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Legendary Capital Founder and REIT Advisors Ordered to Pay Nearly $5 Million for Inappropriate Expense Reimbursements

Legendary Capital Founder and REIT Advisors Ordered to Pay Nearly $5 Million for Inappropriate Expense Reimbursements. Alternative investments, real estate investment trust, regulatory, REIT, Corey Maple, Legendary Capital, Lodging Opportunity Real Estate Investment Trust, Legacy Hospitality II, Legendary Capital REIT III

Corey Maple, the co-founder of non-traded REIT sponsor Legendary Capital, agreed to pay the Securities and Exchange Commission a civil penalty of $100,000 to settle charges over inappropriate expense reimbursements paid to the external advisors of Lodging Opportunity Real Estate Investment Trust and Lodging Fund REIT III Inc.

The improper expense reimbursements paid to the advisors, Legacy Hospitality II LLC and Legendary Capital REIT III LLC, totaled approximately $5 million. Both advisors are co-owned by Maple. The advisors were ordered to pay the SEC approximately $4.8 million in disgorgement, interest and civil penalties.

The REITs in question had no employees and were externally managed by the advisors, Legacy Hospitality II LLC and Legendary Capital REIT III LLC, respectively. The advisors, in turn, hired employees to conduct their business and the business of the REITs, and incurred overhead expenses such as payroll and office rent in connection with the services provided to the REITs.

Lodging Opportunity Fund REIT began soliciting investments in 2014 and Lodging Fund REIT III  began soliciting investments in 2018. The REITs provided private offering memoranda to prospective investors, which included disclosures about the fees and expenses that would be charged in connection with the purchase and ownership of hotel properties. Both OMs essentially stated that the advisors would bear the cost of overhead resulting from maintaining offices and employees.

Despite this, beginning in 2014, Legacy Hospitality II, the advisor to Lodging Opportunity Fund REIT, directed that the REIT reimburse it for its overhead expenses. In addition, for a period of several months in 2018, Legendary Capital REIT III, the advisor to Lodging Fund REIT III, did the same.

The SEC says the reimbursement of overhead expenses by the REITs was inconsistent with disclosures made to investors, which provided that Legacy Hospitality II and Legendary Capital REIT III would be responsible for such expenses. During the relevant period, the expenses, which consisted primarily of payroll and office rent, totaled approximately $5 million.

In the Spring of 2018, Maple was informed by internal employees of Legendary Capital of their concerns regarding the inappropriate reimbursements. These same concerns were voiced to him again when Lodging Fund REIT III began soliciting investors that summer. Maple directed the chief operating officer of Legendary Capital to seek legal guidance over the issue in October 2018 after being confronted with the concerns of the employees for the third time.

In late 2018, Lodging Fund REIT III issued amendments to its OM and its advisory agreement with Legendary Capital REIT III that allowed for the expense reimbursements. The supplement issued to investors highlighted an “Advisor Fee Reduction,” but neither the supplement nor the cover letter to investors that accompanied it disclosed that the amendments had the effect of materially increasing expenses to the REIT.

In June 2019, Legendary Capital REIT III disseminated to the investors of Lodging Fund REIT III a 2018 shareholder report that included a cover letter from Maple which stated that amending the advisory agreement reduced the advisor’s compensation by $24,000 because “it was the right thing to do To Take Care of the Capital [sic].” Yet, neither the letter from Maple nor the shareholder report explained that the amendments shifted expenses from the advisor to the REIT. According to the SEC, Maple was aware of the material increase in expenses that had been shifted to the REIT and its shareholders.

In early 2020, a third-party due diligence firm hired by Legendary Capital raised concerns regarding the overhead expense reimbursement policies applied to Lodging Opportunity REIT. Certain Legendary Capital employees again voiced their concerns as well. Later that year, on June 24, 2020, Maple received an email from his COO that informed him that the advisory agreement states that the advisor to Lodging Opportunity REIT would pay the overhead expenses that had been charged to the REIT since 2014. Later that month, the board of Lodging Opportunity REIT created a special committee to review the matter.

In March 2021, the special committee determined that Lodging Opportunity REIT had been inappropriately billed approximately $2.1 million for expense reimbursement by its advisor and was shortly thereafter reimbursed that amount. The SEC found that an additional $2.3 million was owed to the REIT.

Under the terms of the settlement with the SEC, Maple and the advisors agreed to the fines, disgorgement and interest payment outlined above totaling approximately $4.8 million.

Additionally, the fund advisors have undertaken to retain a qualified independent consultant acceptable to the SEC, at their expense, within 60 days of the date of entry of the order to review their policies, procedures and controls regarding the proper allocation of expenses between the advisors and the REITs.

They also will require the consultant to submit a report to the advisors and the SEC staff within 120 days of the entry of the order with its findings and any recommendations for changes or improvements, and adopt, implement and maintain all policies, procedures and practices recommended by the consultant’s report within 120 days of receiving the report from the consultant.

Maple and the advisors were also ordered by the SEC to cease and desist from “committing or causing any violations and any future violations of Sections 17(a)(2) and (3) of the Securities Act.”

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