The FDIC closed 7 more banks on Friday, bringing the 2010 total to 37.  On the Friday before last, the FDIC bagged 2 New York City banks, the first FDIC takeunders in New York City since 1999.  One of these was a small privately held firm named Park Avenue Bank, which had been operating under a cease and desist order since February 2009.   Park Avenue Bank had just four branches in Manhattan and Brooklyn.

Interestingly, one of Park Avenue Bank’s owners is David Lichtenstein, who became famous for orchestrating the disastrous acquisition of Extended Stay Hotels in 2007.  Lichtenstein agreed to buy the chain from Blackrock for $8 billion, layering on so much debt in the process that the company couldn’t even pay its phone bill.

Back In 2004, Lichtenstein acquired Park Avenue Bank with Charles Antonucci, who was appointed President.  With Lichtenstein’s help, Antonucci set about expanding the bank’s commercial real estate portfolio, and that ultimately became his undoing.  The New York Sate Bank Banking Superintendent slapped the bank with a Cease and Desist order, and two weeks ago the bank was shut down by the FDIC.  Last week, in connection with the failure, Antonucci was arrested and charged with criminal fraud for attempting to steal $11 million from the Troubled Asset Relief Program.

The FBI is accusing Antonucci, who was hauled out of bed with just enough time to don a red St. John’s sweatshirt, of self-dealing, bank bribery, embezzlement and fraud.  According to prosecutors, Antonucci created sham transactions in order to  be approved for TARP bailout money, but once it became clear that he was under scrutiny, he withdrew the bank’s application.  Shortly afterward, he resigned as President.

Prosecutors say Antonucci created the “functional equivalent of Monopoly money” in order to convince federal authorities he should qualify for TARP money.  But Federal authorities say Antonucci actually wanted to obtain millions of dollars in TARP funds for his own use, in part so he could obtain a controlling interest in the bank.

Why he would want control of a failing lender is beyond me, but it may be due to the fact that he was using it as his own personal piggy bank.  Earlier, a New York area car dealership sued Park Avenue Bank claiming that it was forced to pay off a loan by giving away Cadillacs to bank employees and their families, including Antonucci.  Antonucci got a $75,000 2008 Cadillac Escalade and his wife got a 2010 Cadillac SRX valued at $50,000, the lawsuit alleged. 

After his arrest, Antonucci was released on $2 million bail, but nobody seems to know whether she drove him home in her SRX, or his Escalade.

Federal prosecutors also accused him of approving approximately $8.5 million worth of overdrafts at the bank to companies controlled by a co-conspirator who was a close associate of his.  In return, the co-conspirator, whose identity was not released, allowed Antonucci to use his private plane at least 10 times for personal trips, including flights to Phoenix to attend the Super Bowl, to Augusta, Ga., to watch the Master’s golf tournament, and to Florida to see relatives.

Lichtenstein’s involvement in all of this not entirely clear, and he has not been accused of any wrong doing, but prosecutors hint there is more to come.   At the same time that the bank was under review by the state banking superintendent, Lichtenstein approved an $11 million infusion into Park Avenue Funding LLC, a company run by Lichtenstein and closely associated with Antonucci.  Among other endeavors, Park Avenue Funding makes loans to Park Avenue Bank and its customers. This included 10 loans to Solomon Dwek, the central figure in a $50 million bank fraud and New Jersey political corruption scandal.

If lending to a shaky bank such as this sounds a wee bit risky, it is. But it’s a lot less risky if you can do it with other people’s money.  Lichtenstein used shareholder money from a non-traded REIT he controls, Lightstone Value Plus I REIT, to make the 2008 investment, just one month after Bear Stearns collapsed.  Park Avenue Funding then used at least some of that money to take first loss positions in certain Park Avenue Bank loans, partially insulating the Bank from its loan losses.  As of the end of February, at least $4.75 million of Park Avenue Funding LLC’s positions had been wiped out by short sales, and the FDIC expects a tax payer loss of approximately $50 million from the takeover.  Stay tuned, because that’s a lot of Cadillacs for a bank with just $500 million in assets.

see: U.S. v. Antonucci, 10-cr-507, U.S. District Court, Southern District of New York (Manhattan)

After a furious year of churning CMBS, repurchasing outstanding corporate debt and refinancing its bank loans, among other feats, Northstar actually ended the year with a little bit of cash. That’s the good news. The bad news is they’re going to need it.

