5 Ways You Can Protect Your Clients from Self Directed IRA Frauds

Peter Lynch was famous for his stellar performance as manager of Fidelity’s Magellan Fund from 1977 to 1990. Over his 13 year tenure he was able to generate a 29.2% compounded annual return, compared to the S&P 500’s return of 15.8%. Very few people could top his success while he ran the Magellan Fund.

What Peter Lynch is also known for is his ability to take complicated topics and distill them down into simple terms. Quotes such as: “Never Invest in any idea you can’t illustrate with a crayon.” and “Invest in what you know.” illustrate his ability to teach basic investing skills to the masses in a simple manner.

Self Directed IRAs – invest in what you know

Investors should take these pieces of wisdom from Peter Lynch and apply them to their own investing plan. Self Directed IRAs as described in my earlier post The Self Directed IRA 101, are a great way to diversify beyond the stock and bond markets into asset classes that you know. If you are an expert in real estate, oil & gas, or private equity, then these are the assets you should focus on.

Investing in what you know could give you an edge over investing in areas that you are not as familiar with. However with opportunity and performance comes risk. Every investment carries a risk of underperformance or failure. That is the nature of investing.

Risks of Fraud with Self Directed IRAs

Performing proper risk management helps to mitigate these potential risks. One of these risks is fraud. The SEC, in its search to protect individual investors, has provided an Investor Alert, Self Directed IRAs and the Risk of Fraud, a few years ago to warn investors of the potential for fraud with Self Directed IRAs. In this alert, they discuss 3 common frauds and 5 ways to avoid these frauds.

  1. Misrepresentations regarding custodian responsibilities– This is the risk of a promoter or investment sponsor saying that because a custodian is willing to hold an asset, makes it “approved” and legitimate. In general, self directed IRA custodians explicitly state in their custody agreements that they have no responsibility for investment performance. Investors are responsible for their own investment choices.
  2. Exploitation of tax-deferred account characteristics– Promoters and investment sponsors can take advantage of the “long-term” nature of IRA investments by encouraging the investor to keep their money in it for longer than they might otherwise.
  3. Lack of Information for Alternative Investments– The SEC states that the lack of audited and transparent financial information, like with public companies, makes it easier to perpetuate a fraud scheme. While the SEC’s point is valid, in my experience many investors forego reading the disclosed and audited information provided by public companies. In addition, this availability of information in public companies is no guarantee of its validity. Waste Management, Enron, WorldCom, Tyco were all frauds leading to jail time for the perpetrators. The bottom line is investors need to do proper due diligence, regardless of whether the investment is publicly traded or not.

The SEC’s Solution to Fraud with Self Directed IRAs

The SEC also provided a list of five solutions to avoid fraud. While there are many ways to do proper risk management on an investment, this is a good start.

  1. Verify valuation information on self directed IRA account statements – The SEC’s solution is unclear on this point. They don’t provide a solution, but I will. Alternative investments held at self directed IRA custodians are required to be valued periodically, but no less than once per year depending on asset type. Each alternative investment has different approaches to valuations and must be provided by a third-party professional. If you are unsure about whether it is properly valued, consider speaking with a professional.
  2. Avoid unsolicited investment offers – Investors should be cautious when approached by a promoter. The SEC questions, “Why would anyone tell me about a really great investment opportunity?” Investors should certainly ask themselves this question. There are always people who take advantage of investor’s dreams of being rich. However it is realistic to assume that real people require capital to expand their business, rehabilitate houses, and come up with new ideas. If the investor is uncertain about an investment, then they should not invest. The world will not stop and there will be other investment opportunities available to each investor. Never get hung up on “the one great deal”.
  3. Ask Questions – This should be self-explanatory. Anyone who is considering placing money in an investment should do their own due diligence. This requires asking questions of all different varieties. Asking questions about the investment, management, the exit strategy, and the promoter of the investment. In many cases these people would be required to be registered or licensed in some way. Background checks can be helpful, and relatively easy and assessable via the internet.
  4. Be mindful of “guaranteed” returns – All investments have risk. This is the nature of investing. If an investment appears to have no risk, then you are not looking hard enough into it. Proper risk management is not about avoiding risk, but rather knowing what the risks are, mitigating them as much as possible, and being comfortable with what is left.
  5. Ask a Professional – The SEC suggests that investors get a second opinion from a licensed unbiased investment professional. Finding an Investment Advisory Representative who understands alternative investments held inside a self directed IRA is important. Investing in alternative investments inside Self Directed IRAs holds a different type of complexity than investments in public companies. Find a professional who understands this type of transaction.

