Another Non-Traded REIT Collapses


Investors in the Cornerstone Core Properties REIT Inc. were recently told by the company that the shares, once valued at $8, are now worth $2.25 (see article in InvestmentNews by Bruce Kelly). The article references a letter from the REIT’s chairman and chief executive Terry Roussel, as saying “The estimated per-share value has been adversely affected by the recent global economic downturn, negatively impacting our small business tenant base, which has resulted in approximately $43 million of previously announced impairment charges recorded in the second and third quarters of 2011.”

Anthony Chereso, CEO of FactRight LLC, a due-diligence firm that covers managers of alternative investments indicated that “A couple of years ago, the sponsor had some regulatory issues and had to shut down capital raising,” and that “It had some properties with tenant issues, and the portfolio had issues with covering debt and distributions. It was not constructed well.” FactRight recommended that broker-dealers pull the Cornerstone Core Properties REIT from their platforms last year Mr. Chereso said. Mr. Chereso also noted, “Their only option is to liquidate ‘ There’s not a whole lot that can be done to revive it.”

According to attorney Pratt H. Davis at Page Perry, an Atlanta securities arbitration and litigation firm, the collapse of the Cornerstone Core Properties REIT is indicative of the problems with non-traded REITS. Non-traded REITs “differ from exchange-traded REITs in several respects. As the name implies, shares of non-traded REITs do not trade on a national securities exchange. For this reason, they are illiquid, often for periods of eight years or more. Illiquidity makes them hard to value and trade. The secondary market, if any, is very limited. They are often valued on account statements at the price the investor paid for them. This creates the false appearance that they are immune to market downturns.”

Mr. Davis observed that “non-traded REITs also generally involve excessive fees and investors also need to be aware that distributions may consist of borrowed funds and return of investor principal, rather than being derived from earnings. Distributions can be suspended or stopped altogether.”

The Financial Industry Regulatory Authority Inc. (FINRA) has issued an Investor Alert to inform investors of risks of non-traded REITs. The SEC is also reportedly investigating disclosures regarding how non-traded REITs are valued.

Page Perry is an Atlanta-based law firm with over 170 years collective experience protecting investor rights and fighting Wall Street greed.