Northstar now has about $238 million in the bank, which includes the all important figure of $138.9 million in unrestricted cash. This is discretionary cash, the kind of stuff that Hamamoto can use to expense dinners at Bobby Van’s. The remaining $99.4 million is bottled up inside Northstar’s CDOs, and the ability to profitably reinvest that cash is diminishing by the day as credit spreads tighten and the CDO reinvestment periods expire.

If you strip out all the non-GAAP AFFO noise from NAREIT, you can see the nail-biting story unfolding: Northstar’s cash flows from continuing operations have been declining rapidly. It’s true, Northstar did manage to generate $54 million in cash for all of 2009, but that’s down from $88 million in 2008 and $102 million in 2007. Obviously, an almost 50% drop in operating cash flow is not the sign of a healthy business, but the fact that Northstar is currently in an unhealthy business should also come as no surprise.

The question is, what can Northstar do about it? In the short term, the answer is not much. Northstar’s portfolio is running off, interest rates are at all time lows, and Northstar’s CDO funding model is dead. 2009 interest income of $142.2 million was $70 million less than 2008, and $150 million less than 2007. As Northstar’s asset balances decline, so too have Northstar’s advisory fees and rental income.

The lack of good options may be why NRF is attempting replace this revenue with management fees, and in the meantime Hamamoto is generating a lot of work for his accounting department with the debt buybacks and CMBS trading, but all of this is clearly a stop gap, and it’s just not enough.

Not only that, management fees are not ramping up nearly as fast as Northstar needs them to ramp up, and at the current pace, they may never ramp up. Northstar Realty Income Trust, the new non-traded REIT, has not yet been declared effective by the SEC, and Northstar can’t start raising money in earnest until that happens.

However, judging by its new Reg D offering, Northstar Income Opportunity REIT I, Northstar’s shiny new Denver broker/dealer operation isn’t knocking the cover off the ball. The first investor commitment was made on September 24th, but as of early February, Northstar Income REIT I had only raised $3.1 million in equity. This is certainly not failure, but managing $3.1 million will definitely not pay the rent at 399 Park Avenue. Furthermore, starting a broker/dealer from scratch is neither cheap nor risk free. Northstar must now comply with a whole new raft of federal and state securities laws, and be exposed to the liability that arises from selling shares to retail investors through hundreds of rowdy, independent securities brokers across the country.

On top of paying rent on the 18th floor, dinner at Bobby Van’s, and the expense of starting up a brand new broker/dealer, under its new credit facility with Wells Fargo, Northstar must make $30 million in annual amortization payments. Also, through its loan book, NRF is on the hook for $80 million in future funding commitments, of which only $51.9 million will come out of the CDOs. $50 million in operating cash flow doesn’t create a huge margin for error in a capital intensive business, so Northstar will likely have to borrow most of the remaining $28.1 million using credit facilities.

So what is Hamamoto thinking? That’s unclear, but NRF is definitely walking a tightrope, and that may explain the management and board changes at the end of Q4. Curiously, REITs have collectively raised almost $30 billion of debt and equity capital since the crisis began, and Crexus, Colony Capital and Starwood Capital were among several Mortgage REITs to raise almost $1.5 billion. Somehow, despite the stellar performance of its portfolio, NRF just barely managed to squeeze $25.7 million out of this deluge.

Some portfolio managers I know have said that Hamamoto is not part of the “REIT Mafia”, and therefore he is not always invited to the REIT fundraising parties. This may or may not be true, but I’m not sure what else could explain NRF’s decision to throw a hail mary into the cesspool of Reg D offerings and non-traded REITs.

I spent all day reading the 10K in search of an answer, and it seemed to confirm the REIT Mafia conspiracy theory, as well as the fact that NRF has chosen a particularly rocky path to circumvent it:

“we cannot currently raise large amounts of corporate equity capital at attractive levels…we hope that our reputation in the marketplace will enable us to be early in raising corporate capital when market conditions improve.”

One thing is for sure, Reg D offerings and non-traded REITs won’t do much for NRF’s reputation, so shareholders may also want to hope there is a contingency plan brewing somewhere on the 18th floor.

