Former ARCP CFO Found Guilty of Securities Fraud

Brian Block, former chief financial officer of American Realty Capital Properties Inc. (now Vereit), and long-time partner of AR Global’s Nicholas Schorch, was found guilty today of securities fraud and related crimes for reporting false numbers in quarterly filings with the U.S. Securities and Exchange Commission.

The verdict follows a nearly three week trial in the U.S. District Court for the Southern District of New York. The jury of nine women and three men returned the guilty verdict less than a day after closing arguments.

Block, 45, was convicted of one count of securities fraud, two counts of filing false reports to the SEC, two counts of filing false certifications and one count of conspiracy. Block is facing upwards of 20 years of jail time. Sentencing will be declared at a later date.

While not yet charged with any wrong doing, Nicholas Schorch was implicated in the conspiracy by the prosecution’s star witness, former ARCP chief accounting officer Lisa McAlister. The DI Wire will report further on this matter next week.

DOL Seeks Public Comments on Changes to Fiduciary Rule, Pledges to Work with SEC on Uniform Standard

The chairs of the Securities and Exchange Commission and the Department of Labor testified before separate Senate Appropriations Subcommittees this week on their respective fiscal year 2018 budget requests, with both chairmen affirming their willingness to work together on the DOL’s fiduciary rule that began implementation earlier this month.

This was just the first indication this week that the rule as it presently stands is likely going to change significantly under the Trump administration, as the DOL late yesterday requested comments from the public regarding changes to the rule prior to final implementation on Jan. 1, 2018.

Specifically, the DOL issued a request for information on the agency’s fiduciary rule and prohibited transaction exemptions. The agency is seeking public input on extending the January 1, 2018 applicability date and is also asking the public to weigh in on possible additional exemption approaches or changes to the rule. The request is expected to be published in the Federal Register next week.

Comments relating to extending the January 1st applicability date must be submitted 15 days from the date of publication in the Federal Register, while other responses must be submitted within 30 days of publication.

At the budget hearing before Senate Appropriations Subcommittee on Labor, Health and Human Services, Education, and Related Agencies, Senator James Lankford (R-OK) questioned DOL chairman Alexander Acosta on how the fiduciary rule conversation with the SEC is faring.

Acosta noted that the SEC did not coordinate with the Department of Labor previously, but that is expected to change in the future.

“I think the SEC has important expertise and they need to be part of the conversation,” said Acosta. “I asked [SEC Chairman Jay Clayton] if the SEC would be willing to work with us and the chairman indicated his willingness to do so. It is my hope as the SEC also receives a full complement of commissioners, that it will continue to work with the Department of Labor on this issue.”

At the Senate Appropriations Subcommittee on Financial Services and General Government, Senator Jerry Moran (R-KS) told SEC Chairman Jay Clayton that he was worried that there was a “lack of regulatory harmonization” between the DOL and SEC on the fiduciary rule.

Chairman Clayton noted that the issue is “very complicated” but that he was confident that the two agencies would cooperate.

“What’s happening at the Department of Labor is going to affect the markets we regulate and vice versa, said Clayton. “It’s my intent as chairman to try and move forward and effectively deal with that in a way that is coordinated, so that our Main Street investors have access to investment advice and access to investment products.”

He added, “I don’t want to see any of these actions that we would take reduce the access to investment advice or the access to investment products. At the same time very much fulfilling our investor protection mission.”

Earlier this month, the SEC issued a request for public comment on standards of conduct for investment advisers and broker-dealers that provide investment advice to retail investors.

The DOL is conducting an ongoing examination of the rule as directed by President Donald Trump.

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KBS Strategic Opportunity REIT II Registers Follow-on Offering

KBS Strategic Opportunity REIT II Inc., a publicly registered non-traded real estate investment trust, filed a registration statement for a $1 billion follow-on offering of its common stock, according to a filing with the Securities and Exchange Commission.

KBS Strategic Opportunity REIT II invests in opportunistic real estate, real estate-related loans, real estate-related debt securities and other real estate-related investments located in the United States and Europe.

The company is offering 180 million shares of Class A and Class T common stock for $10.00 and $9.63 per share, respectively, as well as $760 million shares for the company’s distribution reinvestment plan priced at $9.05 each.

Class A shares include a 6.5 percent selling commission and a 2 percent dealer manager fee, and Class T shares include a 3 percent selling commission, a 2 percent dealer manager fee, and a 1 percent annual stockholder servicing fee.

As reported by The DI Wire earlier this month, the REIT’s board approved an estimated NAVper share of $9.05 for the company’s common stock.

