Lightstone REIT Shareholder Rights Under Fire

lightstone reit losses

The removal of several NASAA protections for shareholders has been sought by Lightstone Value Plus REIT I, Inc., Lightstone Value Plus REIT II, Inc., and Lightstone Value Plus REIT III, Inc. in a series of proxy proposals for shareholders drawn up by them.

Haselkorn & Thibaut currently represent REIT investors that lost substantial funds due to bad advice. If you own a Lightstone REIT, please contact us for a free consultation by calling 1-800-856-3352 

Key amendments sought

  1. Lightstone REITs entities are required to seek a listing on a national stock exchange within 8 years (10 in case of Lightstone II) after their public offering terminates. Failure to do so would initiate the process of seeking liquidation and dissolution. The removal of this deadline provision has been sought in order that there is greater flexibility in pursuing options for providing liquidity to stockholders, as noted by the boards of these REITs.
  2. An elimination has been sought of the fiduciary duties that:
    1. The boards have to the Lighthouse shareholders and REITs
    2. Directors have for supervision of the relationship with external advisors

The boards have justified this modification by stating that reducing their obligations “will improve our ability to retain and recruit board candidates.”

  1. Certain protections that kick-in in the event of roll-up transactions, such as appraisal rights being available to shareholders, and the option of either retaining the original security or receiving cash instead of another entity’s stock/security, are sought to be eliminated.

It must, however, be noted, that regardless of whether this gets the nod or not, approval of shareholders of the REIT attempting to merge into another entity, will still be needed

  1. The present quorum requirements stipulate a minimum of 50% of eligible votes to be cast. This is sought to be replaced by a provision that reduces the requirement to 33%, once a third independent director is added to the boards of the respective REITs.

Reasons for the amendments

The NASAA-mandated limitations that “impose an administrative burden on the [Lightstone REITs] and could put us at a competitive disadvantage relative to our competitors whose charters do not contain these restrictions” has been explained as the reason behind seeking these changes by the management teams of these REITs, particularly since raising capital through a public offering is not anticipated.

In an analysis of the Lightstone proxy requests, third-party due diligence provider FactRight, a third-party provider of due diligence services, analyzed the proposals and noted, “…that elimination of these charter provisions will generally reduce shareholder participation in the governance of the respective REITs, enhance the power of the respective boards of directors, and eliminate protections for shareholders, including provisions that seek to guide the Lightstone REITs toward liquidity events for shareholders, which are long overdue in our opinion.”

Footnote

Lightstone I was declared effective in early 2006, Lightstone II in 2009 and Lightstone III in 2014. Taken together, on the 30th of June, 2022, the Lightstone REITs had cumulative assets of about $900 million. The debt-to-assets ratio for individual REITs ranged between 41 and 49%.

An amendment to and restatement of the charter requires a majority of all votes that have an entitlement to vote. In the annual meeting of the three REITs, scheduled for the 8th of December, abstentions and non-votes effectively serve as votes against the proposal.

REIT High fees

Because non-traded REITs are not traded on exchanges, advisors are increasingly incorporating technology solutions to simplify their back office processes. These solutions include electronic signatures and straight-through processing, which allow advisors to save time and money by creating efficiencies in an otherwise error-prone process.

High fees for non-traded REITs are not necessarily indicative of poor investment performance. Inexperienced investors may be wary of investing in these REITs because of their lack of transparency. It is important to ask questions about upfront and back-end costs. Always make sure that the management team is experienced and committed, and ask if there are conflicts of interest. Also, ensure that you pay a fair commission to your advisor if you’re selling a non-traded REIT. It’s also important to consider the potential benefits and risks of the investment.

Non-traded REITs typically charge high upfront fees to cover selling commissions and other fund formation costs. Historically, these fees accounted for as much as 15 percent of the gross investment amount. This meant that only 85% to 90% of the investor’s initial commitment went to work. As a result, REITs were still valued at par before the fees. This was known as Net Investment Amount or NINA.

Lack of liquidity

Although non-traded REITs share many features with public real estate limited partnerships, they don’t trade like their traded counterparts. These REITs are not registered with the SEC and, therefore, do not require the same disclosure requirements. Investors should ensure they are reading the required disclosures before investing in non-traded REITs.

Non-traded REITs often charge high upfront fees. They can be as much as 15% of the offering price, reducing the investment return. Also, these REITs often solicit new investments before purchasing real estate. This makes it difficult for investors to determine the risks associated with non-traded REITs and make informed investment decisions. In addition, REITs that don’t trade on the market are not regulated by the SEC or FINRA.

Despite the high yields, non-traded REITs are not suitable for all investors. While they may be a better choice for those who are not worried about lack of liquidity, investors should carefully review the prospectus to determine if they are comfortable with the management team and fees associated with such investments.

Tax-favored distributions on REITs

Tax-favored distributions for non-traded REITs are distributed to shareholders in tax-exempt form. This type of distribution’s taxation differs from that of a pass-through entity, such as an individual. A pass-through entity will generate a K-1, which is typically much more complicated. While this deduction may be attractive to investors, it is not the primary reason to invest in REITs.

Non-traded REITs typically own income-producing real estate and related assets. These REITs do not develop properties for resale but instead purchase property to operate as a diversified investment portfolio. They may own office buildings, hotels, storage units, warehouses, and commercial properties.

Debt Load on Non Traded REITs

Non traded REITs have lower leverage than listed REITs but still carry a high amount of debt. The leverage ratio, which measures the amount of debt to total assets, has declined 18% since the end of 2007 and has fallen 37% from its peak during the Great Recession. During this property cycle, listed REITs have relied more on equity and joint venture capital than debt to fund acquisitions and development.

Public REITs typically have corporate credit ratings of BBB or Baa3, which means they can use unsecured investment-grade borrowings with a lower rate of default. However, private REITs tend to have higher leverage and rely more on secured borrowings. The higher leverage of non-traded REITs carries a greater risk of default and depreciation, which reduces the value of shares when liquidated.

Lack of Transparency

There is a lack of transparency in the non traded reit world. Investors and financial advisors rarely communicate with REITs. Instead, they receive monthly statements. These statements are rarely transparent and can lead to unhappy investors. In order to mitigate the risk of such problems, investment managers should disclose their ongoing monitoring efforts.

Investors should be aware of the risks of non-traded REITs. Some REITs focus on one market segment, business sector, or geographic area, which can create concentration risks. Because of this, investors should understand the risks associated with the REIT’s concentration. In addition, REITs should disclose the non-traded securities that make up a large percentage of their portfolio.

One important factor to consider when considering a REIT is the upfront fees. These fees can reduce the returns on your investment. The initial $15 billion might have risen to $25 billion if you had invested the money over a period of years. Because these REITs are not listed on exchanges, they are not transparent and can lead to conflicts of interest.

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