CrowdStreet Seeks Takeover Of Another Nightingale Asset As Fraud Concerns Spread

After Nightingale Properties allegedly misappropriated more than $50M in CrowdStreet investor funds for two deals that never closed, suspicion is growing around the one property the New York-based real estate investor actually did acquire with equity raised on the platform.

CrowdStreet is seeking to appoint an independent manager to take over the entity that controls 200 West Jackson Blvd., a 480K SF office tower in downtown Chicago for which Nightingale raised $25M on the platform to acquire last year.

Austin, Texas-based CrowdStreet told investors in the 200 West Jackson campaign in an email dated July 20 that it also has requested the audited financial records of the building from Nightingale, but it hasn't received them.

"Nightingale’s actions and its lack of response regarding information and distributions with respect to 200 West Jackson has us concerned that Nightingale may have acted inappropriately in managing the 200 West Jackson property as well," CrowdStreet investor relations wrote in the message, which was obtained by Bisnow. "Our goal is to create and support a legal mechanism for collective action to remove Nightingale as manager, determine if any impropriety has occurred, and seek recovery."

The 200 West Jackson campaign was the first Nightingale sponsored on the platform. The New York-based firm, run by CEO and co-founder Elie Schwartz, closed on the acquisition in February 2022 for $130M, securing an $86M senior mortgage from Citibank and $17M in mezzanine financing from Kawa Capital Management.

The $25M campaign was the biggest office deal in CrowdStreet's history by that point, eclipsed a few months later when Nightingale raised $54M to acquire the 915K SF Atlanta Financial Center office complex.

But it never closed on that deal, and the vast majority of the equity raised for it is missing, an independent fiduciary told investors earlier this month. A $9M campaign Nightingale sponsored for Lincoln Place, a Miami Beach office building, was similarly pillaged, the fiduciary said.

“This was not a crowdfunding issue, this was simple illegal behavior by a real estate developer," CrowdStreet CEO Tore Steen said in an interview last week. "There were investors outside of the CrowdStreet platform that were involved here. Whether it’s online or offline, fraud exists in this industry.”

The independent manager, Anna Phillips, put the entities created for the Atlanta and Miami Beach deals into bankruptcy July 14, which she said would speed up her ability to investigate the missing funds and recover what she can. 

CrowdStreet told investors it wants to appoint Phillips as the manager of the entity that controls 200 West Jackson, but the process for the transfer of the property is more complex than for the Atlanta Financial Center and Lincoln Place deals, since the property transferred ownership and is encumbered by multiple loans.

"200 West Jackson is an operating asset, the property includes equity investors who are not associated with CrowdStreet, the property loan has covenants regarding management and breach of those covenants could put the property in default, Nightingale likely has provided certain financial guarantees to the lender, and the operating agreement provides very limited bases under which to replace Nightingale," CrowdStreet wrote in the letter.

The firm said it has hired a forensic accountant to review all the materials it received from Nightingale before and after its fundraising campaigns. And it retained outside counsel to evaluate what action investors can take to wrest control of the building, as well as potential claims against Schwartz and his company.

"CrowdStreet has never taken action like the steps it is taking with respect to Nightingale," the company's letter said. "While we do not currently have evidence that Nightingale has misappropriated any funds in connection with 200 West Jackson, we are deeply concerned."

In Nightingale's first-quarter report to 200 West Jackson investors, which was reviewed by Bisnow, Schwartz wrote that the operating entity had changed its name from Nightingale Realty LLC to Nite Sky Realty LLC.

He told investors that it couldn't make the distribution because three tenants were delinquent on their rent, one of which hadn't paid since March 2022. The building was 90.9% occupied and in line with the business plan, the quarterly update said.

"We will provide another update shortly with an exact date of distribution," Schwartz wrote in the update. "We apologize for the delay and not communicating this sooner, we had hoped to have the tenants caught up by this point. We appreciate your trust and confidence as we continue to execute the business plan."

A CrowdStreet investor in 200 West Jackson, who spoke on the condition of anonymity, said that update, sent May 15, was the last communication investors have received. The update disclosed that the building had $10.4M in its reserve account, which the investor said was a point of concern.

"Where’s that money? Is it still there?" the investor said. "No one at CrowdStreet is looking out for us. I expected them to be on our side."

A CrowdStreet spokesperson said the last contact the company had with Nightingale or Schwartz was about a month ago. She declined to say when CrowdStreet started examining the 200 West Jackson deal.

Multiple investors in the Atlanta Financial Center campaign told Bisnow last week that they were unaware their investment wasn't placed into escrow until the deal closed. CrowdStreet is using escrow for all of its deals going forward, Steen said in an interview last week.

The investor said the $25K he put into 200 West Jackson was the fifth investment he had made via the platform, but he had "no clue" those investments weren't put into escrow before the deals closed. 

"If I had known that, I'd never have done a deal with them," he added.

Other sponsors have been more communicative than Nightingale, the investor said, and he is now questioning what sort of due diligence was done on the 200 West Jackson deal. He expressed dismay at investors' seeming lack of recourse.

"It seems like the operating agreement that Nightingale put all these properties under is so one-sided, we don’t know what’s going on, we’re not getting information, they’re cutting the dividend, and basically we don’t have any rights," the investor said. 

Sponsors are "expected" to provide CrowdStreet investors with quarterly reports, annual tax documents, performance and distribution updates, as well as answer questions, a CrowdStreet spokesperson said. The spokesperson didn't say what sponsors are required to do as part of their operating agreement.

The pressure at 200 West Jackson is just the latest issue for Nightingale, which is facing a growing pile of lawsuits and debt defaults. It lost a 2.2M SF property in Philadelphia to receivership, is facing foreclosure lawsuits at commercial buildings it owns in Manhattan and Brooklyn and owns one of the biggest empty office buildings in New York City. 

A Nightingale spokesperson didn't respond to a request for comment. 

CrowdStreet isn't re-examining any of the 770 other crowdfunding campaigns on its platform, its spokesperson said.

"CrowdStreet did a full review of deals on our marketplace, and we remain confident in our vetting process and the additional escrow requirement recently put in place," the spokesperson wrote in an email.

Jarred Schenke contributed reporting for this article.

CORRECTION, JULY 24, 9:50 A.M. ET: A previous version of this story misstated the date of CrowdStreet's letter to investors in 200 West Jackson. It was sent July 20. This story has been updated.