AR Capital to stop creating new nontraded REITs, close existing programs to new investors

Executives cite DOL fiduciary rule, market uncertainty for major reversal

Nov 16, 2015 @ 6:44 am

By Bruce Kelly

Nicholas Schorsch, co-owner of AR Capital.
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Nicholas Schorsch, co-owner of AR Capital. (Bloomberg News)

In a major reversal, AR Capital, the powerhouse nontraded real estate investment trust sponsor built by Nicholas Schorsch, will stop creating and selling new alternative investment products.

Instead, AR Capital will focus on managing the roughly $19 billion in its current suite of investments.

“As a result of regulatory and market uncertainty affecting capital raising for both new and existing offerings in the direct investment industry,” AR Capital will halt taking new investor money for the programs by the end of this year, according to a company statement early Monday.

The programs include: Business Development Corporation of America II, ARC Healthcare Trust III, New York City REIT II, ARC Hospitality Trust and ARC Global Trust II.

In the statement, William Kahane, who co-owns AR Capital along with Mr, Schorsch, cited the Labor Department's proposed fiduciary standard and new client account statement pricing standards for nontraded REITs and other alternative investments as reasons for AR Capital's pullback from the market it formerly dominated.

The decision not to sell any more new nontraded REITs comes after a weekend during which Mr. Schorsch had a series of telephone meetings with the boards of several ARC-branded companies to discuss their futures, according to a source with knowledge of the discussions.

And the decision also comes just a few days after the state of Massachusetts charged Realty Capital Securities, or RCS, with fraudulently rounding up proxy votes to support real estate deals sponsored by AR Capital, which is owned by Mr. Schorsch and William Kahane. Mr. Schorsch is also a principal shareholder in RCAP.

In an administrative complaint, Massachusetts Secretary of the Commonwealth William Galvin said agents of RCS impersonated shareholders and cast fake votes for investment programs sponsored by AR Capital.

Broker-dealers had already begun to suspend the sale of AR Capital REITs and other alternative investments. On Friday, Cetera Financial Group, the retail brokerage network owned by RCS Capital Corp., halted sales of ARC- branded real estate investment trusts and other alternative investments.

AR Capital also announced on Monday that it directed Realty Capital Securities to discontinue all proxy activities for all AR Capital sponsored companies in light of the recent action taken by Massachusetts, according to the statement.

Andrew Backman, a spokesman for AR Capital and RCS, said the company had no comment beyond the statement.

Last year, another company formerly controlled by Mr. Schorsch, American Realty Capital Properties Inc., revealed a $23 million accounting misstatement from the first half of 2014 that was intentionally uncorrected. AR Capital REIT sales fell close to 50%.

“Until there is greater clarity, we have decided to sit this one out,” Mr. Kahane said in the statement.

The tide of bad news began to wash over Mr. Schorsch and AR Capital last Monday, when Apollo Global Management and AR Capital called off an earlier announced transaction in which Apollo would have bought a majority stake in the company for $378 million.

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