Nicholas Schorsch steps back from some nontraded REITs

Puts longtime investment partner William Kahane in charge of two of them

Dec 1, 2014 @ 12:02 pm

By Bruce Kelly

Nontraded real estate investment trust czar Nicholas Schorsch is taking a step back from his various top roles of the nontraded REITs he controls, handing the reins of two of them to his longtime investment partner, William Kahane.

In filings with the Securities and Exchange Commission last month, Mr. Schorsch resigned as chief executive from at least six companies he oversees, including three nontraded REITs sponsored by American Realty Capital.

Mr. Schorsch's nontraded REIT empire has been reeling for the past month.

(More: Schorsch's vast web of businesses)

Broker-dealers in late October began suspending sales of RCAP-distributed and Cole REITs after American Realty Capital Properties Inc., or ARCP, a giant net-lease REIT that Mr. Schorsch controls, disclosed a $23 million accounting error over the first half of the year that was intentionally left uncorrected.

Separating the role of chairman and CEO is regarded as a positive for corporate governance in REITs and the corporate world in general, according to Kevin Gannon, president and managing director at Robert A. Stanger & Co. Inc., an investment bank that focuses on nontraded REITs.

“It's a preferred practice to separate those titles and positions,” Mr. Gannon said. “It's not necessary but more executives are doing it.”

“I have no inside information, but the way I read it, additional corporate governance matters are kicking in,” he added. “The housekeeping seems appropriate.”

Mr. Schorsch presumably will remain chairman and CEO of ARC. He will also remain chairman of American Realty Capital Properties Inc., a related company, and executive chairman of another related company, RCS Capital Corp.

(More: SAC Capital's Steven Cohen increases stake in RCAP)

Mr. Kahane is replacing Mr. Schorsch as CEO of the ARC Daily NAV Trust and American Realty Capital-Retail Centers of America II Inc. Michael Happel has been appointed CEO of a third ARC REIT, New York City REIT Inc., by its board.

In addition to the REITs, Mr. Schorsch is relinquishing his CEO position at three finance companies to Peter Budko, another longtime business associate and a partner at ARC. They are: Business Development Corp. of America, Business Development Corp. of America II, and ARC Realty Finance Trust Inc.

In the SEC filings, the REITs state that Mr. Schorsch is ceding authority to Mr. Kahane in current and future products sponsored by ARC.

An SEC filing dated last Tuesday from American Realty Capital Daily Net Asset Value Trust, which has just $32 million in assets, stated: “Mr. Kahane's appointment as chief executive officer of the company reflects the greater responsibility he will be taking for the nontraded real estate investment trusts, business development companies and other programs currently in offerings that are directly or indirectly sponsored by [ARC], the parent of the company's sponsor.”

“Mr. Kahane will be charged with examining board composition of each of these programs to reduce overlap among independent directors from one board to the next, and assure that the independent directors are sufficient in number and suitable in skill sets to properly and effectively perform their responsibilities, especially with respect to the audit function and general oversight,” the filing stated. “Mr. Kahane will further see to it that each of the companies has a strong internal audit function to assure confidence in the financial controls and statements of all of the programs.”

In the wake of accounting problems at ARCP, the rest of Mr. Schorsch's empire has drawn scrutiny for its complexity. Michael Weil, CEO of RCS Capital, the broker-dealer holding company, last month also moved to simplify his position in the Schorsch empire and stepped down from numerous roles at ARC-branded REITs and related businesses.

(More: Some broker-dealers resume selling Schorsch-related REITs)

Andrew Backman, a spokesman for RCS Capital Corp., the parent company of the wholesaling operation for the ARC REITs, declined to comment.

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