Watch Out! Lightstone REIT is Trailing Smoke

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Watch Out! Lightstone REIT is Trailing Smoke

Post by REIT Wrecks » Sun Mar 21, 2010 3:18 pm

"We don't care what the analysts say," David Lichtenstein said in 2004, [url=http://www.allbusiness.com/operations/facilities-commercial-real-estate/4422684-1.html]"we'll buy anything."[/url] Unfortunately, for investors in his pet REIT, Lightstone Value Plus I, Lichtenstein wasn't kidding. (Update: [url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=47]Lightstone REIT Cuts Dividend; SEC Involved but Role Unclear[/url])


Among other adventures, Lichtenstein agreed to pony up $122 million of shareholder money to buy a New York City office building with no clear title, and $11 million to rescue Lichtenstein's personal investment in a failing bank.

The $11 million was plowed into a company called Park Avenue Funding in April 2008, just as the credit crisis was suffocating companies like Bear Stearns, Lehman Brothers, and AIG. As the name implies, one of Park Avenue Funding's business purposes was to make loans to Park Avenue Bank and its customers.

Park Avenue Bank was acquired by Lichtenstein and Charles Antonucci in 2004, and when Lichtenstein used Lightstone Value Plus I money to make his $11 million investment in Park Avenue Funding, the bank, Lightstone and Park Avenue Funding all shared office space. Unfortunately, Park Avenue Bank was also in the middle of being [url=http://www.banking.state.ny.us/ea090211.pdf]audited by the state banking examiner[/url] and teetering on the edge of insolvency. Indeed, less than 24 months later Park Avenue Bank was taken over by the FDIC and last week, in connection with the bank's failure, [url=http://reitwrecks.com/2010/03/fbi-uncovers-first-alleged-tarp-fraud.html]Antonucci was arrested and charged with criminal fraud[/url] for attempting to steal $11 million from the federal government's Troubled Asset Relief Program.

Sadly, these are the kinds of deals you do when you're paid 2.75% to spend other people's money, which is mostly what David Lichtenstein does for a living. Lightstone Value Plus I REIT is just one of a number of investment vehicles run by Lichtenstein, and through them, Lichtenstein has managed to manufacture an almost epic string of disasters.

None were more disastrous than Lichtenstein's $8 billion purchase of Extended Stay Hotels in 2007, using almost $7.4 million of debt. In fact, Lichtenstein layered the hotel chain [url=http://www.realestatechannel.com/us-markets/vacation-leisure-real-estate-1/extended-stay-inc-lightstone-group-llc-blackstone-group-lp-bear-stearns-david-lichtenstein-federal-reserve-wachovia-943.php]with so much debt that the company couldn't even pay its phone bill[/url]. Lenders moved to foreclose in 2009, and just two years after the acquisition, appraisers valued the company at less than half of what Lichtenstein had agreed to pay.

Obviously, things are not going so well for Lichenstein's Lightstone Group. On top of the $7.4 billion in delinquent debt on Extended Stay Hotels, Lightstone recently said it stopped making payments on another $563 million of mortgages, almost doubling the $253 million in payment defaults that Lightstone disclosed in the previous year.

Fortunately, there is a silver lining for Lightstone Value Plus REIT I shareholders, and that is Prime Outlets. Prime Outlets was an unquestionable success. In fact, it was such a success that Lichtenstein put it up for sale in order to bail himself out of the Extended Stay mess, and in Q4 Simon Properties (NYSE: SPG) entered into an agreement to buy Prime Outlets for $2.32 billion. Lightstone Value Plus I shareholders own about thirty percent of Prime Outlets, and at that price they'd be entitled to net proceeds of about $196 million in cash and approximately $50 million in SPG stock.

Unfortunately, Lichtenstein notified shareholders on January 15th that they may need to wait another 7-10 years before they see their share of the proceeds. Lightstone shut down its share repurchase program just 45 days later, and it looks like the Lightstone Value Plus I "independent" board of directors will force investors to suffer through another decade of having their money locked up in Lichtenstein's REIT.

