Another nontraded REIT sees value plummet

 If you do not understand where in the cycle you are investing this may be the result. Aivars Lode

Pacific Cornerstone property trust hammered; 'only option is to liquidate,' claims due-diligence expert

By Bruce Kelly

March 28, 2012 3:48 pm ET

REIT

Another nontraded real estate investment trust has taken a sudden and precipitous decline in value — this time plunging nearly 72%.

Investors in the Cornerstone Core Properties REIT Inc. were told this month by the company that the shares, once valued at $8, are now worth $2.25. “The estimated per-share value has been adversely affected by the recent global economic downturn, negatively impacting our small business tenant base, which has resulted in approximately $43 million of previously announced impairment charges recorded in the second and third quarters of 2011,” according to the letter, which was signed by Terry Roussel, the REIT's chairman and chief executive.

A sharp decline in tenant occupancy has hammered the REIT: Tenant occupancy of the REIT's retail properties was 69% at the end of last year, compared with 92% at the end of 2008.

“A couple of years ago, the sponsor had some regulatory issues and had to shut down capital raising,” said Anthony Chereso, CEO of FactRight LLC, a due-diligence firm that covers managers of alternative investments. “It had some properties with tenant issues, and the portfolio had issues with covering debt and distributions. It was not constructed well.”

Mr. Roussel did not return calls seeking comment.

FactRight last year recommended that broker-dealers pull the Cornerstone Core Properties REIT from their platforms, Mr. Chereso said.

The REIT's regulatory issues had to do with marketing at the sponsor level, Mr. Chereso said. The sponsor broker-dealer is Pacific Cornerstone Capital Inc. “Their only option is to liquidate,” he said. “There's not a whole lot that can be done to revive it.”

The Cornerstone REIT raised only $172.7 million between 2006 and 2009, making it a relatively small player in a marketplace in which the largest players have raised and deployed billions of dollars. Still, other nontraded REITs or real estate funds sold by REIT sponsors recently have seen dramatic declines in value, eating away at investors' portfolios and making life difficult for the brokers who sold the products.

At the end of December, investors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share Dec. 31, 2010.

And the Behringer Harvard Opportunity REIT I Inc. saw its estimated value decline to $4.12 a share at the end of last year, from $7.66 a year earlier.

The Cornerstone Core Properties REIT changed its chief financial officer at the end of last year, replacing Sharon Kaiser with Stephen Robie, according to filings with the Securities and Exchange Commission.

The REIT has been focused on paying down debt, selling three properties in the fourth quarter of 2011 with $24.8 million in sales value. The proceeds were used to pay down $13.5 million of debt and to build cash reserves, according to an SEC filing.