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Home > Blog > Monthly Archives: August 2012

Monthly Archives: August 2012

The Behringer Harvard Strategic Opportunity Fund I Saga

It’s been a rocky road of financial trouble for several Behringer Havard non-traded real estate investment trusts (REITs). Behringer Harvard Strategic Opportunity Fund I now appears to be going the same way as the Behringer Harvard Short-Term Opportunity Fund I LLP and Behringer Harvard Strategic Opportunity Fund II – and that way is not good for investors of the products.

Behringer Harvard Strategic Opportunity Fund I is reportedly underwater, with its debts now outweighing its assets. As of the end of last year, the Strategic Opportunity Fund I had fallen by nearly 40% to $4.12 a share. And that may be just the tip of the iceberg.

The Financial Industry Regulatory Authority (FINRA) has issued several investor alerts on non-traded REITs, calling attention to the unique risks, features and fees of the products. Among the concerns is the periodic distributions that help make non-traded REITs appealing can, in more and more instances, be heavily subsidized by borrowed funds and include a return of investor principal. Additionally, early redemption of shares is often very limited, and fees associated with sales of non-traded REITs can be especially high and erode total return.

Eight of the largest non-traded real estate investment trusts have lost $11.3 billion, or 37% of their equity value, over the past seven years, according to a recent analysis conducted by MTS Research Advisors behalf of Investment News. Just this month, CNL Lifestyle Properties Inc., which initially raised $2.7 billion at $10 a share, reported a sharp decline in value. Its share price dropped to $7.31.

Similarly, the Dividend Capital Total Realty Trust, which raised $1.8 billion in equity at $10 per share, revised its value to $6.69 per share last month. In March, the REIT reported its value as $8.45 per share to investors.

In the wake of the problems surrounding many non-traded REITs, more investors of the products are coming forth with claims of mischaracterization and misrepresentation on the part of the brokers who initially sold them on the investments. Indeed, some of the common themes in their FINRA arbitration include the fact that the products were presented as suitable investments for conservative investors (they are not), with their lack of liquidity, fees and other risks never disclosed.

For more on non-traded REITs, read FINRA’s Investor Alert.

If you’ve suffered significant financial losses in a non-traded REIT, including the Behringer Harvard Strategic Opportunity Fund I, Inland Western (Retail Properties of America) and others, please contact us to tell your story.

Bad News for Investors of Behringer Harvard Strategic Opportunity Fund I

Investors in the Behringer Harvard Strategic Opportunity Fund I were given news last week news that they likely never thought they would hear. Their investment, which many investors had purchased on the recommendation of brokers who characterized the product as a low risk, safe investment, is now underwater.

The Strategic Opportunity Fund I’s “liabilities are greater than its assets,” said Michael O’Hanlon, chief executive of the funds comprising Behringer Harvard’s opportunity platform, in an Aug. 26 story in Investment News.

First offered in 2005, the Behringer Harvard Strategic Opportunity Fund I raised $65 million and invested in six properties, including an office building in Amsterdam and a hotel on Wilshire Boulevard in Los Angeles.

Non-traded real estate investment trust (REITs) like the Strategic Opportunity Fund have encountered a number of problems over the past year. Among them: Disclosure issues, high front-end fees of sometimes up to 15%, complex fee structures, lack of a secondary market, and restrictions or suspensions of distributions.

Maddox, Hargett & Caruso, P.C. currently is investigating claims by investors who suffered significant losses in the Behringer Harvard Strategic Opportunity Fund I, as well as in other non-traded REITs. If you have a story to tell regarding your experiences, please contact us.

Behringer Harvard REIT: Debt Outweighs Its Equity

Investors in non-traded real estate investment trusts (REITs) have had to face some unpleasant news recently – from inaccurate valuations to suspended dividends. Now, Behringer Harvard Holdings LLC is preparing to inform clients that its Behringer Harvard Strategic Opportunity Fund I is under water.

As reported Aug. 22 by Investment News, Behringer reportedly will inform investors about the demise of the REIT tomorrow, Aug. 24.

