The Sec has approved FINRA’s plan to overhaul how member firms calculate the value of unlised real estate investment trusts (“REITs”) and direct-participation programs (“DPPs”). Under the new rules – specifically FINRA Rule 2310 – the firms will be required to include on customer account statements a per-share estimated value for any unlisted REIT and DPP securities that they have reason to believe is reliable.

Firms also will need to make new disclsoures about the nature of the investment, including that they are not traded on a public securities exchange and that the price that the investor receives may be less than the estimated per-shre value.

Please keep in mind that the above information is being provided for informational purposes only. Thus, it is not designed to be complete in all material respects. If you have any questions relative thereto, you should contact a qualified professional.

The Securities and Exchange Commission recently charged the former president of a purported private equity real estate firm based in San Bernardino, Calif., with defrauding nearly 500 investors who purchased promissory notes under the false premise that they were secured by specific properties or other collateral.

The SEC alleges that Larry Polhill used his company American Pacific Financial Corporation (APFC) to buy and sell real estate and distressed assets, and he offered investors the opportunity to invest in the company through unregistered notes that would yield them interest payments of 5 to 17 percent per year. However, the collateral that Polhill and APFC claimed made the investments secure was often non-existent or otherwise impaired. The properties underlying the investments were sometimes even sold without notice to investors. When APFC eventually filed for bankruptcy, it named the investors as unsecured creditors who were owed nearly $160 million. None of Polhill’s investment offerings were registered with the SEC.

Polhill agreed to settle the SEC’s charges and be barred from acting as the officer or director of any public company. The settlement is subject to the approval of the U.S. District Court for the Central District of California, which would decide monetary sanctions at a later date.

According to the SEC’s complaint, in addition to promissory notes, investors also could invest in APFC-sponsored funds that pooled investor money to make loans to APFC. The company made regularly scheduled interest payments to investors in the notes and the funds from the mid-1980s to 2007. As a result, its investor base continually grew and the company began making larger and larger investments in distressed assets by buying numerous companies out of bankruptcy. While a few of APFC’s investments were successful, the vast majority failed unbeknownst to investors. Consequently, the assets held by APFC that were securing the notes and loans held by investors decreased in value. In early 2008, APFC ceased making its scheduled payments to most investors, but continued to issue newsletters, pay preferred investors, and engage in other activities designed to create a false sense of security about the investments in the company.

The SEC alleges that Polhill made several material misrepresentations to investors. Specifically, he told investors that the notes were secured by collateral when no such security interest existed. He failed to disclose that the collateral securing some investors’ notes already had been pledged to other lenders. Polhill represented that he would notify investors if their collateral went into default when that was often not the case. For instance, one investor’s note specifically stated it was secured by property located in Hesperia, Calif., that was owned by APFC and pledged as collateral. However, APFC sold the collateral in 2004, and neither Polhill nor APFC informed the investor that his collateral had been sold and there was no longer any asset securing the note.

The SEC’s complaint charges Polhill with violating Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act. Polhill has consented to the entry of an order that permanently enjoins him from violating these laws and permanently bars him from acting as an officer or director of any public company.

Contact Us:

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

SEC OBTAINS ASSET FREEZE AGAINST MASSACHUSETTS-BASED INVESTMENT ADVISER STEALING MONEY FROM CLIENTS

The Securities and Exchange Commission recently announced an asset freeze against a Massachusetts-based investment adviser charged with stealing money from clients who were given the false impression they were investing in a hedge fund.

In a complaint unsealed today in federal court in Boston, the SEC alleges that Gregg D. Caplitz and Insight Onsite Strategic Management in Wilmington, Mass., raised at least $1.1 million from clients that was used for purposes other than investing in the hedge fund they purported to manage. Investor money was merely transferred to the firm’s chief investment officer and other members of her family who spent it on personal expenses. The firm reported in SEC filings that it has $100 million in assets under management, however the purported hedge fund actually has no assets.

U.S. District Judge Mark L. Wolf granted the SEC’s request for an emergency court order to freeze the assets of Caplitz and his firm as well as others who received investor money and have been named as relief defendants for the purposes of recovering investor funds in their possession.

