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Non-traded REITs are quite rightly coming under increasingly negative scrutiny. ARCP investors should look carefully at the people with whom they’re invested. The analogy of ARCP with Bernie Madoff is not perfect, but the non-traded REIT business is not an area that reflects well on the people who traffic in them. Such tortured logic delivered its own type of just reward when the truth revealed no such profitable front-running activity at all, delivering large losses to the gullible. They were perfectly fine investing with someone who they knew to be dishonest, reasoning that the dishonesty was directed at unwitting others and that their crooked investment manager was honest with them. They believed they incurred no risk and probably expected that if the front-running behavior was detected, the authorities would simply punish Bernie Madoff but not his investors. As hedge fund investors, they thought they were the passive beneficiaries of such illegal behavior. Harry Markopolos reports that this was so in his terrific book on Madoff’s scam, No One Would Listen. Many of his investors believed that his persistently attractive and steady investment returns were derived from the ability of his hedge fund to front run the orders of its brokerage clients. ARCP is not American Realty Capital (their confusingly similar names initially confused me as well) but if a company’s tone is set at the top, ARCP is run by someone who clearly cares more about fee generation that the interests of his clients. Some investors wonder publicly whether to hold or sell, seeking to balance what they perceive as the good versus what is reported to be the bad in their comments.Īnd yet, ARCP is headed by someone who has built a business by selling securities through ethically challenged, fee-hungry intermediaries with little regard for the reasonableness of the resulting economics for their clients. The stock has fallen 40% since the disclosure, as the company has announced that 2013 financial statements previously issued could no longer be relied upon. Their bonuses were set to be higher with the higher figures. Two employees have resigned because they apparently concealed the misstatement. So now we turn to the recent news on ARCP, which is that it is being investigated by the SEC for knowingly misstating its financials.
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It’s hard to conceive how anybody associated with an investment that starts out by pocketing 15% of your money could, in good conscience, claim to be helping you grow your savings. But the growth of the industry speaks more to the power of high fees to induce some brokers whose clients’ interests lie substantially below their own to push such products. American Realty Capital is the largest manager of non-traded REITs, with a portfolio of $30 billion in assets.
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This is, of course, all disclosed and, therefore, quite legal. No public listing means no trading, so no commissions and not much point in writing about it if you work for a sell-side research firm. Forgoing a public listing is sensible if you’d rather not invite the attention of sell-side research analysts to the egregious fees you charge buyers of your product.
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It includes such features as 15% of your investment as fees up front, additional fees for buying and managing properties, incentive fees, and myriad conflicts of interest, in addition to which you can’t sell it because it’s not publicly listed. Like many others, it’s a great investment for brokers, but far worse for their hapless clients. In February, I wrote about a non-traded REIT not managed by ARCP, Inland American Real Estate Trust. While conventional, publicly traded REITS have their place in an investor’s portfolio, the non-traded variety represent a far more dubious sector. Recently, I was struck by some of the commentary on Seeking Alpha surrounding American Realty Capital Properties (ARCP).Their chairman is Nick Schorsch, who is also chairman of American Realty Capital, which is built around the origination and distribution of non-traded Real Estate Investment Trusts (REITs).
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