Rich Uncles: Rich Uncles NNN Inc. Review
Category: Non-accredited investor funds
Honors: None. "Currently under watch".
Way back in 2017, this new REIT from Rich Uncles was ranked #1 for its numerous impressive looking features. But since then, things have changed for the fund, with numerous issue that some may find concerning. In 2018 we dropped the non-accredited fund rankings (since each investor's criteria is different). If we were still doing rankings Rich Uncles would have been downgraded. Instead, this fund has been marked as "under watch".
SEC investigation: Rich Uncles disclosed in public filings that it is currently being investigated by the SEC regarding its advertising and sales of securities. Per their public disclosure: “The SEC’s investigation could require significant attention from members of our advisor’s senior management. Legal and other expenses we expect to incur in connection with the SEC’s investigation could become significant ... If the SEC or another governmental entity were to commence legal action against us, we could be required to pay significant fines and could become subject to injunctions, a cease and desist order or other equitable remedies, which could have a material adverse effect on our business, financial condition and results of operations.”
I asked RichUncles for an update on the current status of the investigation and if there is an anticipated date on when it will be concluded. They said that they were not allowed to discuss this further.
Jan 2019: Investor withdrawals cut-off on "big brother" fund (and more):
Rich Uncles has two triple net lease (NNN) funds. Rich Uncles NNN is the smaller fund that is currently open and accepting money. Rich Uncles REIT I is the much larger, bigger-brother fund (which Rich Uncles uses to pitch their experience) and is closed to new investment.
Rich Uncles has suspended investor redemptions for REIT I under what it calls a "strategic alternatives review process". This occurred after the NAV of the fund dropped from $10.66 a share to $10.57 a share.
Management claims that it was caused "due to funding our share repurchase program and other cash needs". No mention was made of why so many people were wanting to redeem that they were in excess of their liquidity protections.
Additionally an independent board member has resigned from REIT I. Management claims this is also part of the same "strategic alternatives review", and that this also explains why 3 board members of Rich Uncles NNN have also resigned (because they were simultaneously on the REIT I board in apparently a potential conflict-of-interest situation). Additionally, they are now apparently trying to sell off the REIT I portfolio to another owner. (More info...)
More issues are below this review under "other issues".
Rich Uncles is a triple net lease fund (sometimes called NNN). When underwritten conservatively, NNN can be one of the most consistent and safest investments in real estate. In a triple net lease, the tenant is responsible for all of the expenses of maintaining the property including the taxes, and the landlord doesn't have to worry about this. Many triple net leases lock the tenant into a long-term lease (often 7 to 10 years or more) and may include rent escalations, which is desirable from the point of view of the landlord since it becomes a reliable source of cash flow.
The biggest risk is that the tenant may walk out on the lease, although some leases mitigate this risk with the guarantee from a parent company. (So as long as the parent doesn't go bankrupt, there is increased protection). Some of the leases in the Rich Uncles fund are protected this way.
The second-biggest risk is that the tenant may not renew at the end (and the closer an investor gets to the end of the lease, the lower the value of the lease, due to the uncertainty).
In either case, the property "goes dark" and it can be very time-consuming and/or very expensive to bring in a new tenant. So for this reason, many people prefer to invest in triple net leases in a fund, rather than owning a few properties themselves, so they can be protected with the diversification.
This fund has several strengths. The principals and board members appear to have considerable experience in real estate. It has a relatively low leverage of 50%, which is the average for a core plus fund. And the strategy is one of the more conservative for non-accredited investor funds. It also has a very low minimum investment of $500.
The withdrawal fees are average, with a 3% penalty for withdrawing in the first year, 2% up to year two, 1% up to year three, and no fee after that. Skin in the game is also negligible (which makes it average for non-accredited funds, but far below average when compared to accredited triple net lease funds, such as BroadStone Net Lease).
On the downside, all the other fees are much more expensive than the average non-accredited fund. Upon investing, the investor loses 3% immediately to an upfront fee. (The average is 1 to 2%, with several funds not charging any fee here at all). It charges an acquisition of 3% per property purchased (versus 2% average, and some funds that charge no fee at all). It charges a 1.2% asset management fee on aggregate real estate value (versus 0.85% average). But the biggest expense (if the fund does well) is that it charges a profit split. After achieving a 6.5% hurdle, it takes a 40% share of all the profits. The average fund does not charge a profit split.
The other downsides are the legal issues involving an SEC investigation into the fund.
They have also added BRIX student housing REIT which has a $5 minimum investment.
1) The Wall Street Journal reported that an investor and a NY accounting forensics firm are alleging that Rich Uncles is inflating its cash flow on REIT I to make its operations look better.
Per their auditor Squar Milner "As we discussed, prior to our appointment as auditors, REIT I early adopted both ASU 2017-01 and ASU 2016-15, as permitted in both standards, and properly applied the provisions of both standards in the 2017 and 2016 financial statements. This is consistent with other REITs and real estate companies."
2) 2018-01-29: the SEC has charged the auditor of Rich Uncles' company and REIT 1 (Anton and Chia), with fraud.
Rich Uncles pointed out that this particular fund's auditor has never been with Anton and Chia, responding, "NNN REIT's auditors have been E&Y, for our initial (2016) and current (2017) 10-K audits."
Further, they elaborated that, " REIT I's prior auditor, Anton & Chia, has been replaced by Squar Milner."
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Ian Ippolito is an investor and serial entrepreneur. He has been interviewed by the Wall Street Journal, Business Week, Forbes, TIME, Fast Company, TechCrunch, CBS News, FOX News, USA Today, Bloomberg News, Realtor.com, CoStar News, Curbed and more.
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