports, Inland American Real Estate Trust is the subject of an ongoing SEC investigation. The SEC probe is determining whether the company incurred in any violations of the federal securities laws with regards to its fees, company organization structure, distributions paid to investors, and reported property impairments. Inland American is the largest non-traded...
The "New" Non-Traded REITs Look a Lot Like the Old Ones
(May 2012)
Yesterday's Wall Street Journal had an article describing the "new versions" of non-traded real estate investment trusts (REITs), which purport to solve some of the transparency issues which have made non-traded REITs the subject of regulatory scrutiny. In particular, several non-traded REITs are now offering daily updated net asset values (NAV) in an attempt to calm concerns regarding the lack of transparency in the pricing of non-traded REITs.
However, a review of the prospectus for...
Latest Non-Traded REIT Valuations: Not Good...
(Apr 2012)
Non-traded REITs are real estate investments sold to retail investors despite significant liquidity, transparency, and other risks. We've done a great deal of work on non-traded REITs (including a paper and blog posts), and have warned that their dividend payments and debt levels are often not sustainable. Almost all non-traded REITs are reported in customer accounts at acquisition cost, despite widespread declines in real estate values.
FINRA has recently required non-traded REITs to report...
Greg Smith Leaves Wall Street
(Mar 2012)
The New York Times published an op-ed by Greg Smith, a Goldman Sachs' Executive Director who is resigning from his job after almost 12 years with the firm because, as he puts it, the firm's culture has veered far from what it was when he first joined the firm. He says in spite of the firm's recent scandals "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money." At SLCG, we have come across many examples of the issues raised by Mr....
SLCG Research: Non-Traded REITs
(Mar 2012)
We've posted a new working paper on our website that brings together much of our research related to non-traded Real Estate Investment Trusts (REITs). In it, we discuss the history and structure of non-traded REITs as well as differences between non-traded REITs and other avenues for gaining exposure to real estate. We highlight the dizzying array of fees and conflicts of interest embedded in these companies. We demonstrate that non-traded REITs are often misleadingly valued, heavily...
Déjà Vu: Non-Traded Business Development Companies
(Feb 2012)
Last week we posted an introduction to non-traded REITs that highlighted the many risks inherent to those investments. As it happens, another non-traded investment has been growing in popularity, but has an almost identical set of risk factors and has recently caught the attention of regulators: non-traded business development companies (BDCs).
The resemblance between non-traded REITs and non-traded BDCs is uncanny. Both are special business classes created by Congress in the mid 20th...
An Introduction to Non-Traded REITs
(Feb 2012)
Both FINRA and the SEC have started warning investors about non-traded real estate investment trusts (REITs), which are growing in popularity but expose investors to very serious risks. We at SLCG have had a variety of cases involving non-traded REITs and would like to describe our experience analyzing these investments and what they mean for regulators and retail investors.
In the most general sense, REITs are simply companies that hold almost entirely real estate assets. These companies can...