This is because Lichtenstein needs the cash to bail out the rest of the Value Plus I portfolio. The portfolio's operating cash flow does not support a dividend (even with Prime Outlets), and Lightstone disclosed in its Q3 10Q that the value of its 5 property Camden portfolio was worth only $60 million, versus mortgage debt of approximately $86.7 million. Value Plus I is now in default on 2 of these loans, and lenders have commenced foreclosure proceedings on 2 of the 5 properties. County records indicate that Lightstone used 100% financing to complete the $33.8 million purchase of one of the properties, a 484 unit complex in Tampa. Lightstone's claim that the conditions which led to these third quarter impairments "did not exist" in the previous two quarters is laughable, and it begs the following question: what else are they hiding??

Certainly, Value Plus I shareholders can kiss their $11 million investment in Park Avenue Funding goodbye. And what about that $122 million New York City office building? At the time of its 2007 acquisition, the property represented over 300% of Lightstone Value Plus I's total net assets, yet Lichtenstein wasn't even able to get clear title.

Nevertheless, Lichtenstein heaped a 3 year, interest-only note on the property, totaling over 87% loan to value. This loan will be almost impossible to refinance for two reasons (update: the loan matured in January 2010, and Lightstone has excercised the first of (2) one year extension options, this will not end well): leverage like this is simply no longer available, and New York City office properties are simply no longer worth what they were in 2007. Massey Knackal, a broker specializing in New York City office properties, estimates that average sale prices for New York City office properties have declined by 65 percent since 2007, and Moody's estimates that prices for such property [url=http://reitwrecks.com/wp-content/uploads/2010/06/MoodysCPPI_0110.pdf]fell by 38.1 percent in 2009 alone[/url].

If this sounds familiar, it is. Lightstone Value Plus I REIT's exorbitant fee structure does nothing but encourage the acquisition of assets at almost any price, using as much leverage as can possibly be had. These fees not only dilute investor returns, they encourage managers to pursue highly leveraged, fee-driven transactions at the expense of building prudently managed, prudently levered portfolios. Obviously, all of this is in conflict with shareholders' best interests, and Lichtenstein plays that game as good as anyone.

Related Posts:

[url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=43]Lightstone REIT Implodes; Let's Go to the Audiotape![/url]

[url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=5]REISA Addresses Non-Traded REIT Ponzi Scheme Allegations[/url]

[url=http://www.reitwrecks.com/forum/viewtopic.php?f=2&t=3]Sale and Promotion of Non-Traded REITs - FINRA Investigates[/url]
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Re: Watch Out! Lightstone Value Plus I is Trailing Smoke

Post by REIT Wrecks » Wed Mar 24, 2010 2:41 pm

Update: Two Extended Stay creditors, Line Trust Corp. and Deuce Properties Ltd., have just filed suit in New York State Court, attempting to block Lightstone Group LLC and David Lichtenstein personally from transferring Prime Outlet sale proceeds.

Line Trust and Deuce Properties say they “have become increasingly concerned about the possible dissipation of Lichtenstein’s assets" and that they are "particularly concerned that, if left unaccounted for, these funds could quickly disappear.” The letter was added to the court's docket on March 22nd, one day after I posted the above.

There's even more trouble in toyland than I thought.

crabsofsteel
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Re: Watch Out! Lightstone Value Plus REIT is Trailing Smoke

Post by crabsofsteel » Sat Apr 03, 2010 10:33 am

One could be forgiven for thinking that after amassing a multi-billion dollar multifamily portfolio, then acquiring Prime Retail, Lightstone did indeed have the Midas touch. But having found almost-free financing in the form of CMBS (large-loan Verrone strikes again), it was only a matter of time before they blew up. Complicating the Extended Stay matter was a $100MM personal recourse to Lichtenstein, which he seems to have wangled his way out of via litigation squared.

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Re: Watch Out! Lightstone REIT is Trailing Smoke

Post by REIT Wrecks » Wed May 26, 2010 11:39 am

As expected the BOD voted to keep the Prime Outlets sales proceeds, but for a small distribution to cover investor taxes. So investors have now lost their best asset, they have no access to the cash, and they're left holding a portfolio full of junk that cannot support a dividend. Bon Chance!

moneybags
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Re: Watch Out! Lightstone REIT is Trailing Smoke

Post by moneybags » Sat Apr 09, 2011 3:06 pm

Can the engine re-boot?? I feel a nosedive coming on... not impressed by the hotel purchase...

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