Launched in 2005, the Behringer Harvard Strategic Opportunity Fund I raised $65 million and invested in six properties. Among them: a hotel on Wilshire Boulevard and an Amsterdam office building.

Another Behringer fund, the Strategic Opportunity Fund II, raised $62 million during that same time period. The Strategic Opportunity Fund I’s “liabilities are greater than its assets,” stated Michael O’Hanlon, chief executive of the funds comprising Behringer Harvard’s opportunity platform. The fund is negotiating with banks over one property, the hotel in Los Angeles, that is a “swing issue,” he said in the Investment News story.

The Strategic Opportunity Fund I isn’t the only Behringer Harvard REIT to face problems. At the end of 2011, the Behringer Harvard Opportunity REIT I saw its estimated value decline 46% to $4.12 a share from $7.66 a year earlier. In June, one property in that REIT entered into bankruptcy protection.

Another Behringer REIT has had similar problems. The Behringer Harvard Short-Term Opportunity Fund I LLP had approximately $130 million in assets when it saw its valuation drop to 40 cents a share from $6.48 a share as of Dec. 31, 2010.

Non-Traded REITs Plunge in Value

In the past seven years, some of the biggest non-traded real estate investment trusts (REITs) have lost $11.3 billion, or 37% of their equity value, according to an analysis of eight REITs by MTS Research Advisors for Investment News. The latest REIT to fall is CNL Lifestyle Properties, which initially raised $2.7 billion at $10 a share and then dropped in value to $7.31.

The Dividend Capital Total Realty Trust faced similar circumstances last month, when it revised its $10 per share price to $6.69 per share. In March, the REIT had stated that its value as $8.45 per share.

Many investors in non-traded REITs have seen their investments deteriorate over the past year. Robert Block, a 74-year-old retiree in Florida, invested more than $400,000 in several non-traded REITs from 2006 to 2008 on the advice of investment adviser who told him the investment’s dividends were attractive and the REITs were “about as safe as anything you could get.”

Block’s $400,000 investment was valued at about $300,000 based on REIT share valuations earlier this year.

“I needed income that I could count on and wasn’t risky,” said Block, who is seeking damages from his investment adviser in an arbitration case with the Financial Industry Regulatory Authority (FINRA).

Dividend cuts also have been an ongoing issue for non-traded REIT investors. In April, KBS Real Estate Investment Trust I told shareholders it was suspending its monthly dividend of 5.25%. It also marked down its share price by 30%, to $5.16.

One-Time Seller of Provident Royalties Closes Its Doors

A one-time prominent seller of private placements in Provident Royalties is shutting its doors, with many of the reps at broker/dealer Milkie/Ferguson moving on to another firm, Berthel Fisher & Co. Financial Services.

As reported Aug. 13 by Investment News, Berthel Fisher picked up 26 of the 40 reps formerly with Milkie/Ferguson. The firm’s CEO and owner, Edward M. Milkie, has been registered with Berthel Fisher since June, according to the Investment News story. He started Milkie/Ferguson in 1986. Fisher said Milkie was not working as a manager at Berthel Fisher but was a producing registered rep.

Milkie/Ferguson filed its broker/dealer withdrawal request with the Financial Industry Regulatory Authority (FINRA) last month. In early August, the B-D lost a $25,000 FINRA arbitration claim unrelated to Provident Royalties.

According to U.S. Bankruptcy Court filings, representatives with Milkie/Ferguson sold at least $4.1 million of Provident Royalties preferred shares. The figure could be much higher, however, in that the bankruptcy filing counted only about half of the $485 million in Provident Royalties shares sold by independent broker/dealers to more than 7,000 investors.

The money raised from the Provident offerings was supposed to be used to purchase oil-and-gas interests such as real estate, leases and mineral rights. In reality, the offerings turned out to be part of an elaborate $485 million Ponzi scheme.

The Securities and Exchange Commission (SEC) filed fraud charges against Provident Royalties and three company founders in the summer of 2009 for their role in the scam.