According to the SEC’s complaint, Caplitz’s scheme began around 2009. For example, Caplitz convinced one client and his wife to invest $275,000 in the hedge fund that Caplitz claimed would generate them about $1,000 per month in returns. Caplitz also solicited a 20-year client who after considering his sales pitch decided not to invest in the hedge fund because she considered it too risky of an investment for someone her age. But Caplitz apparently took action to obtain funds from the client’s IRA account and wired thousands of dollars to an Insight Onsite Strategic Management bank account. The client was not aware of the transfers and did not authorize them.

The SEC alleges that instead of using investor funds to purchase shares in a hedge fund or to manage or develop a hedge fund, Caplitz transferred control of client money to Rosalind Herman, his friend who works at the firm. Investor funds also were transferred to her sons Brad and Brian Herman, daughter-in-law Charlene Herman, and a company called Knew Finance Experts. The Hermans, who all live in Las Vegas, own that company. The Hermans used investor money to pay legal bills and other personal expenses at gas stations, drugstores, and restaurants.

The SEC alleges that as part of his scheme, Caplitz obtained funds from a real estate investment trust (REIT) by falsely representing that a hedge fund he operated was interested in making an investment in that trust. The public, non-traded REIT gave $135,000 to Caplitz so he could conduct due diligence on the REIT as a precursor to his making a $5 million investment that never materialized.

The SEC alleges that Caplitz and Insight Onsite Strategic Management violated Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5, Section 17(a) of the Securities Act of 1933, and Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. The Complaint seeks a permanent injunction plus disgorgement, prejudgment interest, and a penalty against Caplitz and his firm. The complaint also names the four Hermans and Knew Finance Experts as relief defendants and seeks disgorgement plus prejudgment interest.

Contact Us:

With extensive courtroom, arbitration and mediation experience and an in-depth understanding of securities law, our firm provides all of our clients with the personal service they deserve. Handling cases worth $25,000 or more, we represent clients throughout Florida and across the United States, as well as for foreign individuals that invested in U.S. banks or brokerage firms. Contact us to arrange your free initial consultation.

At the Fort Lauderdale Law Office of Russell L. Forkey, we represent clients throughout South and Central Florida, including Fort Lauderdale, West Palm Beach, Boca Raton, Sunrise, Plantation, Coral Springs, Deerfield Beach, Pompano Beach, Delray, Boynton Beach, Hollywood, Lake Worth, Royal Palm Beach, Manalapan, Jupiter, Gulf Stream, Wellington, Fort Pierce, Stuart, Palm City, Jupiter, Miami, Orlando, Maitland, Winter Park, Altamonte Springs, Lake Mary, Heathrow, Melbourne, Palm Bay, Cocoa Beach, Vero Beach, Daytona Beach, Deland, New Smyrna Beach, Ormand Beach, Broward County, Palm Beach County, Dade County, Orange County, Seminole County, Martin County, Brevard County, Indian River County, Volusia County and Monroe County, Florida. The law office of Russell L. Forkey also represents South American, Canadian and other foreign residents that do business with U.S. financial institutions, investment advisors, brokerage and precious metal firms.

This post is designed to provide the reader with general information concerning tax shelters as a concept and what constitutes an abusive tax shelter. Please keep in mind that this information is being provided for informational purposes only and is not designed to be complete in all material respects. Thus, it should not be relied upon as providing legal or investment advice. If you have any questions concerning this post or its contents, you should seek a qualified professional.

Tax Shelter:

This is a method used by many investors as a means to legally reduce or avoid tax liability. Legal tax shelters include those investment vehicles using depletion allowances for oil and gas exploration or using depletion of assets such as real estate or equipment. Limited partnerships have traditionally offered investors limited liability and tax benefits. However, the Tax Reform Act of 1986 dealt a severe blow to such tax shelters. The effect of this act and current regulations relating to these types of investments should be discussed with a qualified professional.

There are also investment vehicles that allow tax-deferred capital growth such as various types of IRA accounts, life insurance annuities and Keogh Plans. Again, specific questions relating to these or other types of investments offering some type of tax advantage should be directed to a qualified professional.

Abusive Tax Shelter:

An abusive tax shelter is any investment used to avoid taxes that is not in compliance with the law or the rules and regulations adopted, from time to time, by the Internal Revenue Service.

An example of an abusive tax shelter would be a limited partnership that the IRS deems to be claiming illegal tax deductions or inflates the value of acquired property beyond its fair market value. If these write-offs are deemed excessive, by the IRS, investors must pay severe penalties and interest charges, on top of the required back taxes.

