Cole Capital was once part of a company coveted by former real estate investment trust (REIT) czar, Nicholas Schorsch. Cole Capital appears to be changing hands for $120 million in cash and around $80 million in fees that are to be paid over six years, subject to the revenue generated by Cole. Vereit Inc., a listed real estate trust, which owns Cole, said that it decided because of the continuing slump in the sales of real estate investment trusts. The company has chosen to pull back from the non-traded REIT segment.
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Nick Schorsch, Non-Traded REIT Czar
For the last couple of years, financial advisors and broker-dealers have been asking what happened to Nick Schorsch, aka the non-traded REIT czar?
It seemed as if Schorsch had built a non-traded REIT empire that created and combined multiple REITs with tens of billions of dollars in assets. Among those was Schorsch’s American Realty Capital (AR Capital) non-traded REITs. These private placement investments were often sold by independent broker-dealer firms to everyday investors with promises of annual distributions of 7% or similar promises. That made for some superficially attractive income streams in an otherwise low interest rate environment.
Financial advisors at independent broker-dealer firms seemed to love selling these investments to clients, because they were paid a relatively high commission rate, often 7% or more. This was a very high commission compared to most other available investment products. Broker-dealers and reps made millions of dollars in commissions. Investors were often saddled with large concentrated non-diversified illiquid investment positions.
It appears Mr. Schorsch may have been spending his time with his lawyers negotiating a settlement with securities regulators that shines an unflattering light on some of the activities surrounding various REIT investments. For example, last July, Schorsch, along with the firm that sponsored and managed his REITS, AR Capital, and AR Capital’s chief financial officer and minority owner, Brian Block, agreed to pay $60 million in penalties to settle with the United States Securities and Exchange Commission (SEC).
These matters appear to have involved allegations of civil improprieties that involved wrongfully obtained millions of dollars in connection with REIT mergers that were managed by AR Capital, according to the SEC.
Vereit, CIM Group and Sale of Cole Capital
In late 2017, Vereit, Inc. a full service real estate operating company and CIM Group an integrated real estate investment manager signed a purchase agreement for the sale of Cole Capital. That’s the high level view.
As you get closer to the details, it appears Cole Capital had served as the investment wing of Cole Real Estate Investments Inc., which was purchased by American Realty Capital Properties Inc., or ARCP in 2014 for $11.2 billion. ARCP was the earlier avatar of Vereit, and back then, it was under the management or control of Nicholas Schorsch.
In the same year, RCS Capital Corp. displayed an interest in ARCP and was prepared to pay $400 million in cash and stock, and also take responsibility for the $300 million debt that ARCP had. It appears that deal fell through when it was found that ARCP had been at the center of a $23 million accounting fraud. RCS Capital Corp. dropped the idea of the purchase and paid ARCP $60 million to end the deal.
Problems With Non-Traded REITS
Former chief financial officer Brian Block of ARCP was found guilty of the accounting fraud and sentenced to 18 months in prison. Block was declared guilty of securities fraud on six counts and also of falsifying filings with the SEC.
Vereit and other companies like it had to reconsider their presence in the non-traded REIT business as the Department of Labor’s new fiduciary rule was becoming more of a reality. Another competitor in the market, W.P Carey Inc., was also pulling out of the market, while continuing to manage its then existing portfolio, but not looking (at the time) to sell any more non-traded REITs.
According to Vereit’s CEO, Glenn Rufrano, “This transaction allowed us to simplify our core business model and focus on our large, diversified single-tenant real estate portfolio. Cole Capital will have a sponsor in CIM with an institutional foundation and established distribution relationships with wirehouses.”
According to investment fraud lawyer, Jason Haselkorn, Esq. a partner with Haselkorn & Thibaut, P.A. in Palm Beach, Florida, “… it should really tell you almost everything you need to know about these non-traded REIT investments – if the companies were contemplating ending the sales to retail investors if the Fiduciary Duty rule was applied, it tells you that if placing the investor’s interests ahead of their own was required by law, the independent broker-dealers and the individual financial advisors effectively had to stop selling these products to retail investors.”