Investors should always first look at how they can lose money in an investment before they look at how they can profit. Anyone who prioritizes risk management, and does it well, will save themselves a lot of headaches. If investors stick to what they know, they should very easily be able to illustrate it with a crayon.

If you want to learn more about Self Directed IRAs, Alternative Investments, or other related topics, read other contributions posted in Kirk’s column RIA Perspectives below:

Alternative Investments 101

Top 2 Reasons Investors Don’t Invest IRA Funds into Alternative Investments

The Self-Directed IRA 101

Capital Guardian Joins Kovack Securities as Super OSJ


Capital Guardian LLC, a Miami-based independent broker-dealer and wealth management firm, has joined Kovack Securities Inc., an independent broker-dealer based in Fort Lauderdale.

Capital Guardian, which has 35 financial advisors, dissolved its broker-dealer platform and is now an independent branch, or Super-OSJ (office of supervisory jurisdiction), of Kovack Securities for all future brokerage activities.  Including Capital Guardian’s brokerage assets, Kovack Securities will support nearly $10 billion in total advisory and brokerage client assets going forward.

“In this era of surging industry consolidation, our strategic alliance with Capital Guardian underscores the value proposition Kovack Securities offers to firms that seek to operate scalably, while enjoying the benefits of ownership stability and the boutique service culture that only a well-resourced, family-owned firm with a national footprint can deliver,” said Brian Kovack, president and co-founder of Kovack Securities.

Capital Guardian’s advisors will continue to conduct all fee-based advisory services and financial planning through Capital Guardian Wealth Management LLC, the firm’s independent registered investment advisor, which will remain under its current ownership structure and brand.

In other Kovack news, the broker-dealer recently completed an asset purchase agreement with TKG Financial, an independent broker-dealer and financial advisory firm based in Santa Barbara, California, under which TKG became a super-OSJ of Kovack Securities.

Kovack Securities operates in tandem with its affiliated RIA platform, Kovack Advisors. Founded in 1997, the firm supports approximately 400 affiliated independent financial advisors across the country.

Capital Guardian Wealth Management provides investment opportunities from various domestic and international money management firms, mutual fund companies, as well as asset categories, including managed futures, non-registered real estate investment trusts, hedge funds, private equity, and other alternative investments.

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KBS REIT II’s $280 Million Sale of Union Bank Plaza Sale Canceled

KBS Real Estate Investment Trust II Inc., a publicly registered non-traded real estate investment trust, announced that the $280 million sale of Union Bank Plaza in Los Angeles has been canceled, according to a filing with the Securities and Exchange Commission. The purchaser, Pacific Reach Properties affiliate RC Acquisitions, exercised its right to terminate the agreement, the company said.

Located at 445 South Figueroa Street on 3.7 acres of land, Union Bank Plaza totals approximately 627,000 square feet and represented approximately 13.2 percent of KBS REIT II’s assets and 17.8 percent of its total revenues for the first half of 2017. The REIT purchased the 40-story office building in September 2010 for $208 million from international real estate firm Hines’ U.S. Office Value Added Fund.

RC Acquisitions signed an agreement earlier this month to purchase the property and will receive a refund of its earnest money deposit.

KBS REIT II went effective in April 2008 and closed its primary offering in March 2011 after raising $1.8 billion in investor equity. The company’s portfolio consists of 10 properties (9 office properties and an office campus consisting of eight office buildings) and one real estate loan receivable.

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


FS Investments REIT Makes First Investments 

FS Credit Real Estate Income Trust, a $2.5 billion non-traded real estate investment trust sponsored by FS Investments, has closed on two floating-rate mortgage loans totaling $43.8 million in its first investments since being declared effective last week.

The first investment is a $9.5 million floating-rate whole mortgage loan purchased from an affiliate of Rialto Capital Management Inc., the REIT sub-adviser. The loan, which was originated in March 2016 by the Rialto affiliate, is secured by Oxford Point, a 200-unit multifamily property with 11 residential buildings totaling 251,000 square feet, located in Gulfport, Mississippi.