If you suffer damages as a result of a tax shelter in which you have invested being determined abusive, you must seek qualified counsel to determine what your options are, which would include seeking indemnification from whomever either recommended or sold the investment to you. Because of the fact that it usually takes a few years, after the investment has been made, for the IRS to make this determination, you should seek immediate assistance because claims against third parties may be impacted by statute of limitation issues.

As with any investment, you should take into account your own financial situation, consult your financial adviser, and perform thorough research before making any investment decisions concerning REITs. You can review a REIT’s disclosure filings, including annual and quarterly reports and any offering prospectus at sec.gov. You can invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a broker (as you would other publicly traded securities). Generally, you can purchase the common stock, preferred stock, or debt securities of a publicly traded REIT. You can purchase shares of a non-traded REIT through a broker that has been engaged to participate in the non-traded REIT’s offering. You can also purchase shares in a REIT mutual fund (either an index fund or actively managed fund) or REIT exchange-traded fund.

Special Tax Considerations:

The shareholders of a REIT are responsible for paying taxes on the dividends that they receive and on any capital gains associated with their investment in the REIT. Dividends paid by REITs generally are treated as ordinary income and are not entitled to the reduced tax rates on other types of corporate dividends. For this reason, some investors prefer to own shares of a REIT or REIT fund inside a tax-deferred account (such as a retirement account) in order to defer paying taxes on the dividends received and any capital gains incurred from that REIT until they start withdrawing money from the tax-deferred account. Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors. Consider consulting your tax adviser before investing in REITs.

Please keep in mind that this information is being provided for educational purposes only. Thus, it is not designed to be complete in all material respects. Consequently, it should not be relied upon as legal or investment advice. If you have any questions concerning the contents of this post, please make sure that you consult a qualified professional.

(a). Lack of Liquidity: Non-traded REITs are illiquid investments; they generally cannot be sold readily on the open market. If you need to sell an asset to raise money quickly, you may not be able to do so with shares of a non-traded REIT. Although non-traded REITs usually offer share redemption programs, these are typically subject to significant limitations and may be discontinued at the discretion of the company. Investors may have to wait to receive a return of their capital until the company decides to engage in a transaction such as the listing of the shares on an exchange or a liquidation of the company’s assets. The timing of these liquidity events is at the discretion of the company, and may be more than 10 years after the investment is made.

(b). Share Value Transparency: While the market price of a publicly traded REIT is readily accessible, it can be difficult to determine the value of a share of a non-traded REIT. Because non-traded REITs are not traded on an exchange there is no market price available. Non-traded REITs typically do not provide an estimate of their value per share until 18 months after their offering closes, but this may be years after you have made your investment. As a result, you may not be able to assess the value of your non-traded REIT investment for a significant time period and may not be able to assess the volatility of your investment.

(c). Significant Up-Front Fees: Non-traded REITs are typically sold by financial advisers. Non-traded REITs generally have high upfront fees that lower the value of the investment by a significant amount. They usually charge sales commissions and upfront offering fees of approximately nine to 10 percent. Investors should understand that a portion of the share purchase price represents sales commissions and that the amount actually invested in the company is reduced by these commissions.

(d). Distributions May Be Paid from Offering Proceeds and Borrowings: Investors may be attracted to non-traded REITs by their relatively high dividend yields compared to those of publicly traded REITs. However, investors should consider the total return of a non-traded REIT – capital appreciation plus dividends – instead of focusing exclusively on the high dividend yield. Unlike publicly traded REITs, non-traded REITs frequently pay distributions in excess of their funds from operations. To do so, they may use offering proceeds and borrowings. This practice, which is typically not used by publicly traded REITs, reduces the value of the shares and reduces the cash available to the company to purchase additional assets. In considering an investment in a non-traded REIT, you should assess the extent to which distributions have been paid from sources other than funds from operations.

(e). Conflicts of Interest: Non-traded REITs are typically externally managed-meaning the REITs do not have their own employees. The external manager may be paid significant fees by the REIT for things that may not necessarily be aligned with the interests of shareholders, such as fees based on the amount of property acquisitions and assets under management. In addition, the external manager may also manage other companies that may compete with the REIT.

Please keep in mind that this information is being provided educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. Before considering investing in a non-traded REIT, you are strongly urged to consult with a qualified professional.

