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Inland Residential Properties Trust, Inc. (Residential Properties Trust) is a non-traded Real Estate Investment Trust (REIT) sponsored by affiliates of Oak Brook, Illinois-based The Inland Group. The Trust was founded in December 2013 and started selling common stock on February 18, 2015. Residential Properties Trust will invest in stabilized Class A and B multifamily properties in the top 100 metropolitan statistical areas in the United States.

Residential Properties Trust is a non-traded REIT, which is a company whose shares are not listed on an exchange. The shares therefore have limited or no liquidity.

Residential Properties Trust will be managed by external managers who charge fees or commissions when the Trust buys, holds or sells real estate. External managers for Residential Properties Trust are controlled by affiliates of the Inland Group and charge fees paid to Inland affiliates. In this respect, the Trust’s structure shares similarities with the initial setup of its sister vehicle, Inland American Real Estate Trust (now known as InvenTrust Properties Corporation). Inland American shareholders have been charged $1.4 Billion in related-party fees. A March 2015 Wall Street Journal article described Inland American as a “zombie REIT” noting its failure to unwind, the plunge in value of its holdings, and the drastic cut to shareholder distributions.

All of Residential Properties Trust’s executive officers staff or direct at least one of its external managers, and they also split their time acting as directors or staff of other Inland vehicles. In its SEC filings, the company disclosed that Residential Properties Trust’s officers will have conflicts of interest due to the competing demands for the time they spend between different funds, and that these might lead to them violating their fiduciary duties. The SEC filings further acknowledge that the Trust’s external managers will face conflicts of interest because of their compensation arrangements. Such actions could include purchasing assets that are not in shareholders’ best interests, or negotiating higher purchase prices for assets than they otherwise would if they were not compensated based on the purchase price, among other things.

Fund Management
Residential Properties Trust has no paid staff. It is managed by five executive officers who all staff or direct one or more of the Trust’s fee-based external advisors. The external advisors are owned by The Inland Group. Due to this setup, the fund has inherent conflicts of interest.

The external advisors are tasked with running the business of the Trust, including: selecting potential real estate investments, negotiating contracts, managing properties and advising the board of directors on asset acquisitions and sales, among other things. In return, they will earn fees through schedules laid out in agreements with Residential Properties Trust. The contracts were not negotiated at arm’s-length.

For example, Mitchell Sabshon is the CEO, President and a Director of Residential Property Trust. He is also the President and CEO of Residential Property Trust’s business manager and a director of the Trust’s dealer manager. The business manager receives acquisition fees, real estate sales commissions, and a host of other fees for its activities. The dealer manager receives commissions and fees on every share investors buy.

Residential Properties Trust’s structure is very similar to the initial structure of Inland American. At Inland American, related-party transactions have contributed to litigation and regulatory scrutiny. These include a finding of breach of fiduciary duty by Inland American’s Special Litigation Committee, a subpoena by the Illinois securities division, and problems regarding its securities renewal in California. Inland American withdrew its request for renewal of its California securities registration after regulators repeatedly raised concerns about conflicts of interest and other issues. Inland American stockholders have been charged over $1.4 Billion in fees by external managers.

Since 2012, Inland American has sold hundreds of assets, resulting in over $4.6 Billion in net proceeds. However, the Trust has so far declined to make any special distributions of those proceeds to shareholders. Instead, it is planning to use the proceeds to buy and develop more properties.

Fees
The external managers of Residential Properties Trust are compensated through a set of fees charged to investors on a variety of fund transactions. Because most of the fees are not performance-based, the managers will make money on the Trust’s investments no matter how well – or poorly – they perform. Several fees are structured in a way that could incentivize external managers to act counter to the interests of investors. For example, business management fees and mortgage financing fees reward managers, respectively, for holding onto highly valued (or even overvalued) assets for long periods of time and loading up on mortgage debt.

Another fee, called an acquisition fee, is tied only to the amount of money the Trust pays for real estate. Under this structure, managers do not benefit by trying to negotiate lower prices for acquisitions.

Acquisition fees have been controversial at a sister Inland product, Inland Real Estate Income Trust (Income Trust). Income Trust recently came under fire for its plans to purchase properties that were owned by a different Inland vehicle just months prior. The Wall Street Journal dubbed the transaction a “boomerang buy”. As the Journal reported, “Inland Real Estate Income Trust Inc. said it will pay $318 million for 15 shopping centers owned until earlier this year by one of its sister REITs.” Income Trust planned to charge shareholders a $5 million acquisition fee. The proposed acquisition fee was on top of the portfolio’s $318 million price tag and closing costs. Income Trust admitted that it did not obtain independent appraisals of the properties in the portfolio. On November 5, 2014, Income Trust announced that it agreed to permanently waive the acquisition fee.

Competition for Deals
Residential Properties Trust’s executive officers all staff or direct one or more other Inland investment vehicles that could compete with the new Trust for deals. They could also face a conflict of interest should one Inland vehicle attempt offload assets to another, like the “boomerang buy” that Income Trust engaged in, as mentioned above.

Mitchell Sabshon, for instance, is the CEO, President and a Director of Residential Properties Trust. He is also CEO and Director of Income Trust and a director of Inland Private Capital Corp. Both of these vehicles invest in multifamily products.

Apartment REIT Sector
Residential Properties Trust is targeting multifamily properties. In February 2015, a mutual fund manager was quoted in the Wall Street Journal as saying, “You’ve got more supply coming into the market than people were hoping, and we’ve had earnings reports that on the whole I’m not thrilled with.” The article noted slower growth and talk of oversupply in the apartment sector.