Losses in CNL Lifestyle Properties?

November 15, 2012

Salas Wang LLC is announcing its investigation into CNL Lifestyle Properties, a “lifestyle” real estate investment trust headquartered in Orlando, Florida.    Investors in CNL  may have lost over 50% of their principal in the investment.  We believe there are claims against the company and that stockbrokers have been selling this investment to individuals without adequately disclosing the grave risks:
  •   Cash Flow Risks: “We may have difficulty funding distributions solely from cash flow from operations, which could reduce the funds we have available for investments and your overall return.”  Annual Report, p. 22.
  •   Inconsistent Stock Pricing:  “The price of our shares is subjective and may not bear any relationship to what a stockholder could receive if their shares were resold.” Id. p. 23.
  •   Stock Pricing Based on a Non-Market Price:  The REIT “determined the offering price of our shares in our sole discretion based on: [(1)] the price that we believed investors would pay for our shares; [(2)] estimated fees to be paid to third parties and to our Advisor and its affiliates; and [(3)] the expenses of this offering and funds we believed should be available for us to invest in properties, loans and other permitted investments.”  Id.
  •   No Public Market for Shares:  “There is no public market for our shares on which to base market value and there can be no assurance that one will develop.” Id.
  •   Unfavorable Market Conditions:  “Our loans may be affected by unfavorable real estate market conditions. When we make loans, we are at risk of default on those loans caused by many conditions beyond our control, including local and other economic conditions affecting real estate values and interest rate levels. We do not know whether the values of the properties collateralizing mortgage loans will remain at the levels existing on the dates of origination of the loans. If the values of the underlying properties drop or in some instances fail to rise, our risk will increase and the value of our interests may decrease.”  Id., p. 18
  •    Acquisition of Distressed Properties:  When we acquire property by foreclosure following defaults under our mortgage, bridge or mezzanine loans, we have the economic and liability risks as the owner of such property. This additional liability could adversely impact our returns on mortgage investments.”  Id., p. 18.
  •    Lack of Protection from Default:  Further, if there are defaults under our loans, we may not be able to repossess and sell the underlying properties or other security quickly. The resulting time delay could reduce the value of our investment in the defaulted loans. An action to foreclose on a mortgaged property securing a loan is regulated by state statutes and rules and is subject to many of the delays and expenses of other lawsuits if the defendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among other things, may impede our ability to foreclose on or sell the mortgaged property or to obtain proceeds sufficient to repay all amounts due on our loan. Any failure or delay by a borrower in making scheduled payments to us may adversely affect our ability to make distributions to stockholders.  Id., p. 18.
  •   Subordinated and Unsecured Loans: “We may make loans on a subordinated and unsecured basis and may not be able to collect outstanding principal and interest. Although our loans to third parties are usually collateralized by properties pledged by such borrowers, we have made loans that are unsecured and/or subordinated in right of payment to such third parties’ existing and future indebtedness. In the event of a foreclosure, bankruptcy, liquidation, winding up, reorganization or other similar proceeding relating to such third party, and in certain other events, such third party’s assets may only be available to pay obligations on our unsecured loans after the third party’s other indebtedness has been paid. As a result, there may not be sufficient assets remaining to pay the principal or interest on the unsecured loans we may make.”  Id., p. 18-19.
  •   Lack of Company Oversight:  “We will not control the management of our properties. In order to maintain our status as a REIT for federal income tax purposes, we may not operate certain types of properties we acquire or participate in the decisions affecting their daily operations. Our success, therefore, will depend on our ability to select qualified and creditworthy tenants and managers who can effectively manage and operate the properties. Our tenants will be responsible for maintenance and other day-to-day management of the properties and, because our revenues will largely be derived from rents, our financial condition will be dependent on the ability of third-party tenants and/or operators to operate the properties successfully. We will attempt to enter into leasing agreements with tenants having substantial prior experience in the operation of the type of property being rented, however, there can be no assurance that we will be able to make such arrangements. Additionally, if we elect to treat property we acquire as a result of a borrower’s default on a loan or a tenant’s default on a lease as ‘foreclosure property’ for federal income tax purposes, we will be required to operate that property through an independent contractor over whom we will not have control. If our tenants or third-party operators are unable to operate the properties successfully or if we select unqualified managers, then such tenants and operators might not be able to pay our rent, or generate sufficient property-level operating income for us, which could adversely affect our financial condition.”  Id. p. 15

 

  •    Conflicts of Interest:  “Joint venture partners may have different interests than we have, which may negatively impact our control over our ventures. Investments in joint ventures involve the risk that our co-venturer may have economic or business interests or goals which, at a particular time, are inconsistent with our interests or goals, that the co-venturer may be in a position to take action contrary to our instructions, requests, policies or objectives, or that the co-venturer may experience financial difficulties and be unable to fund its share of required capital contributions. Among other things, actions by a co-venturer might subject assets owned by the joint venture to liabilities in excess of those contemplated by the terms of the joint venture agreement or to other adverse consequences. This risk is also present when we make investments in securities of other entities. If we do not have full control over a joint venture, the value of our investment will be affected to some extent by a third party that may have different goals and capabilities than ours. As a result, joint ownership of investments and investments in other entities may adversely affect our returns on investments and, therefore, cash available for distributions to our stockholders may be reduced.”  Id. pp. 14-15.

If you are a CNL investor, please contact Jeffrey Salas at 312.803.4963 or fill out the contact form below.

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