The Oxford Point loan matures in March 2018 with a 12-month extension option and bears interest at a floating rate of 4.50 percent over the one-month London Interbank Offered Rate, with an interest rate floor of 4.95 percent per year, and an appraised loan to value ratio of approximately 72 percent. The loan was purchased at cost (100 percent of par) and was funded with proceeds from the REIT’s private offerings and a $5.70 million draw from its Wells Fargo credit facility.

The company also closed a $34.31 million senior floating-rate mortgage loan (of which $29.25 million was funded at closing), secured by a portfolio of seven office buildings totaling 493,000 square feet located in Memphis, Tennessee. The properties are situated adjacent to the Federal Express Corporation World Headquarters and Southwind PGA Golf Course.

The Southwind Loan has an initial 24-month term with three 12-month extensions and bears interest at a floating rate of 4.25 percent over the one-month LIBOR with an interest rate floor of 5.30 percent per year, and an appraised loan to value ratio of approximately 73 percent. FS Credit REIT funded the loan purchase with proceeds from private placement offerings and $17.6 million from the Wells Fargo credit facility.

FS Credit Real Estate Income Trust, which is advised by FS Real Estate Advisor and sub-advised by Rialto Capital Management, plans to invest in floating-rate mortgage loans that are secured by first-priority mortgages on transitional commercial real estate properties. The dealer manager is FS Investment Solutions.

For more FS Investments news, visit their directory page here.



Procaccianti to Launch $552 Million Non-Traded REIT

Privately-held real estate firm Procaccianti Companies Inc. is launching a $552 million non-traded real estate investment trust named Procaccianti Hotel REIT Inc., according to registration documents filed with the Securities and Exchange Commission. Procaccianti Companies owns TPG Hotels & Resorts, one of the largest privately held owner/operators of hotels in the United States.

Proceeds from the offering will be used the fund the purchase of hospitality properties throughout the United States, as well as distressed debt and preferred equity with the intent of acquing hotel properties underlying these types of investments.  Procaccianti Hotel Advisors LLC will serve as the REIT’s advisor, and S2K Financial LLC will serve as the dealer manager.

The offering is comprised of four share classes: Class A, Class I, Class T, and Class K shares. The minimum purchase is $2,000, except in New York where the minimum purchase is $2,500.

Class A shares will be priced at $10.00 each and include a 5 percent selling commission and a 3 percent dealer manager fee.

Class I shares will be priced at $9.50 each and include a 3 percent dealer manager fee and no selling commission.

Class K shares will be priced at $10.00 each and include a 5 percent selling commission and a 3 percent dealer manager fee.

Class T shares are priced at $10.00 each and include a 3 percent selling commission, a 3 percent dealer manager fee, and an annual 1 percent shareholder servicing fee.

Class A, Class K, and Class T shares will be available for purchase through various distribution channels, while Class I shares will only be available through wrap accounts, registered investment advisers not affiliated with a participating broker-dealer, and by institutional investors.

The company will use all proceeds from the sale of Class A shares to fund organization and offering expenses related to Class I, Class K, and Class T shares. The proceeds will also be used to make up the difference of the reduced Class I share price, as well as certain reduced or waived selling commissions or dealer manager fees.

The advisor, dealer manager, and their respective affiliates have agreed to purchase Class A shares at $10.00 each, however, no selling commissions, dealer manager fees, or other organization and offering expenses will be paid by these entities.

The REIT is also offering $50 million in distribution reinvestment plan shares for Class I, Class K, and Class T shares only. No Class A DRIP shares will be offered.

Procaccianti Hotel REIT disclosed that it has the option to acquire a 51 percent joint venture interest in two select service hotels owned by an affiliate of the REIT’s sponsor. The hotels include the 119-room Staybridge Suites St. Petersburg Downtown in St. Petersburg, Florida and the 200-room Springhill Suites Wilmington Mayfair in Wilmington, North Carolina.

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SEC Chair Calls “Harmonized Fiduciary Rule” Top Priority

Securities and Exchange Commissioner Jay Clayton sat before the Senate Banking Committee on Tuesday and discussed coordinating with the Department of Labor and state regulators on a “harmonized” fiduciary rule, which he called a “top priority.”

