fbpx

Wolper Law Firm, P.A. is Pursuing Recovery Options for Investors with Losses in the Delaware Statutory Trusts (“DST”) Sold Through Kay Properties, Kingsbarn Realty Capital and FNEX Capital

The Wolper Law Firm represents investors around the country who have lost money in complex investment strategies and products, including Delaware Statutory Trusts, or “DSTs” recommended by Kay Properties, Kingsbarn Realty Capital, Marcus and Millichap and FNEX Capital.

The Wolper Law Firm has extensive experience litigating DST cases throughout the country, including DST transactions involving failed due diligence. If you have experienced investment losses due to the DSTs sold through Kay Properties, Kingsbarn Realty Capital, Marcus and Millichap and FNEX Capital, please contact the Wolper Law Firm, P.A. for a free consultation. We can be reached at (800) 931-8452 or by email at mwolper@wolperlawfirm.com.

What is a Delaware Statutory Trust (DST)?

A DST is a legally recognized trust that is created for a specific business purpose. Traditionally, DSTs are utilized to provide a governing agreement by which real estate can be purchased, held, managed and administered among a pool of investors who own participation interests in the DST. The DST allows an investor the opportunity to own an interest in the underlying real estate without the responsibility of managing the property. A trustee is appointed to manage the property on behalf of the investor pool. A Tenant-in-Common or TIC investment offering is similar to a DST in that both investment vehicles pool investor capital toward the purchase of underlying real estate but the legal ownership structure is different. DST and TIC investments are commonly used as a mechanism through which real estate owners can facilitate a 1031 exchange, which refers to a section of the Internal Revenue Code that allows a seller of real estate to defer paying capital gains taxes if the sale proceeds are reinvested in qualified real estate within a designated period of time.

DSTs and other private placements have increased in popularity over the years as investment professionals attempt to capitalize on volatility experienced among publicly trades securities. Private placements, such as DSTs, are often marketed and sold as safe and tax-efficient income producing vehicles that are not subject to the same market forces as publicly traded securities. While there is some level of truth to that statement, the reality is that private placements are speculative and do not have the same reporting requirements as publicly traded securities. This means that DSTs can often mask financial difficulties until it is too late. Moreover, because DSTs are illiquid, investors are often unable to sell their interests to third-parties before experiencing an investment loss.

Kay Properties and Kingsbarn are real estate investment firms that specialize in facilitating DST transactions. Many of the Kay Properties representatives hold their securities registration through a FINRA member brokerage firm, FNEX Capital. FNEX Capital is a brokerage firm that specializes in alternative investments, including DSTs. Because DSTs are privately held investment vehicles, the disclosure requirements to retail securities investors are not the same as publicly traded securities. In order to bridge this gap, investors rely on firms like Kay Properties, Kingsbarn and FNEX Capital to conduct due diligence prior to recommending DST investments.

FINRA Regulatory Notice 10-22 provides specific requirements that brokerages and financial professionals must undertake when conducting due diligence on privately held securities, including DSTs, before recommending them to investors. Moreover, the FINRA suitability rule requires that brokerages and financial professionals make both reasonable basis and customer specific suitability determinations prior to recommending securities to customers. These due diligence obligations are absolute but are often overlooked by brokerage firms because they don’t have the resources or infrastructure to effectively conduct due diligence. It is often passed along to third-parties, who fail to meet the exacting standards of FINRA Regulatory Notice 10-22.

Problems with DST Investments

Recent examples of DSTs that have experienced significant problems due to failed due diligence include Kingsbarn Green Valley North DST and REVA San Antonio HQ DST.

According to SEC Filings, the Kingsbarn Green Valley North DST sought to raise $35 million from investors in order to fund the acquisition and management of various commercial properties in Nevada. The Kingsbarn Green Valley North DST was represented to have passed an extensive due diligence process and would serve as a safe, tax-efficient investment vehicle that would produce income.

Investors have recently been advised that the lender exercised a cash sweep option, which occurs when the lender uses the cash flow generated from the DST to cover and/or reduce the costs associated with a loan. This most commonly occurs when a tenant’s credit drops, occupancy of the property declines or other risk factors come to fruition that compromise the lender’s security in the underlying property. In the case of Kingsbarn Green Valley North DST, as part of the cash sweep, distributions to investors have been discontinued and it is unlikely that those distributions will resume any time soon. This has had a devastating impact on investors. As is often the case with DSTs, individual investors do not have control of individual decisions made by the DST structure and, accordingly, rely on their financial professionals to recommend DSTs with seasoned, professional managers and creditworthy tenants, that have undergone an extensive due diligence process.

Similarly, REVA San Antonio HQ DST, which was sold through Kay Properties and FNEX Capital, advertised to have “long-term net leased portfolio in an income tax free state.” Investors in the REVA San Antonio HQ DST were recently notified that the building underlying the DST had significant foundation issues, which required an immediate draw on reserves, plus additional borrowing, to repair the problem. From all indications, these foundational problems existed prior to the DST closing and should have been part of the due diligence process conducted by Kay Properties and FNEX Capital. The problems with the building have led to vacancies, revenue decline and, in turn, a reduction in investor distributions.

The Kingsbarn Green Valley North DST sold through Kingsbarn Realty Capital and Marcus and Millichap, and REVA San Antonio HQ DST, sold through Kay Properties and FNEX Capital, are just some of the many examples of failed due diligence of DST investments. This has become a more pervasive problem in the industry as 1031 exchange transactions have become more popular among real estate and financial services firms.

In addition, many real estate professionals do not hold securities licenses yet they are selling DSTs, which are securities. While some states exempt real estate professionals from the requirement of registration, those exemptions are limited. For example, California has an exemption for the sale of intrastate DSTs to California residents. That exemption does not necessarily apply to California real estate professionals selling DSTs to investors outside of California or for properties outside of California. Selling securities without proper registration violates both Federal and state securities statutes and may entitle investors to rescind any transaction facilitated by the unregistered person.

The Wolper Law Firm, P.A. Offers Free Consultations to Discuss Losses in DST Investments

The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled more than 1,000 securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at (800) 931-8452 or by email at mwolper@wolperlawfirm.com.

 

Attorney Matthew Wolper

Attorney Matthew WolperMatt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]