KBS Strategic Opportunity REIT II went effective in August 2014, and through a private placement offering and a subsequent initial public offering, has raised a total of $210 million in investor equity. The company’s portfolio is comprised of six investments with an investment cost of $334.3 million, according to Summit Investment Research.

For more KBS related news, visit their directory page here.

CNL Growth Properties Sells Joint Venture Property Near Houston

CNL Growth Properties, a publicly registered non-traded REIT, sold Modera at Spring Town Center, a 396-unit multifamily community, to Abbey Residential LLC for $49.8 million, according to a filing with the Securities and Exchange Commission.

In December 2013, CNL Growth and MCRT Spring Town LLC formed a joint venture to purchase a 19.5-acre parcel of land located in the Houston suburb of Spring, Texas on which to develop the property. The property had a total development budget of $46 million, and CNL Growth holds a 95 percent interest in the joint venture.

The net cash to the REIT was approximately $16.4 million after repayment of approximately $31.4 million of debt and other closing costs, reserves, and distributions to its joint venture partner.

The DI Wire reported on Monday that the REIT sold an Arizona multifamily property for $41.8 million. The recent sales are part of CNL Growth’s ongoing liquidation plan that was approved by stockholders in August 2016.

CNL Growth Properties, formerly known as Global Growth Trust, commenced its $1.5 billion initial public offering in October 2009. In April 2013, the REIT closed the offering after raising approximately $94.2 million and changed its name to CNL Growth Properties. In August 2013, the company initiated a follow-on offering and refined its investment focus on multifamily development projects in the Southeast and Sun Belt regions of the U.S. The combined offerings raised a total of $208 million in investor equity. CNL Growth Properties’ portfolio consists of five class A multifamily properties.

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Strategic Storage Trust IV Appoints New Independent Director

Strategic Storage Trust IV Inc., a publicly registered non-traded real estate investment trust sponsored by SmartStop Asset Management, announced that Stephen Muzzy has resigned from the company’s board of directors. Muzzy served as an independent director, member and chairman of the audit committee, and member of the nominating and corporate governance committee of the board. His decision did not involve any disagreement with the company or the board, according to a filing with the Securities and Exchange Commission.

The board appointed Alexander Vellandi to serve in the roles vacated by Muzzy. Vellandi, who has nearly 20 years of commercial real estate and finance experience, currently serves as general counsel of commercial real estate marketplace lender Money360 Inc., where he is responsible for all legal aspects of its corporate and business operations.

Vellandi was formerly in-house legal counsel to Sabal Financial Group LP, associate general counsel of Triple Net Properties LLC, and an attorney with two California-based law firms. Since 2002, he owned a residential real estate brokerage firm, Orange County Property Company.

Vellandi holds a bachelor’s degree from the University of California at Irvine and his juris doctor from UCLA School of Law. Prior to entering law school, he served as an appointee of former California Governor Pete Wilson, and is a member of the State Bar of California, a licensed real estate broker, and serves in a leadership capacity for various charities and professional organizations.

Strategic Storage Trust IV, which focuses on the acquisition of self storage properties, was declared effective in March 2017 and has raised nearly $1.5 million in investor equity, as of June 21, 2017. The company purchased its first property in April.

For more Strategic Storage Trust IV news, please visit their directory page here.

KBS Growth & Income REIT Terminating Offering on Friday

KBS Growth & Income REIT Inc., a publicly registered non-traded real estate investment trust, is closing its primary offering at the end of the month, according to a filing with the Securities and Exchange Commission. The REIT plans to continue offering shares under its distribution reinvestment plan.

The board of directors approved the offering termination effective June 30, 2017 to prepare for and market an online private offering to accredited investors. Subscriptions for the primary public offering must be received in good order no later than June 30th.

In connection with the preparation of an online private offering, the company said that it expects to establish and announce an estimated net asset value per share of its common stock. Following the NAV announcement, the REIT’s advisor, KBS Capital Advisors, has agreed to pay stockholders any difference between the “net price paid” by stockholders and the estimated NAV per share. “Net price paid” is the gross purchase price paid by stockholders less selling commissions and dealer manager fees.

The payment will be funded entirely by the advisor without any reimbursement from the REIT and is ineligible for reinvestment through the distribution reinvestment plan. The company noted that the tax treatment of the payment is not entirely clear, and stockholders should consult with their tax advisor to determine the associated tax consequences.

KBS Growth & Income REIT expects to declare an estimated NAV and the stockholder payment to be made before the end of the third quarter of 2017.

KBS Growth & Income REIT was formed in January 2015 and has raised a combined $80 million in its private and public offerings, the latter of which commenced in April 2016. The company currently owns three properties with an investment cost of $136.8 million, according to Summit Investment Research.

