Conflict of Interest - Nobody Does it Better

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losemoneynow
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Conflict of Interest - Nobody Does it Better

Post by losemoneynow » Fri Jun 11, 2010 9:29 am

Well, well. Seems like the best exit strategy for real estate companies that own too much property acquired at peak prices is to start a non-traded REIT and pawn the risk and future losses off to unsuspecting senior citizens. Yes, those are the same senior citizens that blindly entrust their 401k savings to the financial advisors that hawk non-traded REITs. Griffin Capital, one of the newer entrants into the non-traded REIT space, has wasted no time living up to the reputation these fine firms have as being expert money managers working their butts off to deliver exceptional returns to its shareholders. To call this a conflict of interest run amok is too kind. Attached is the link to the article.

http://www.chicagorealestatedaily.com/cgi-bin/news.pl?id=38541

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Re: Conflict of Interest - Nobody Does it Better

Post by REIT Wrecks » Sun Jun 13, 2010 7:12 pm

Nice!

How about a picture? In this case, it's the Moody's/Real Property Price Index doing the talking:

Defying The Law of Gravity.jpg
Defying The Law of Gravity.jpg (81.61 KiB) Viewed 18286 times
With a new, longer term lease in place, I'm willing to believe this is at least possible. But let's face it, if there's any investment product able to defy the laws of gravity, it's non-traded REITs. Either way, at the end of the day, the cash flow on these properties isn't even coming close to covering the GC Net Lease REIT dividend.

kevinshields
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Re: Conflict of Interest - Nobody Does it Better

Post by kevinshields » Sun Jun 13, 2010 10:37 pm

Please allow me to respond to your comments and the responses thereto. The article you referenced in your note regarding a 'Conflict of Interest' was based upon inaccurate information. I informed the reporter of the inaccuracies and am hoping he will revise his article accordingly. In short, the article indicated our REIT purchased the World Kitchen property (a 700,200sf warehouse/distribution facility located in the Chicago metropolitan market) for $26.3 million and that, based upon a net operating income of $1.3 million, the initial capitalization rate of 5% - outrageous! Were that the case, I could not have agreed more. In fact, the net operating income is $2.311 million, resulting in an initial capitalization rate of 8.79%.

The REIT acquired the property from a group of four investors of which I am one (I owned a minority non-controlling interest in the property). Each of us contributed our equity in the property to the REIT operating partnership pursuant to an I.R.C. Section 721 exchange. The $26.3 million sale price included an obligation to the sellers to fund an approximately $778,000 capital expense allowance to World Kitchen. As such, the investors 'netted' $25.527 million, or total appreciation of 6.36% over the five year holding period. The investors did, however, receive an approximate 8% cash on cash return during the same period. In exchange for this residual return, the sellers negotiated a five year lease extension with World Kitchen (so that now 10 years are remaining in the base term) and an opportunity to expand the facility an additional 191,000 square feet to accommodate World Kitchen's future growth. Should the expansion occur, the lease will extend upon completion thereof such that another 10 years shall remain and the rent will increase by a factor equal to 10% of the cost of construction.

In short, this is an outstanding acquisition for the REIT. The REIT acquired a great buildng in a great Chicago submarket with a strong, long-term tenant. Both the acquisition and the potential expansion are very accretive to the REIT. The cash on cash return to the REIT relative to the equity related to the acquistion is over 11%. In fact, with just three assets in the REIT's portfolio, representing over $80 million in asset value, the REIT, on a pro-forma basis with contract rent in place, covers its dividend with MFFO. The REIT went effective in November 2009. I think it a rarity indeed that a REIT at this stage in its lifecycle can cover its dividend with MFFO, but ours is and we remain committed to doing so.

It is troubling to me that just when we should be taking a victory lap, we are having to defend our actions resulting from a published article based upon inaccurate facts. It is incumbent upon reporters, particularly in this sensitive day, to take the extra time necessary to confirm the facts of a story before such story is released. Unfortunately, that was not the case in this instance.

Thank you for the opportunity to respond to your comments. Your publication had earlier provided The GC Net Lease REIT, Inc. with some favorable press relating to our ability and intent to cover our dividend with MFFO. I am pleased to say your earlier assessment was correct.

