AR Capital decided to suspend its capital raising activities for some of its current programs effective December 31, 2015.The decision was due to market and regulatory uncertainty affecting its capital-raising for new and existing offerings in the direct investment industry.

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AR Capital

AR Capital is a full-service investment management firm providing advisory service to retail and institutional investors. Nicholas Schorsch established the firm in 2006.

ARC Capital will not create any new product offerings

According to AR Capital, it would not create any new product offerings or pursue its existing offerings after the end of this year.

In a statement, AR Capital Founding Partner, William Kahane explained that the pending regulatory changes proposed by the Department of Labor fiduciary standards and the valuation measures issued by FINRA (15-02 directive) are still largely unclear about its implications for the investment industry.

Mr. Kahane said they will reconsider their current stance on the issues once the government’s policy becomes clear.

AR Capital to focus managing its investment programs

AR Capital said it will continue focusing on managing its $19 billion investment programs, which include Business Development Corporation of America II, ARC Healthcare Trust III, New York City REIT II, ARC Hospitality Trust and ARC Global Trust II.

Mr. Kahane said, “We will focus our efforts for the time being exclusively in managing our investment programs for the benefit of our shareholders, standing firmly by our ‘investor first’ philosophy.”

Additionally, Mr. Kahane said the firm will also focus on generating strong and risk-adjusted returns for investors. “This is the correct decision, we believe, to protect both current and future shareholders while maintaining our position as an industry thought leader.

AR Capital is the largest and well-capitalized sponsor for non-traded REITs and BDCs in the direct investment industry.

According to the firm, it would continue accepting subscriptions for its open investment programs until the end of 2015. ARC Capital would allow subscriptions in process to be delivered within up to 45 days following the suspension.

Furthermore, the firm said its Dividend Reinvestment Program (DRIP) and Share Repurchase Plan (SRP) will remain for all investment offerings. It will continue to service its existing investors under its investment programs.

AR Capital – Administrative complaint against RCS

Moreover, AR Capital ordered Realty Capital Securities to stop all proxy activities on behalf of the firm’s sponsored campaigns in connection with the recent action of the state of Massachusetts.

Massachusetts filed an administrative complaint against Realty Capital Securities (RCS) related to the fraudaluent proxy votes supporting the real estate transactions sponsored by AR Capital.

The state’s Commonwealth Secretary, William Gavin alleged that the agents of RCS impersonated shareholders and fabricated proxy votes for AR Capital’s sponsored investment programs. He argued that such action is a serious violation of securities laws. According to him, RCS should pay significant amount of fine and its broker-dealer registration should be revoked.

Broker-dealers including Cetera Financial already stopped selling AR Capital REITs and other alternative investments.

ValueWalk is in the process of producing a story about a (different) company which also operates non public REITs. A famous hedge fund has taken a short position in the company and believes it is worthless since it is a “ponzi scheme”. The company is under possible SEC investigation currently.

In the meantime, see a great piece on the dangers of non public REITs we posted a while ago.

This week’s “Dumb Investment Idea” focuses on a class of assets known as Public Non-Traded REITs. A Real Estate Investment Trust, or REIT for short, is a company that owns, operates, or provides financing for real estate. REITs own almost every type of real estate asset from single family rental homes to offices and apartment buildings, hotels and casinos, shopping centers, timberland, and even warehouses and industrials buildings. REITs are designed to be the real estate equivalent of mutual funds and provide a tax-free corporate vehicle for investors to own real estate. If a company elects to be treated as a REIT and meets certain requirements, then it can avoid paying any corporate income tax.

One of the requirements is that the REIT must distribute 90% of its income to shareholders in the form of dividends. It’s these high dividend payouts that make REITs attractive to older investors seeking income. Unfortunately, it’s these high initial dividends that can also be used by unscrupulous brokers and financial advisors to sell some really dumb investments to unsuspecting clients. In fact, public non-traded REITs can be so dumb that even FINRA released a warning about them (and that’s saying something)! So let’s dig in and see what makes Public Non-Traded REITs “dumb.”

Public non-traded REITs are typically sold to investors using the same tried and true sales pitch. Financial advisors and brokers usually tell clients that the REIT will provide steady income and stability because the price of the shares won’t change every day, and they are a safe investment.

Problem 1: Hidden Fees and Expenses

Quick! How much of the money that you invested in a public non-traded REIT actually went to buying real estate and how much went to line the pockets of various brokers and middlemen? I bet you can’t tell me. Why? Because the REITs and the advisors that sell them go to great lengths to keep that information hidden behind confusing babble.

Let me give you a real-life example from a client I’ve helped.

A client owned a Wells Capital REIT that was so bad that Chief Investment Officer of Yale University, David Swenson used it in his book Unconventional Success: A Fundamental Approach to Personal Investment as an example of how bad public non-traded REITs are for investors. Wells* charged investors these fees: sales commissions of 7%; dealer management fees of 2.5%; and offering expenses of 3%. That means, for every $100 my client had invested only $87.50 actually made it into the fund. Every investor lost 12.5% of their money, right off the bat! But the largesse didn’t stop there. To buy the actual property, Wells charged another 3% for “review and evaluation of potential real property acquisitions” and another .5% as reimbursement for acquisition expenses. Once Wells actually purchased the buildings, investors’ wallets were 16% lighter.

You would think that 16% of your money would be enough to satiate the greed of Wells and its brokers. If you own this REIT, then you probably think that at least you will have all the income the properties generate. But you’d be wrong.

Each year Wells helped itself to another 4.5% of revenues and another separate 3% fee for leasing newly constructed property. By now you probably can’t wait to be out of this investment. Surely, that is the end of the fees. Nope. When Wells exited the portfolio, it was entitled to take 10% of the potential profit after a certain minimum hurdle had been reached.

Wells is not just one bad apple in the bunch. High fees are endemic to the public non-traded REIT industry. Another recent client had several public non-traded REIT investments that charged upfront fees of 10%, 9.5%, 7%, 8%, and 6%, respectively.

Indeed, a study by University of Texas and Blue Vault Partner, LLC, showed public non-traded REITs underperformed the market by an average of 1.4% per year

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