Since then, many investors have filed arbitration claims with FINRA against the various broker/dealers that sold them the failed products. At least 23 of 60 broker/dealers that sold Provident Royalties shares have closed their doors because of impending lawsuits or other issues related to the fraud.

On July 13, 2012, two former Provident executives, Brendan W. Coughlin, 46, and Henry D. Harrison, 47, were charged by the office of the U.S. attorney for the Eastern District of Texas with one count of conspiracy to commit mail fraud and 10 counts of mail fraud, according to a statement by the Department of Justice. If convicted, each faces up to 20 years in prison.

Previously, FINRA had suspended both Coughlin and Harrison for two years from the securities industry and fined them each $50,000.

Wells Fargo Security Wreaks Financial Havoc on Investors

The intro paragraph of a New York Times story says it all: “The bank that put together the unusual security did well. The customers who bought it suffered large losses. No one – at least no one who traded the security – seems to have understood the risks that were hidden deep in the prospectus.”

The security in question was a Wells Fargo security that had a lengthy and convoluted name: Floating Rate Structured Repackaged Asset-Backed Trust Securities Certificates, Series 2005-2). Like its cumbersome name, the security was highly complex and hard to understand.

It was created and sold in 2005 by Wachovia Securities, then part of Wachovia Bank and later renamed Wells Fargo Advisors after Wells Fargo acquired Wachovia. Clients of Wachovia Securities/Wells Fargo purchased approximately $28 million of the Floating Rate Structured Repackaged Asset-Backed Trust Securities Certificates, Series 2005-2 securities, which went by the nickname of Strats.

Investors thought they were buying an investment that offered a modest but safe yield. They would later learn otherwise.

Strats was marketed in $25 units, and investors were promised monthly interest payments for as long as 30 years. At that time, investors would get the $25 back. Those interest payments would fluctuate with interest rates on Treasury Bills, but they could not go below 3% a year or above 8%.

Wells Fargo now says if investors had only read the prospectus they would have known that disaster was forthcoming in June, when news related to the security was disclosed. But that disclosure actually had the opposite effect on the market. In New York Stock Exchange trading, the price of Strats rose higher, on heavy volume, and stayed there for weeks.

The price per share was $24.88 on July 12, when trading was halted as investors learned they would get just $14.69 a share. Trading never resumed.

That’s because Wells Fargo received $10.69 a share as compensation for the profits it would have made over the next 23 years had the security not been redeemed.

If that wasn’t bad enough, underlying Strats was another security – a trust preferred security issued by JP Morgan.  Investors in Strats now not only owned a proportionate amount of the JP Morgan security, but they also were counter parties to Wells Fargo in an interest-rate swap. 

Wells would collect the 5.85% coupon from JPMorgan and pay out 3 to 8% interest to investors in the security. The bank would suffer if interest rates went up, and profit if they fell. If JPMorgan redeemed the security when rates were low, Strat investors would have to pay to terminate the hedge.

That information was disclosed on Page S-12 of a supplement to the prospectus. Specifically, it warned investors that “this loss could be quite substantial.” Wells Fargo thinks that minute warning served as an adequate disclosure, despite the fact that no examples were provided to illustrate exactly how devastating the termination payment would be for investors.

When the redemption did take place, JPMorgan paid out the equivalent of $25.6541 per Strat share, including some accrued interest. Wells Fargo kept $10.9683 to compensate it for the early cancellation of the interest- rate swap, and paid out what was left, $14.6857, to the public investors.

Investors, meanwhile, paid the ultimate price. For those who owned the security since its creation in 2005, they received about $6.70 in interest per share and a capital loss of $10.31.

 “It was a very conservative security,” said one investor, a professor, in the New York Times story. Like many investors in Strats, the professor (who wished to remain anonymous for the NYT article) lost money on an investment that was supposed to be “a very nice, Grandma type” of security.  He says the prospectus never made the risks clear. If it had, he would have invested his money elsewhere.

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