AR Capital Halts Creation Of New Nontraded REITs

AR Capital, the massive real estate investment trust sponsor established by Nicholas Schorsch, will cease creating and selling new alternative investment products.

“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 stop taking new investor funds for the programs by the end of this year, according to a company statement. These 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.

William Kahane, co-owner of AR Capital, noted the Department of Labor’s proposed fiduciary standard and new client account statement pricing standards for nontraded REITs and other alternative investments as reasons for AR Capital’s decision to withdraw from the market it used to control.

This decision comes mere days after the commonwealth of Massachusetts charged Realty Capital Securities (“RCS”) with fraudulently gathering proxy votes to support real estate deals sponsored by AR Capital. 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 started halting the sale of AR Capital REITs and other alternative investments. Last Friday, Cetera Financial Group, the retail brokerage network owned by RCS Capital Corporation, ceased sales of branded real estate investment trusts and other alternative investments.

AR Capital further announced that it mandated RCS to stop all proxy activities for all AR Capital sponsored companies following Massachusetts’ actions.

In 2014, 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.

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