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“Another One Bites the Dust”

Cornerstone REIT investors had to brace themselves earlier this month, when they got a letter informing them that the share price of their investment had fallen from $8 to $2.25. That amounts to a 72% drop. And the sad reality is that in all likelihood, very few Cornerstone investors were prepared for that news. Most of them were, no doubt, caught completely off-guard.

The Cornerstone Core Properties REIT is a non-publically traded REIT. I’ve taken issue with non-traded REITs before, and for good reason:

Because shares are not listed on an exchange, non-publically traded REITs are an illiquid investment. And redemptions are very limited…and often very expensive (in some cases redemptions are priced 10% below purchase price). This means that once they buy, investors are basically locked in with no emergency exit. And front-end fees that eat into investor’s returns can be as high as 15%. The distributions – the big attraction – are not guaranteed…and may be suspended or terminated at the Board’s discretion (and distributions can be subsidized by borrowed funds and can include a return of the investor’s principal).

Those issues mean non-traded REITs are not appropriate for all investors. But those issues are not typically spelled out clearly by the brokers selling REITs. It’s not a stretch to say that the Cornerstone REIT was not appropriate for all of its investors. And it’s not a stretch to say that some Cornerstone investors didn’t know what they were getting themselves into until it was too late. And once you’ve lost 72% of your investment, it’s safe to say it’s a little too late.

Cornerstone Real Estate Funds maintains a Code of Business Conduct and Ethics. According to that code: “While we expect our employees to try hard to advance the interests of the company…no employee takes unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misinterpretation of facts, or any other unfair-dealing practice”. I don’t know what exactly Cornerstone considers “unfair” advantage or “unfair” dealing, but I do know that their code of ethics is full of gaping holes. But that goes not only for Cornerstone…it goes for every brokerage firm that sold the Cornerstone Core Properties REIT to unknowing investors.

In its letter to investors, the company said that the share price “has been adversely affected by the recent global economic downturn, negatively impacting our small business tenant base”. Those adverse affects amounted to occupancy falling from 92% in 2008 to 69% last year…and impairment charges of $43 million in the second half of 2011.

But reasons and explanations are poor consolation for investors who had to stand by and watch 72% of their money evaporate.


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