SEC Fines REIT Manager $5M After Using Investor Funds For Payroll, Office Rent
The Securities and Exchange Commission has ordered a North Dakota-based hotel real estate investment firm to pay nearly $5M for inappropriately paying corporate overhead expenses out of two of its funds.
Legendary Capital created two nontraded real estate investment trusts, Legacy Hospitality II and Legendary Capital REIT III, which amassed $215M from investors to buy and manage hotels across the U.S.
The funds, as well as Legendary Capital co-founder Corey Maple, agreed to pay $4.76M to the SEC for violating its own private offering memoranda, which specifically mentioned that the advisory firm would cover its own overhead costs, the SEC said in an order published Monday.
Legendary charged the funds about $5M combined between 2013 and 2021 to cover corporate expenses, primarily payroll and office rent, according to the SEC. In both original operating agreements, Legacy agreed “at its expense” to pay for office facilities and sufficient staff and payroll.
SEC officials wrote that concerns raised by Legendary Capital employees to Maple in 2018 about the expenses were initially dismissed, only for Maple to amend one of the fund's operating agreements nearly a year later to allow the firm to expense overhead.
In December 2020, a preliminary investigation by SEC staff recommended that the commission bring an enforcement action against Maple and the advisory for the third fund, The DI Wire reported.
The board of the second fund created a special committee and found in 2021 that Legendary had inappropriately billed $2.1M in overhead. While Legendary reimbursed the fund that amount, an additional $2.3M of expenses wasn't reimbursed, according to the SEC.
Legendary Capital owns more than 30 hotels in 18 states under such brands as Hyatt Place, Home2 Suites, Crowne Plaza, Holiday Inn Express and Fairfield Inn & Suites.
In May, Maple resigned as CEO of the fund advisers and doesn't have day-to-day involvement in the financial operations of the advisory firm, according to the SEC.
As part of the settlement, Maple was personally ordered to pay $100K to the SEC. The entity advising the second fund was ordered to pay a total of $3.9M, $1.1M of which is a civil penalty. The third fund's adviser was ordered to pay $774K, $225K of which is a civil penalty.
