Schorsch Real Estate Empire Under Scrutiny
For the past few decades, billionaire Nicholas Schorsch has been a very busy man. But many on Wall Street and some among the broker-dealers that offer Schorsch’s securities to retail investors are questioning whether the real estate mogul may have gotten too busy to preserve the integrity and good reputation of his empire. The breakneck pace with which Schorsch companies gobble up real estate and offer alternative investments has a lot of people worried and has prompted investigation. At the same time, the possibility of accounting irregularities have triggered an SEC inquiry into Schorsch’s flagship company, American Realty Capital Properties, because of what may be overstated earnings statements and an alleged cover-up by the company’s management. The general impression in the financial world - that Schorsch may be overextended and/or losing control of his empire - may also be a cause of the steady erosion of the valuation of his companies and funds.
Now, you may be asking yourself why a retail investor should be concerned with all this talk about a fairly obscure real estate mogul… Well, because many ordinary investors are invested in Schorsch’s private or publicly-traded REITs, whether they’re aware of it or not.
The Rise of the American Realty Capital Empire
Born and raised in Philadelphia, Schorsch has grown a commercial real estate empire with assets now worth an estimated $20 billion. Having first amassed a fortune leasing commercial real estate properties to banks, companies owned and/or managed by Schorsch, he subsequently expanded into the space of alternative-investments, including private and publicly-traded REITs (or Real Estate Investment Trusts).
Schorsch now controls more than 20 different companies involved in real estate and alternative-investments, many of which share management personnel and, allegedly, fees as well for interrelated transactions.
American Realty Capital Enters the REIT Space
Schorsch’s first nontraded REIT, American Realty Capital Trust, was launched in 2007. Non-traded REITs like AR Capital Trust are different from traditional securities in that they are not bought or sold on stock exchanges, but rather are traded by retail investors privately, through a network of broker-dealers and financial advisors. Using the money raised through these private offerings, REITs like American Realty Capital Trust buy real estate properties; when successful, these REITs can offer an unusually high rate of return. The tradeoff however is that oftentimes these REITs are more risky - and more illiquid - than other traditional investments such as real estate mutual funds. Part of Schorsch’s success in the nontraded REIT space involved his ability to cash out his investors more quickly than other private REITs. Instead of holding investors’ money for five or ten years, Schorsch REITs would often return the money in two or three years. Again, Schorsch is all about pace.
But recent investigations allege that one of the reasons Schorsch may have been able to constitute and liquidate his REITs so quickly was that he was selling the properties controlled by the REITs to his own companies. In turn, his companies enjoyed rather huge fees for these transactions.
As this alleged dubious deal-making model came to light, and as the SEC announced its probe into Schorsch’s company, several of the nation’s largest brokerages abruptly announced they would stop selling Schorsch-backed securities. These broker-dealers include LPL Financial Holdings, Inc. AIG Advisor Group, and National Planning Holdings, Inc.
It remains unclear if the problems besetting the Schorsch empire are the result of too much growth - or some form of misconduct. But the financial world is waiting anxiously to find out. And of course so are thousands of retail investors whose life-savings are tied up in REITS.
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