The purpose of this post is to provide the reader with certain general information and comments relative thereto. Please keep in mind that this information is being provided for educational purposes only and is not designed to be complete in all material respects. Thus, it should not be relied upon as providing legal or investment advice. In you have any questions relative to the subject matter here, you should contact a qualified professional.

There are significant differences between publicly traded and non-traded REITs. The specific differences are beyond this parameters of this post. However, a few examples are:

• publicly traded REITs file reports with the SEC and their shares are traded on national stock exchanges.
• non-traded REITs file reports with the SEC but their shares are not traded on national stock exchanges.
• publicly traded REITs Shares are listed and traded, like any publicly traded stock,
  on major stock exchanges. Most are NYSE listed.
• non-traded REITs Shares are not traded on public stock exchanges. Redemption programs for shares vary by company and are typically very limited. Investors may have to wait to receive a return of their capital until the company decides to engage in a transaction such as the listing of the shares on an exchange or a liquidation of the company’s assets.
• publicly traded REITs have the same transactional costs associated with their purchase and sale as do common stocks.
• non-traded REITs usually carry commission charges of anywhere between 8 to 10% of the investment in addition to other upfront offering costs. Ongoing acquisition and management fees and other expenses are also typical. Back-end fees may also be charged.

Before investing in a REIT, make sure that you understand not only the fees charged but all other material aspects of the transaction. Because of the unique characteristics of these types of investment, they are not for everyone.

Three Categories of REITs: Equity, Mortgage, and Hybrid:

REITs generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs. Most REITs are equity REITs. Equity REITs typically own and operate income-producing real estate. Mortgage REITs, on the other hand, provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities. Mortgage REITs tend to be more leveraged (that is, they use a lot of borrowed capital) than equity REITs. In addition, many mortgage REITs manage their interest rate and credit risks through the use of derivatives and other hedging techniques. You should understand the risks of these strategies before deciding to invest in these types of REITs. Hybrid REITs generally are companies that use the investment strategies of both equity REITs and mortgage REITs.

Because they often invest in debt securities secured by residential and commercial mortgages, mortgage REITs can be similar to certain investment companies that are focused on real estate. Generally, companies that invest a majority of their assets in real estate are exempted from the rules that govern investment companies, such as mutual funds. However, please keep in mind that the SEC has initiated a review to determine whether certain mortgage REITs should continue to be exempt from investment company regulation. Those rules generally limit the amount of leverage that a fund can use and regulate the fees that can be charged to investors.

How to Qualify as a REIT?

To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends. A company that qualifies as a REIT is allowed to deduct from its corporate taxable income all of the dividends that it pays out to its shareholders. Because of this special tax treatment, most REITs pay out at least 100 percent of their taxable income to their shareholders and, therefore, owe no corporate tax.

In addition to paying out at least 90 percent of its taxable income annually in the form of shareholder dividends, a REIT must:

• Be an entity that would be taxable as a corporation but for its REIT status;
• Be managed by a board of directors or trustees;
• Have shares that are fully transferable;
• Have a minimum of 100 shareholders after its first year as a REIT;
• Have no more than 50 percent of its shares held by five or fewer individuals during the last half of the taxable year;
• Invest at least 75 percent of its total assets in real estate assets and cash;
• Derive at least 75 percent of its gross income from real estate related sources, including rents from real property and interest on mortgages financing real property;
• Derive at least 95 percent of its gross income from such real estate sources and dividends or interest from any source; and
• Have no more than 25 percent of its assets consist of non-qualifying securities or stock in taxable REIT subsidiaries.

Specifically, REITs have been around for more than fifty years. Congress established REITs in 1960 to allow individual investors to invest in large-scale, income-producing real estate. REITs provide a way for individual investors to earn a share of the income produced through commercial real estate ownership – without actually having to go out and buy commercial real estate.

What is a REIT?

A REIT, generally, is a company that owns – and typically operates – income-producing real estate or real estate-related assets. The income-producing real estate assets owned by a REIT may include office buildings, shopping malls, apartments, hotels, resorts, self-storage facilities, warehouses, and mortgages or loans. Most REITs specialize in a single type of real estate – for example, apartment communities. There are retail REITs, office REITs, residential REITs, healthcare REITs, and industrial REITs, to name a few. What distinguishes REITs from other real estate companies is that a REIT must acquire and develop its real estate properties primarily to operate them as part of its own investment portfolio, as opposed to reselling those properties after they have been developed.