Eccleston Law Offices, P.C. represents individual and institutional investors in litigation and arbitration proceedings to recover their investment losses caused by unsuitable investment recommendations, breach of fiduciary duty, negligence or other misconduct. We have extensive experience representing investors in arbitration and litigation disputes with securities broker-dealers and investment advisory firms, and have recovered tens of millions of dollars for investors.

Our attorneys are investigating the legal claims of those investors who have suffered losses investing in the Desert Capital Real Estate Investment Trust ("REIT") as a result of its decline in value, its illiquidity, and its recent Chapter 11 bankruptcy filing. If you are an investor in Desert Capital Real Estate Investment Trust, your losses may be recoverable through securities arbitration.

Desert Capital REIT Forced into Involuntary Chapter 11 Bankrupcty in April 2011

On May 5, 2011, an involuntary petition for protection under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101 et. seq., was filed against Desert Capital REIT, Inc. with the United States Bankruptcy Court for the District of Nevada, Las Vegas Division. Creditors with claims of over $43 million filed the petition to put Desert Capital into involuntary Chapter 11 bankruptcy. Some of these creditors include Taberna Preferred Funding VI, Taberna Preferred Funding VIII and Sage Trust.

Although Desert Capital REIT initially objected to the involuntary bankruptcy, it is reported that in early June 2011, attorneys for Desert Capital REIT told Judge Linda Riegle that it was withdrawing its objection to the bankrupcy proceeding. In light of this development, investors are encouraged to explore their recovery options outside of the Chapter 11 bankruptcy process.

The History and Demise of Desert Capital REIT, Inc.

According to its filings with the SEC, Desert Capital REIT, Inc., is a Maryland corporation formed in December 2003 as a real estate investment trust. When it first began conducting business, it specialized in the financing of real estate development projects by providing short-term mortgage loans to homebuilders and commercial developers in markets where Desert Capital believed that it possessed requisite skills and market knowledge, which were primarily in the western United States and Las Vegas in particular.

Historically, Desert Capital REIT invested in 12 to 18 month, first and second lien mortgage loans, consisting of acquisition and development, construction, and commercial property loans to both local and national developers and homebuilders. Desert Capital REIT derived its revenues primarily from interest payments received from mortgage investments funded with our equity capital and borrowed funds.

In late 2007, Desert Capital began experiencing a significant level of borrower defaults, and in 2008 and 2009 virtually all of Desert Capital's borrowers defaulted on their loans. As of March 31, 2011, Desert Capital had foreclosed on the property underlying its original mortgage loans on all but three loans. Due to the development stage of the properties at the time of foreclosure, which was primarily undeveloped or partially developed land, none of these properties are income producing and many have significant operating costs such as property taxes. The combination of significantly reduced interest income from performing loans, increased costs related to the ownership of non-income producing property, ongoing day-to-day operating costs of the Desert Capital, and the depressed real estate market, has had a materially adverse impact on Desert Capital's financial condition and has severely impacted Desert Capital's ability to conduct business as originally intended. With limited revenue from its investment portfolio, Desert Capital was forced to incur debt and sell properties as needed to generate operating capital and fund debt payments.

When Desert Capital began its investment strategy in 2004, it stated that its intent to either list Desert Capital REIT, Inc. stock on a national exchange or begin the liquidation of its portfolio by December 2011. Due to the collapse of the real estate market beginning in late 2007 and continuing into 2011, Desert Capital's business strategy, which was to invest in performing mortgage loans on a continuous basis, was cut short due to our lack of capital.

Desert Capital was been unable to make significant investments in mortgages since early 2008, and its investment portfolio of mortgage loans that existed at that time has been substantially foreclosed, resulting in a portfolio of real estate investments that are non-income producing and are valued at amounts significantly less than the original loan amounts.

Given the financial condition of the Desert Capital, the company recently conceded that listing Desert Capital REIT, Inc. stock on a national exchange is no longer a viable consideration.

As a result, Desert Capital REIT is currently in the process of liquidating its assets as needed for liquidity purposes.

Effective as of May 31, 2011, Todd B. Parriott resigned as President, Chief Executive Officer, Chief Investment Officer and as a director of the Company and Stacy M. Riffe resigned as Secretary and Treasurer of the Company.

Recent Problems with Non-Traded REITs Like Desert Capital REIT

Non-listed real estate investment trusts (“REITs”) are designed to allow retail investors to participate in large commercial real estate development projects, such as shopping malls or hotel properties, that they could not otherwise participate in.