Non-Traded REITs are a funny lot. They register with the SEC and comply with all public company filing requirements, yet their shares don’t trade on any public exchange. Most aspire publicly to achieve some sort of “liquidity event” for investors within 7-10 years of formation, either through a public listing or bulk asset sales. Last week, after more than 2 decades, numerous lawsuits and a complicated 3 for 1 reverse split that effectively locks up shareholders for another 12 months, one of the largest Non-Traded REITs in the business finally made the leap to a public listing.

Formerly known as Wells REIT until it was spun out into a new, self-managed entity and renamed in 2007, Piedmont (PDM) sold 12 million shares at $14.50 and began trading on the New York Stock Exchange on the morning of February 10th. The Company had planned to offer 18 million shares at a price of $16-$18.

Piedmont, which owns and manages a 73 property, $4 billion portfolio of office buildings across the country, including trophy properties like the Aon Center in downtown Chicago and the Nestle headquarters in Los Angeles, has a colorful history.

The company was founded in 1997 by Leo Wells and quickly became adept at raising money through a network of independent brokers, paying them commissions of 7% along the way. Wells also earned lucrative acquisition fees for buying property, as well as advisory fees for managing the portfolio. Allegedly, Wells also encouraged investor participation in prayer chains for favorable acquisitions.

This unconventional model attracted the attention of many skeptics, including David Swensen, Yale Endowment’s chief investment officer. Swensen accused Wells of turning a blind eye toward investors’ best interests while he raced to raise money and buy more property. In his book “Unconventional Success” (pages 70-75), Swenson said the high fees simply encouraged two things: the sale of still more shares and the purchase of property – any property – at almost any price:

No rational buyer can compete with the Wells acquisition machine’s willingness to overpay for product. As a consequence, investors suffer the double indignity of high fees and poor investment prospects.

Unfortunately, the Piedmont IPO is confirming Swensen’s claims. Prior to the public listing, Wells orchestrated a 3 for 1 reverse stock split that created four separate classes of shares. Only one class, the Class A shares, now trade on the NYSE, while the rest will convert over time. This effectively delays a full “liquidity event” for another 12 months. The Class A shares traded up to $16 on Friday, but that still translates into a pre-split loss of almost 40%, according to Green Street Advisors.

Even the Wall Street Journal pilloried the IPO. The Journal estimated that investors would have received a “paltry” 2.1% annual return including dividends, assuming the offering priced at the high end of the $18 range. According to an analysis by Green Street Advisors, had those investors simply bought shares in an index of publicly traded real-estate stocks, their total return over that time would have averaged about 8% a year.

Ironically, shareholders had the option of being cashed out in 2007 through a series of buyout offers from Lexington Realty Trust (LXP). Lexington offered to pay up to $9.25 per share (a post-split equivalent of more than $18 per share), but Wells never informed investors of the offers.

Sir Leo argued that the Lexington buyout offers were not material because they were merely tentative expressions of interest. Unfortunately, a federal district court disagreed, stating that “there can be no doubt that this information is material, as it would be considered important by a reasonable shareholder in deciding whether to vote for or against the [spin off].” The court also granted the plaintiff’s request for a class action, and discovery continues.

However, not only did Wells not inform shareholders of the LXP offer, he took the bulk of a $175 million stock payout as a result of the spin off to Piedmont. And when it came time to actually issue himself the stock grant, he lowered the official share price to $8.63, below the $9.25 per share offered by LXP, in order to increase the size of his award.

Certainly, public REITs are imperfect vehicles for a variety of reasons. They are highly correlated to equities, they can be much more volatile than the underlying real estate in which they invest, and they are not great as inflation hedges either. However, beginning at 9:30 every Monday through Friday, excluding holidays, investors in public REITs can vote with their feet and reclaim their money. Sadly, long-suffering Wells shareholders are stuck sucking swamp water for another 12 months before they finally get that freedom. (Update: here’s some information on how to sell non-traded REITs.)

There is no real estate investment I would work more diligently to avoid than a non-traded REIT. They routinely pay dividends using money from new investors peter or paul? and one of them, Wells Timberland REIT, doesn’t even qualify as a REIT. So what gives? It’s pretty simple: your friendly neighborhood broker is paid handsomely to sell them, regardless of whether it’s in your best interest to buy them.