The Office of Management and Budget approved a proposal by the DOL last month to delay implementation of the remaining provisions of the agency’s fiduciary rule for 18 months until July 1, 2019.

During the hearing, Senator Jon Tester (D-MT) questioned Clayton on whether the SEC was working with the DOL to “harmonize” the rule so that “people don’t get ping-ponged back and forth between two rules.” Clayton responded in the affirmative, although he did not specify a time frame.

“Everything can’t be a priority. This is a priority for me. We’re pushing this one. This is at the top of my list in that area of [the SEC], responded Clayton on the rule harmonization.

Fiduciary rule opponent Senator Tim Scott (R-SC), who worked as a financial advisor before entering the public sector, said that recent surveys have shown that advisors are taking on fewer small accounts due to the increased compliance costs and legal risks associated with the regulation that seeks to eliminate conflicts of interest in retirement investment advice.

“Restricting access to professionals in the financial industry has a negative impact on the resources available to the average American for retirement,” said Scott. “The last thing that we need to do at this point is to find ways to get experts out of the household, which is the unintended consequence of the fiduciary rule, in my perspective.

Scott questioned Clayton on the SEC’s coordination with the DOL and the recent 18-month delay of the fiduciary rule, a move he applauded. Clayton responded that any joint-rulemaking efforts conducted with the DOL and state regulators must adhere to four principles: choice, clarity, consistency, and coordination.

He said that low-income investors must have choice, rather than being “pushed into a narrow set of circumstances as a result of the steps we take.” Investors must clearly understand the type of investment professional they are dealing with and the obligations owed to them, Clayton said. He believes there must be a consistent standard applied to both retirement and non-retirement accounts, and that the DOL, SEC, and state regulators must coordinate their efforts.

Clayton also noted that he and his staff are currently reviewing the information gleaned from the recent public comment request on standards of conduct for investment advisers and broker-dealers.

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First Capital REIT Subsidiaries Declaring Bankruptcy

A number of indirect subsidiaries of First Capital Real Estate Trust, a publicly registered non-traded REIT, have filed for relief under chapter 11 in the United States Bankruptcy Court for the Eastern District of California. The subsidiaries include Township Nine Owner LLC, Capitol Station Holdings LLC, Capitol Station Member LLC, and Capitol Station 65 LLC.

The REIT’s operating partnership, First Capital Real Estate Operating Partnership LP, owns a stake in Township Nine Owner LLC, which through a series of subsidiaries, owns 23 parcels of land in Sacramento, California known as the Township 9 Properties.

The Township 9 Properties are secured by a loan that is currently in default, as previously reported by The DI Wire. According to the lender, the total amount owed was approximately $43.7 million as of May 5, 2017.

First Capital OP previously agreed to sell its interests in the properties to a subsidiary of Presidential Realty Corporation (OTC: PDNLA/PDNLB), a multifamily REIT, in exchange for $32.6 million of its operating partnership units valued at $1.00 each.

The issuance of the units is subject to a hold-back requirement until certain conditions are met, including an appraisal of the ownership interest and a work out of the mortgage debt secured by the underlying property.

First Capital REIT has not yet delivered an updated appraisal to Presidential, and the fair market value of the interest must appraise for at least $85.4 million. The default loan has not been refinanced or extended at this time, and First Capital said that they cannot offer any assurances that the Chapter 11 bankruptcy proceeding will impede the satisfaction of this condition.

For more First Capital news, visit their directory page here.

Cetera Names New Chief Marketing Officer 

Cetera Financial Group, a network of independent broker-dealers, has appointed Michael Zuna as the company’s chief marketing officer, effective immediately.

In his new role, Zuna’s will develop and implement the firm’s marketing strategy, brand development and digital and social media marketing, and will oversee other key communications initiatives. He is based in San Diego and will report directly to Cetera president Adam Antoniades.

Prior to joining Cetera, Zuna served as senior vice president, chief marketing and digital officer of Petco Animal Supplies, where he had oversight of all marketing, e-commerce and brand-building activities for the company.

