After avoiding the pitfalls of disastrous Regulation D deals during the past decade, Commonwealth Financial Network and LPL Financial LLC are contending with potential fallout from a real estate private placement that faces pressure from its creditors.
Financial advisers from both Commonwealth and LPL sold the fund in question, the Laeroc 2005-2006 Income Fund LP, which wants to raise another $12 million to $15 million to pay off – at a steep discount – $49 million of debt.
Laeroc Partners Inc., a real estate investor that focuses on Los Angeles and other parts of Southern California, in June issued a “cash call” notice to investors who bought the Laeroc 2005-2006 Income Fund.
The fund’s lenders have said that they will foreclose by the end of the year on a shopping center in Sacramento, Calif., if the fresh cash isn’t paid, according to the notice. The Laeroc fund has paid more than $180 million to buy eight properties and owes $105 million in mortgage debt.
It isn’t clear how much of the Laeroc 2005-2006 Income Fund Commonwealth and LPL brokers sold. Plaintiff’s attorneys said that they have received a handful of calls from clients who bought the product but haven’t filed arbitration complaints against either Commonwealth or LPL.
Reg D Difficulties
Dozens of small to midsize independent broker-dealers became ensnared in the fallout from Reg D private placements after the Securities and Exchange Commission charged two sponsors, Medical Capital Holdings Inc. and Provident Royalties LLC, with fraud in 2009.
For the most part, leading independent firms such as Commonwealth and LPL sidestepped the toxic products, of which brokers sold $2.7 billion. About half of investors’ principal was wiped out in those two deals, and the steep legal costs associated with client arbitration claims and settlements have pushed dozens of independent broker-dealers to close or be sold.
Industry executives noted that real estate deals of various stripes, including nontraded real estate investment trusts, which raised money and bought properties from 2006 to 2009, are struggling.
But a cash call on a private real estate offering is clearly not a good indication, said Phil Aidikoff, a plaintiff’s attorney based in Los Angeles who has taken information from one LPL client who bought $250,000 of the Laeroc 2005-2006 Income Fund.
“When you see a cash call in a private real estate deal like this, the patient is on life support. It’s a very bad piece of information,” Mr. Aidikoff said.
“I can’t recall when a cash call solved the problem, but only delayed the inevitable. Retail investors can’t throw more money after such deals.”
Laeroc Partners has at least $650 million in assets and has created 14 funds, according to its website. Founded in Manhattan Beach, Calif., in 1986, at first it was a workout specialist for distressed real estate.
In 1993, the company began offering income and equity funds, according to the website.
Kim Benjamin, president of LaeRoc Funds, didn’t return messages seeking comment left Tuesday and Wednesday.
John Rooney, managing principal with Commonwealth, declined to comment, except to confirm that the firm’s advisers sold the fund.
Joseph Kuo, a spokesman for LPL, said that the firm’s reps and clients “have successfully avoided the most difficult product-related issues associated with the financial crisis.”
“The challenges currently faced by the Laeroc fund are driven by market forces resulting from the 2008 credit crisis and the stress to the commercial-real-estate markets from the ensuing recession,” he said, adding that the firm will keep a close watch as Laeroc works to address the issue.