For more KBS related news, visit their Directory Listing here.

Resource REITs Appoint New Executives Following Kevin Finkel Resignation

A number of non-traded REIT’s sponsored by Resource Real Estate announced that Kevin Finkel has resigned from his executive and board positions at the companies. According to filings with the Securities and Exchange Commission, his resignations were not due to any disagreement with the companies, its advisors, or any of their affiliates.

Finkel resigned as chairman of the board of directors and chief executive officer of Resource Apartment REIT III Inc., and the board appointed the REIT’s chief operating officer and president Alan Feldman to replace Finkel as CEO, while George Carleton will serve as the new COO and president.

Finkel also resigned as COO, president, and member of the board of Resource Income & Opportunity REIT Inc., Resource Real Estate Opportunity REIT, and Resource Real Estate Opportunity REIT II Inc. The board also appointed Carleton as COO and president of the three REITs from which Finkel resigned his positions.

Carleton has served as a director of the Resource Real Estate Opportunity REIT II and executive vice president of Resource America since September 2016. He is an executive managing director of Island Capital Group LLC, a commercial real estate merchant banking firm headquartered in New York.

Since its formation in 2010, Carleton has also served as an executive managing director of commercial real estate investment firm C-III Capital Partners LLC, which is externally managed by Island. Prior to joining Island, Carleton was a senior managing director of Insignia Financial Group (NYSE: IFS), a publicly traded commercial real estate services company that merged with CB Richard Ellis in 2003. He received a bachelor’s degree from Florida Atlantic University and a master’s degree from American University.

Resource Real Estate Inc. has sponsored a range of investment vehicles, including traded and non-traded REITs, limited partnerships, joint ventures with institutional partners and global securities. Resource America Inc., the parent company of Resource Real Estate and subsidiary of C-III Capital Partners, is an asset management company that specializes in real estate and credit investments. C-III Capital Partners is a real estate and credit investment management and commercial property services company.

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Strategic Student & Senior Housing Trust Buys University of Arkansas Student Housing Property

Strategic Student & Senior Housing Trust Inc., a private real estate investment trust sponsored by SmartStop Asset Management LLC, has acquired The District, a 198-unit, 592-bed student housing property adjacent to the University of Arkansas in Fayetteville. The purchase price for the building was $57 million.

Formerly known as Sterling District, the 2.3-acre student housing property is located at 376 W. Watson St. and includes one-, two-, three- and four-bedroom, fully furnished floor plans. The District is currently 95 percent pre-leased for the 2017-2018 academic year.

“The District represents a best-in-class, off-campus, purpose-built and pedestrian-to-campus student housing community at the University of Arkansas,” said H. Michael Schwartz, chief executive officer of Strategic Student & Senior Housing Trust. “Completed in 2016, The District is an amenities-rich and modern urban wrap-design property that is consistent with our acquisition strategy of acquiring stabilized and purpose-built student housing assets adjacent to Tier 1 universities.”

The property includes safety features, such as gated access, pass-key systems, on-site management with security patrols and an on-site, six-story controlled access parking garage.

On-site property management will be provided by Asset Campus Housing, which currently manages in excess of 210 properties and 118,500 beds.

“Situated three blocks from campus and the famed Dickson Street, part of the U.S. National Register of Historic Places, The District provides residents with great access to the campus, community and their peers,” said John Strockis, senior vice president of acquisitions of the REIT. “The property also includes a 500 megabytes-per-second internet service that further promotes connectivity for students and parents.”

Community amenities include a computer lab and business center; study rooms; a pool, spa and courtyard; and a fitness facility with a separate yoga room.

The District is certified by the U.S. Green Building Council as LEED-Gold, the second-highest certification level that recognizes properties that use less water and energy, and reduce greenhouse gas emissions. In addition to its energy efficient appliances and other amenities, the property also provides preferred parking for fuel efficient vehicles, a bike-sharing program, and close proximity to mass transit for ride-sharing.

Strategic Student & Senior Housing Trust focuses on the acquisition of income-producing, Class A student housing and senior housing communities.

SmartStop is a real estate company focused on self storage, student and senior housing assets. The company has a managed portfolio that currently includes more than 68,000 self storage units and 7.8 million rentable square feet and approximately $1.3 billion of real estate assets under management. SmartStop is the sponsor of Strategic Storage Trust II, Inc., Strategic Storage Growth Trust, Inc. and Strategic Storage Trust IV, Inc., all public non-traded REITs focusing on self storage assets.

For more SmartStop-related news, visit their directory page here.