Before joining Petco, he served as senior vice president and chief marketing officer of AFLAC Inc., where he was responsible for brand-building activities across marketing and advertising channels, marketing the ‘AFLAC duck,’ and creating AFLAC’s One Day Pay initiative.

Zuna has financial services, investment, insurance and banking experience with companies such as Ameriprise Financial, USAA and others, the company said.

“We interviewed a number of highly qualified candidates…and were immediately impressed by how instinctively Michael grasped our vision, together with his insights on how to leverage both digital and traditional marketing strategies to connect on a deeper level than ever before possible with business and consumer audiences,” said Antoniades. “Moreover, Michael’s expertise with marketing-driven support of AFLAC’s 70,000+ independent insurance agents and brokers make him well-suited to spearhead our plans to more seamlessly integrate marketing, digital lead generation and advisor recruiting.”

Cetera Financial Group is the second-largest independent financial advisor network in the nation by number of advisors, as well as a leading provider of retail services to the investment programs of banks and credit unions. The network is comprised of Cetera Advisors, Cetera Advisor Networks, Cetera Investment Services (marketed as Cetera Financial Institutions), Cetera Financial Specialists, First Allied Securities, Girard Securities, and Summit Brokerage Services.

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Sponsor’s First BDC Declared Effective

A California-based sponsor of real estate programs, Griffin Capital Corporation, has teamed up with Benefit Street Partners (BSP), a multi-strategy credit manager and affiliate of Providence Equity Partners L.L.C. , to offer Griffin-Benefit Street Partners BDC Corp (GB – BDC).

The Securities and Exchange Commission (SEC) recently declared GB-BDC’s registration statement for a $1.5 billion initial public offering effective.

Griffin Capital BDC Advisor will act as the investment advisor to GB-BDC while Benefit Street Partners L.L.C will serve as its sub-advisor.

“We believe that BSP’s industry knowledge and experience coupled with Griffin Capital’s industry leadership in asset management and capital raising create a powerful platform,” commented David Rupert, President of Griffin Capital and CEO of GB-BDC.

The BDC plans to invest in secured debt including senior secured, second lien, and unitranche which is a type of debt instrument that simplifies the debt structure by combining senior and subordinated debt. GB-BDC will also invest in senior unsecured and subordinated debt, plus equity and equity related securities issued by private U.S. middle market companies and public domestic companies with market caps under $250 million.

Be sure to read:

W.P. Carey Plans to Launch a Non-Traded BDC

New Non-Traded BDC Files Registration Statement with SEC

Blackstone REIT Continues Buying Spree with Latest Atlanta Purchase

Blackstone Real Estate Income Trust, Inc., a non-traded REIT sponsored by private equity giant The Blackstone Group (NYSE: BX), purchased the ground lease interest in Emory Point, a mixed-use property in Atlanta, Georgia from an unaffiliated third party for $199 million, according to a filing with the Securities and Exchange Commission.

Emory Point is comprised of a 750-unit Class A+ multifamily property and 124,000 square feet of outdoor retail space. The property, which is walking distance to Emory University and the Center for Disease Control, was originally developed on land owned by Emory University.

The residential portion of the property is known locally as Gables Emory Point and features studio, one-, two-, and three-bedroom apartments, as well as two fitness centers, three saline pools, four club lounges, a pet park, and electric car charging stations.

Retail tenants at the property include Earth Fare, CVS, Loft, Papi’s Cuban Grill, Emily J Aveda Salon, and Orangetheory Fitness.

The acquisition was funded through a combination of proceeds from the offering and a $130 million loan from The Prudential Insurance Company of America. The loan has a 7-year term and an annual interest rate of 3.66 percent.

Blackstone REIT has raised a staggering $755.6 million since it was declared effective by the SEC at the end of August 2016. Last month, The DI Wire reported that the company purchased two property portfolios for a combined $832 million.

Blackstone Real Estate Income Trust is a $4 billion offering that plans to invest in stabilized income-oriented commercial real estate in the United States. The company is headquartered in New York City and externally managed by BX REIT Advisors., a subsidiary of Blackstone. Blackstone currently manages various private investment funds and one publicly-traded REIT. The REIT’s portfolio is comprised of seven properties with a combined acquisition price of $1.2 billion.

Click here to visit The DI Wire directory page.