These non-traded REITs are typically managed by a founding sponsor, who earns fees for services they render such as managing or acquiring properties. These non-traded REITs raise money for these acquisitions by selling shares in the REITs to retail investors.

Non-traded REITs trend to attract unsophisticated investors who do not understand the extent of the risks involved in the investment, such as lack of liquidity, conflicts of interest, and high fees. Brokers who sell non-traded REITs can earn anywhere from 6-15% in commissions for selling these products. In some cases, due to the high commissions brokers and financial advisors may ignore their duty to recommend investments that are suitable for the investor in order to profit off of the sale of a non-traded REIT.

Non-traded REITs are typically sold at $10 or $11 per share, which is an arbitrarily set price that does not change unless the REIT gets revalued. Other than limited exit windows, investors can only redeem (exit) the investment when the REIT lists publicly, is acquired, or if the investor can find a private buyer. Non-traded REITs are supposed to have a limited life, usually not exceed 10 years, after which they are supposed to distribute the proceeds from the investments.

Brokers selling unlisted REITs have raised more than $59 billion since 2000, which has caused securities regulators to examine the sales practices of those brokers. In particular, securities regulators are focused on whether or not the sales were suitable for investors and whether the brokers failed to fully disclose the risks, fees and liquidity of the investments.

As a result of the economic turmoil of the past few years, investors have been filing securities arbitration claims after being hurt by share devaluations along with the suspension of share buyback and dividend programs in non-traded REITs. Some of the non-traded REITs that were forced to respond to lower occupancy rates and falling rents with reduced dividends or suspension of redemptions.

In response to the dividend reductions and redemption suspensions in these non-traded REITs, investors have been filing FINRA arbitration claims against the securities brokers or financial advisors who sold them the non-traded REITs in an effort to try to recover some of their losses.

Non-traded REITs Like Desert Capital REIT, Inc. May Not Be Suitable For All Investors

 Securities brokers and financial advisors have a duty to recommend investments that are "suitable" for, among other things, an investor's age, investment objectives, risk tolerance. In many cases, by recommending that an investor purchase a non-traded REIT such as Desert Capital REIT, Inc., a breach of the suitability rule takes place as the financial advisor is not taking into account the client’s investment objectives in light of the risks involved in non-traded REITs. Some of the risks that make a non-traded REIT unsuitable for an investor include the following.

All non-traded REITs invest in various types of real estate properties.  They buy the properties, manage and maintain the properties, attempt to rent the properties, and ultimately seek to sell the properties for profit.  That raises the first concern: REITs are concentrated in one market sector – real estate.  Whether the REIT invests in lodging, office, industrial, residential, health care facilities, or a combination thereof, the REIT portfolio neither is balanced nor diversified.  As such, REITs are subject to all of the real estate related investment risks and economic risks.

Non-traded REITs suffer from conflicts of interest.  For example, the sponsor’s chairman or president may own or have duties as an officer of a third-party advisor, a manager, contractor or a competitor.  This problem is so widespread that the securities regulator FINRA has sent “targeted examination requests” to firms promoting non-traded REITs in order to investigate those conflicts of interest.

Non-traded REITs commit “highway robbery” in charging egregious upfront fees of 12% to 15%.  One is hard-pressed to identify a higher-charging investment!

Non-traded REITs are illiquid.  That means that there is no public market for sale.  Sometimes, but certainly not often, these products can be sold through a “secondary market”, but only at a small fraction of the offering price in a kind of “fire sale.”

In some cases, a client might have multiple unsuitable investments in their portfolio which include other non-traded REITs, private placements, or other illiquid and risky investments. Investors should review their entire portfolio to evaluate whether or not Desert Capital REIT, Inc. is the only potentially unsuitable investment.

Recovery Options For Investors

Investors who have suffered losses investing in non-traded REITs, private placements, and other unsuitable investments may be able to recover their losses through the securities arbitration process administered by the Financial Industry Regulatory Authority ("FINRA").

The attorneys at Eccleston Law are representing investors who have suffered losses in non-traded REITs such as Desert Capital REIT, Inc. in FINRA arbitration proceedings. If you are investor who has suffered losses investing in Desert Capital REIT, Inc. and would like a free, no obligation consultation about your recovery options, please contact one of our attorneys at 312-332-0000.