Financial Advisor to Chair FSI Board of Directors

The Financial Services Institute, a trade organization that represents independent financial advisors and financial services firms, has elected new directors for its 2018 board of directors.

The new directors include Ed Forst, president and CEO of Lincoln Investment Planning; Chris Maryanopolis, president of Signator Investors; and Scott Spiker, chairman and CEO of First Command.

Dean Harman, founder and CEO of Harman Wealth Management, was named chairman of the board, the second financial advisor to hold the position.

“Our membership has been blessed once again with a strong, diverse and visionary board,” said FSI president and CEO Dale Brown. “The CEOs and financial advisors who lead our board understand the critical nature of our advocacy and how it impacts their businesses and their clients. They will not only lead FSI, but the entire industry, into a brighter future.”

“Never has the voice of independent financial advisors and financial services firms been more indispensable in the critical debates happening on Capitol Hill, in the states and in the financial services industry,” said David Knoch, incoming board vice chair.

The board also elected five directors to the 2018 executive committee, including:

Chair of the board: Dean Harman

Vice Chair (Chair in 2018): David Knoch, president of 1st Global

Immediate Past Chair: Richard Lampen, president and CEO of Ladenburg Thalmann Financial Services

Finance Chair: Scott Curtis, president of Raymond James Financial Services

PAC Chair: John Rooney, managing principal of Commonwealth Financial Network

In addition to those elected to leadership positions, continuing on the board are Adam Antoniades of Cetera Financial Group; Valerie Brown of Advisor Group; Richard Bryant of Capital Investment Companies; Kent Christian of Wells Fargo Advisors Financial Network; Bill Dowell (financial advisor); Joe Himelick (financial advisor); Tony Lajeunesse (financial advisor); Kimberly Kropp (financial advisor); Shawn McLaughlin of McLaughlin Ryder Investments; and James Poer of Kestra Financial.

The Financial Services Institute represents more than 100 independent financial services firm members and their 160,000+ affiliated financial advisors.

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Block Maintains Innocence During ARCP Fraud Trial

Brian Block, former chief financial officer of American Realty Capital Properties, maintained his innocence during testimony at his criminal trial in New York, telling the jury that he did not intend to defraud investors when he allegedly manipulated the company’s financials to make it appear that it had met certain targets when it had not.

Block and his former colleague Lisa McAlister, who served as ARCP’s chief accounting officer, are accused of manipulating the company’s second quarter 2014 financial results by inflating the company’s adjusted funds from operations, or AFFO, hours before filing the results with the Securities and Exchange Commission.

Instead of $0.26 per share, which was publicly reported by ARCP to its shareholders and the investing public, the correct AFFO was $0.23 per share. Block told jurors that there is no correct method to calculate AFFO and that he did not make up numbers to plug into the filing.

According to a document filed with the court, Block’s legal team argued that there are various methods used by REITs to calculate AFFO, and that ARCP’s AFFO was calculated and disclosed appropriately “given the ambiguous environment and discretionary nature of the process.” Federal prosecutors maintain that Block acted in bad faith.

McAlister, who pled guilty to fraud last year and is now a cooperating witness for the prosecution, testified earlier in the trial that CEO Nicholas Schorsch told Block that he could effectively manipulate the line item called “amortization of deferred financing costs” in order to hide the fudged numbers.

McAlister said that Block handed Ryan Steel, the director of financial reporting, a document with the revised deferred financing costs to be used in the AFFO calculation – which was overstated by approximately $0.03 per share.

Steel testified previously that Block used an improper methodology to calculate the company’s AFFO and that he had issued multiple warnings of the accounting mistake. Steel was granted immunity by federal prosecutors in exchange for his cooperation.

William Gribbin, Steel’s boss and the SEC’s whistleblower, testified that Steel confided in him that the numbers had been manipulated.

Federal prosecutors also argued that Block’s bonuses were partially tied to the company meeting AFFO targets and his extensive stock ownership was motivation to keep the share price “propped up.”

Block owned 1.4 million shares of ARCP and could have potentially received a cash and equity bonus of up to eight times his $500,000 annual salary had certain targets been met. The value of AFFO constituted a 20 percent portion of Block’s bonus.

Block was a founding partner of American Realty Capital, later known as AR Capital, along with chairman and CEO Nicholas Schorsch, Michael Weil, Peter Budko and William Kahane. Following the various scandals that commenced with the ARCP accounting cover-up for which Block is being charged, the company formed AR Global – where Block, Schorsch, Weil, Budko and Kahane are all presumed to continue in their roles as partners.

Schorsch has not been named in any federal indictments regarding the ARCP affair or other AR Global-related scandals. McAlister’s sentencing is expected later this summer.

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