Almost $9 billion in non-traded REIT equity was raised in 2008, a record that was easily eclipsed in 2009 after 11 non-traded REITs registered to raise a combined $19 billion. Officially, these non-traded REITs are gearing up to capitalize on opportunities arising from the recession and the distressed property market. Unofficially, it’s a commission and fee bonanza for everyone involved, and hapless retail investors are paying the freight.

Indeed, it would be easier and cheaper to hire Johnny Cochran to bail you out of a murder charge than to somehow come out ahead on a non-traded REIT investment. You would also be leaving much less to chance. In addition to the upfront commissions of 7 percent paid to your broker and a dealer/manager fee of up to 3 percent paid to the sponsor, there are individual property/asset acquisition fees of up to 2.75 percent, property financing fees of up to 1 percent, disposition fees of up to 1 percent, and asset management fees of up to 1 per annum, plus expense reimbursements. The net result is that out of a $10,000 initial investment, only about $8,000 would remain to buy property.

Obviously, these fees encourage only two things: sales of non-traded REIT shares and purchases of property – any property – at almost any price. David Swensen, Yale Endowment’s chief investment officer, singles out the Wells REITs in his book, “Unconventional Success” (pages 70-75). Swensen obviously knows his way around alternative investments, and his opinion of Wells is unambiguous:

“No rational buyer can compete with the Wells acquisition machine’s willingness to overpay for product. As a consequence, investors suffer the double indignity of high fees and poor investment prospects.”

How then, are investors convinced to suspend common sense and buy these commission-laden pigs? In theory, non-traded REITs offer price stability and a reliable source of income, and those are the major selling points. But a quick glance glance at almost any prospectus reveals these key “features and benefits” to be nothing more than highly profitable gimmicks.

Officially, the share price is almost always set at something remarkably close to $10 by the REIT sponsor, and almost as remarkably, it never ever changes no matter what. This is true of almost all non-traded REITs, regardless of the quality of their assets, their location, leverage, current market conditions or how long the REIT has been in operation. This lack of transparency is somehow supposed to provide investors with comfort.

Realistically though, how could a brand new REIT with no assets and unproven management be worth the same $10 a share as a 5 year old REIT with $3 billion in diverse assets spread across the country, and the same as a 10 year old REIT with just $200 million in assets concentrated in one small market? It’s a $10 coincidence that is just as impossible as it is unbelievable.

In fact, the latter example is Whitestone REIT, a non-traded REIT that was the product of one real estate entrepreneur’s efforts to consolidate his real estate holdings in Houston. The result was a bitter dispute with Whitestone management that lasted almost a decade. Could this REIT still be worth $10 a share to the investors whose dividends were cut and whose shares can no be longer redeemed? It’s improbable, and recent Whitestone insider transactions value it at $5.15 a share, about half the “official” price paid by outside investors.

If egregious fees and lack of transparency weren’t enough to perfect this foul smelling stew, why not add conflicts of interest and fraud? For an example of the former, look no further than Inland American REIT, and Inland Western REIT, two non-traded REITs managed by the Inland Group in Chicago. Inland Western needs to repay $1 billion in debt this year, which may be an impossible feat. In fact, as we type, Inland Western is rather desperately trying to raise cash to avoid bankruptcy (see What Are Inland Western Shares Really Worth?).

But that’s no matter, especially since Inland Western can easily raise cash by selling its kryptonite to affiliates. Inland Western did just that earlier this year, pocketing $99 million in cash by selling two properties to Inland American. This was done at a time when commercial real estate sales volumes reached all time lows. Whether any of this was truly arms length and representative of fair market value is difficult to tell, but it seems unlikely.

Fraud and misrepresentation complete this cancerous portrait. This particular example is brought to you courtesy of the SEC which recently settled a non-traded REIT kickback scheme with W.P. Carey. According to the settlement, W.P. Carey paid nearly $10 million in undisclosed compensation – using the assets of the REIT – to a broker-dealer that sold shares of W.P. Carey’s non-traded REITs to the public. Carey executives then used fake invoices and misrepresented the payments in securities filings to keep it all secret. The arrangement benefited not only the broker-dealer, but also W.P. Carey, because the broker-dealer’s sales of REIT shares increased the management fees paid to W.P. Carey. In the settlement, W.P. Carey and 2 senior executives agreed to pay $30.3 million in disgorgement, interest and penalties.