Kevin A. Shields
President
Griffin Capital Corporation
The GC Net Lease REIT, Inc.

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Re: Conflict of Interest - Nobody Does it Better

Post by REIT Wrecks » Mon Jun 14, 2010 12:51 pm

Kevin, thanks for your candid, constructive reply. Your comments certainly bring some balance to the majority of the views expressed here.

Using GC Net Lease Inc as an example of the extensive conflicts of interest that exist in this space is a little unfair and somewhat ironic, given that the alignment of interests between Griffin Capital and GC Net Lease REIT investors is actually much stronger than most other non-traded REITs in the market. The confusion here simply highlights the rather critical need for greater transparency, more investor education and increased responsibility. (Jason Mattox to Bloomberg: "We do not have knowledge as to an individual investor’s communication with his financial adviser." Good grief!)

Here's the deal, as I understand it, with GC Net Lease REIT: This was not a sale, but a contribution of equity. This means that unlike 99.99% of the rest of the market, Kevin Shields and members of management actually have real money in the REIT. The National Association of Securities Administrators requires a minimum of $200,000 to capitalize a non-traded REIT. Over and over, time after time, this is all that sponsors are willing to contribute, [url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=31]and it's no surprise[/url]. It seems to me that most sponsors think of their $200,000 as a recoverable expense, not an investment.

At the margins, reasonable people can and will disagree with the valuations in this transaction, but the bottom line is that members of GC Net Lease REIT management have contributed much more equity to the REIT than is usual, customary, or required. This means they have a much stronger incentive to create a positive outcome for their investors (e.g., producing real dividends that are actually covered by FFO). Unfortunately, the equity came in the form of a relatively opaque contribution of property, not cash, but it is a step forward. Time will tell, but management here may actually be sitting alongside investors, not across the table from them as is so often the case.

kevinshields
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Re: Conflict of Interest - Nobody Does it Better

Post by kevinshields » Mon Jun 14, 2010 2:27 pm

Chris: Thank you for your note back. I take full responsibility for the conclusions erroneously drawn in the Crain's article you originally referenced. The author's assertions were based upon inaccurate facts that I believe stemmed from ambiguities in our Supplement No. 5. We have since clarified the facts of the transaction and recently filed our Supplement No. 6 accordingly. If you or your investors are interested in reading about the details of our World Kitchen transaction, you can pick up our Supplement at the following: http//sec.gov/Archives/Edgar/Data/1456016/000119312510138860/d424b3.htm. In short, this acquisition represents a great deal for the REIT and is substantially accretive thereto. We directed the author of the Crain's article to the Supplement No. 6 and I am hopeful he will issue a revised and accurate article accordingly.

To your other point, I agree that the NASSA minimum equity requirement of $200,000 is nothing more that a chip shot when the average public, non-traded equity REIT offering is $1 billion or so. That is not a sufficient economic commitment to maintain an alignment of interest with the investors in the REIT. Personally, I have over $20 million of equity invested in our own product and, as such, I have over 20 million reasons to be a watchful shepherd of our investors' capital. Were I a broker-dealer in the market today attempting to ferret out the various investment options, I would require a sponsor to have first made a meaningful commitment to its own offering.

Finally, I do not think the contributions made pursuant to an I.R.C. Section 721 exchange are in fact opaque. There is a wealth of information in our Prospectus and each of our Supplements that address the terms and conditions of our contributions in extensive detail. Whereas reasonable minds may differ on valuation, the World Kitchen property was contributed at the appraised value, which appraisal was provided by Cushman & Wakefield and which appraisal was commissioned by our lender pursuant to its debt underwriting - this is the lender's appraisal, not ours. Further, the acquisition capitalization rate of 8.79% is very reasonable given current market conditions, particularly when we are referring to a state of the art distribution facility in the largest industrial market in the world and leased on a long term basis to an outstanding tenant.

Thanks again for the opportunity to address this acquisition and its related aspects in his forum. If there are any further questions with respect to the World Kitchen transaction, please feel free to call up our filings with the SEC. If anyone has further questions, please feel free to call me directly.

Kevin A. Shields
President
Griffin Capital Corporation
The GC Net Lease REIT, Inc.

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