In terms of the other key selling point, reliable income, non-traded REITs are not so reliable. Many, like Cornerstone Core Properties REIT, are busy funding their dividends from borrowings and returns of capital. Grubb & Ellis Healthcare REIT is a great (but not isolated) example of the lengths to which non-traded REITs will go to maintain their dividends. For example, for the three months ended March 31, 2009, Grubb & Ellis paid distributions of $14,247,000, as compared to cash flow from operations of $5,895,000. In many cases, distributions paid in excess of cash flow ponzi scheme are paid using proceeds from new investors. Slowly but surely, these fictitious dividends are starting to be cut.

OK, so you made a mistake, and now you want out. Good luck brother – you’re stuck. As of the end of May, the six largest non-traded REITs have shut down their share repurchase programs. These include Behringer Harvard REIT I, Cole Credit Property Trust II, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust, Piedmont Office REIT and Wells Real Estate Investment Trust II.

Other nonlisted REITs that have either stopped repurchasing shares or that have been unable to repurchase all the shares submitted include Behringer Harvard Opportunity REIT I, Desert Capital REIT, Dividend Capital Total Realty Trust, Grubb & Ellis Apartment REIT, KBS Real Estate Investment Trust and Whitestone REIT. It may be years, if ever, before investors experience a so-called “liquidity event” with these REITs (see Piedmont Office REIT Finally Goes Public…Sort Of ).

There seems to be no boundary around the financial sleight of hand deceit employed by some non-traded REIT sponsors. For example, Lightstone Value Plus REIT claims to be on investors’ sides by allegedly allocating 100 percent of investor proceeds toward real estate investments and co-investing alongside shareholders. This is quite far from the real economic truth, and even a cursory read of the Lightstone “Value Plus” prospectus shows otherwise (read more on Lightstone’s investment prowess midway through this post, or click here for an update on Lightstone Value Plus I REIT’s financial condition, which is not so great). There’s really nothing not to like about these non-traded REIT scams, except everything.

Update: This post received almost 30 comments before I had to migrate the entire site to a new platform. Not all of the comments ported over during the move, so I republished all 30 or so under my name in one “bulk” comment below. Even more comments have followed. If you have additional questions or comments,you can post them here or on the Non-Traded REIT Forum. The forum is searchable, you can upload documents and images (charts, graphs) and publish links. Cheers RW

Click here for a list of non-traded REITs

commercial real estate, non traded reits

Non-traded REITs are public companies, but their shares aren’t listed on any stock exchange. In reality, this makes non-traded REITs a very opaque and private market (not to mention illiquid). REIT Wrecks has decided to pull the curtain on this lack of transparency and compile a list of non-traded REITs and their vital statistics.

If you’re thinking about buying one of these things, do yourself a favor and read this post on Non-Traded REITS first. You can find current information, including earnings analysis, valuation estimates and other related news on the Non-Traded REIT Forum. Click here for an updated list of Non-Traded REITs ranked by total assets

In the meantime, the market is getting crowded. According to Bank of Montreal, there were 44 non-traded REITs operating as of September 2008. As of the end of 2009, there were another $19 billion in non-traded REITs in registration, and nearly $2 billion in still more registrations had been announced as of early 2010.

Non-traded REITs are a unique breed of REIT that investors should investigate carefully before signing any subscription agreements. Many (but not all) REIT dividends in this space are being paid from borrowings and capital – not funds from operations. This is obviously no bueno. This list includes working links to the home page of each REIT, current yields vs. offering yields and current redemption policies, all of which are critical elements in evaluating any investment.

See also the REIT Definition post, which provides more information on how REITs work.

Click here for a list of Apartment REITs
Click here for a list of Healthcare REITs
Click here for a list of Hotel REITs
Click here for a list of Industrial REITs
Click here for a list of Office REITs
Click here for a list of Retail REITs
Click here for a list of Storage REITs
Click here for a list of REIT Funds

Click here for a REIT ETF List
Click here for a list of all REITs
Click here for a list of REITs paying dividends in stock

mortgage reits, reit, reits