HJ Sims Reg D Offerings: Heads, HJ Sims Wins - Tails, Their Investors Lose, Craig McCann, Susan Song, Chuan Qin and Mike Yan available at https://www.slcg.com/resources/blog/691.
"First National Realty Partners Reg D Offerings: Muppets Do Commercial Real Estate" Craig McCann, Susan Song, Chuan Qin and Mike Yan available at https://www.slcg.com/resources/blog/693.
We also published an extensive study of the unregistered Reg D securities markets:
In this note, we provide a further example of Walton Group USA ("Walton") Reg D abuse using private placement memoranda and audited financial statements for Walton Land Fund 4, LP ("WLF4").
Our review of actual investor experience with Walton offerings is dramatically at odds with Walton's representations of success.[1] Based on our review of WLF4 financial statements and previous review of Walton Land Fund 3, LP financial statements, the primary purpose of Walton's offerings is to immediately make off with more than half the capital raised from uninformed investors with the assistance of unscrupulous brokers.
A stylized sketch of WLF4, LP is as follows:
48% of investors' capital raised is used to buy undeveloped land.
11% of investors' capital is paid to third-tier securities brokerage firms.
41% vanishes in payments to Walton:
20.2% of investors' capital is taken by Walton upfront as an unaccounted finder's fee - 3% is taken by Walton "for making the opportunity available" and 17.2% is taken by for previously incurred operating expenses unrelated to LF$.
An additional 21% of investors' contributed capital is set aside for Walton to withdraw as unaccounted management fees and expenses for virtually nonexistent services.
Over time, Walton takes even more of investors' capital through additional expenses such as carried interest and a 3% disposition fee on land sales which are the only source of repayment to investors.
Walton Land Fund 4, LP Private Placement Memorandum
The WLF4 PPM describes the offering and selectively summarizes results of past Walton Group offerings. The initial PPM's Use of Proceeds table is reproduced below as Table 1. The initial WLF4 PPM reported that only 56.6% of investors' capital invested would be invested in undeveloped land, 11% of investors' capital was going to be paid to brokers as selling commissions and expense reimbursements and 33% of investors' capital was to be taken by Walton.
Table 1 Use of Proceeds, WLF4 PPM, Page 24.
In addition, if properties are sold at a profit, Walton would take 40% of any proceeds beyond what was necessary to provide investors with a return of capital and a 10.5% noncumulative return (preferred amount) on a per property basis. Thus, even if WLF4 investors never received any distributions and lost most of their money, if one property sold at a substantial profit, Walton could take additional fees as carried interest. Walton also planned to take 3% of any land sales proceeds.
The 17.2% "Operating Expenses of Walton USA" and the 3% "Sponsor Fee" totaling a contemplated $20 million are simply lump sums Walton takes out of the LF4 net proceeds through markups it adds to the arms-length cost of properties bought by a Walton affiliate. The 35.6% markup of land prices in riskless transactions by Walton USA comes directly at the expense of WLF4 investors. [Walton USA eventually marked up the land it purchased into WLF4 by 46.4%, not 35.6%.]
WLF4 Raises Capital and Buys its First Properties
Southern Trails
When Walton published the First Supplement Dated August 9, 2013, one investment property, Southern Trails, had been identified. Walton increased the amount of investors' capital it was intending to take for itself and reduced the amount it was intending to use to buy undeveloped land. It still listed a 3% Sponsor Fee in the Use of Proceeds table reproduced as Table 2 but effectively increased its management fee from 12.3% to 15.2%. Only 53.7% of investors' capital invested would be invested in land and Walton was going to take at least 35.4% of investors' capital for itself.
Table 2 First Supplement, August 9, 2013; More kept by Walton, Less for Investors
(red annotations were added)
Harvest Grove South
Walton updated the LF4 Use of Proceeds, reproduced as Table 3, on October 22, 2013 and identified a second land purchase, Harvest Grove South. Walton further increased the amount of investors' capital it was intending to take for itself, reduced the amount it was intending to spend on land to 50.8%, increased its management fee from 15.2% to 18.0% (on top of the 20.2% of investors' capital Walton was taking as property markups).
Table 3 Second Supplement, October 22, 2013; Much Worse for Investors
(red annotations were added)
The Harvest Grove South purchase was dramatically worse than the already shameful Southern Trails purchase. With Southern Trails, 53.7% of investors' capital went to purchase land and 35.4% was kept by Walton for itself. With Harvest Grove, only 46.2% went to purchase land and Walton increased its take from 35.4% to 42.9%.
West Creek
Walton updated the LF4 Use of Proceeds, reproduced as Table 4, nine days later on October 31, 2013 and identified a third land purchase, West Creek. Walton further increased the amount of investors' capital it was intending to take for itself, reduced the amount it was intending to spend on land to 50.0% and increased its management fee from 18.0% to 19.0% (on top of the 20.2% of investors' capital Walton was taking as property markups).
Only 50.0% of investors' capital invested would be invested in land and Walton was going to take at least 39.1% of investors' capital for itself.
Table 4 Third Supplement, October 31, 2013
(red annotations were added)
York Farm
Walton updated the LF4 Use of Proceeds on March 10, 2014, reproduced as Table 5, and identified a fourth land purchase, York Farm. Even considering Walton's demonstrated lack of ethics, the York Farm transaction is appalling. After 10.9% is paid to the brokerage industry, only 42.4% of investor capital was going to purchase York Farm and 46.7% was going to be kept by Walton.
Table 5 Fifth Supplement, March 10, 2014
(red annotations were added)
Rock Creek
Walton updated the LF4 Use of Proceeds on April 30, 2014, reproduced as Table 6, and identified a fifth land purchase, Rock Creek. With this update, Walton further reduced the amount it was spending on land to 48.0% and increased the amount of investors' capital it was taking for itself to 41.1%, increasing its management fee from 19.0% to 20.9%.
Table 6 Sixth Supplement, April 30, 2014
(red annotations were added)
By April 2014, WLF4 had raised $85 million from investors to purchase $41 million in five undeveloped properties, paying roughly $9 million to third-tier brokerage firms and keeping $35 million for itself.
Bellehaven
We do not have a seventh supplement to the WLF4 PPM but see from subsequent WLF4 documents ts that WLF4 raised an additional $8,859,210, paid $885,921 to the brokerage industry, purchased a sixth property - Bellehaven - for $6,134,264 from a Walton affiliate who had recently paid $4,409,125 for the property and put the remaining $1,839,025 aside for Walton to take for itself.
Property Records Document Walton's Inflating Property Values
A reader of the Walton Land Fund 4, LP PPM and supplements could not fully appreciate the price gouging Walton intended to engage in or that these transfers from investors to Walton for worthless services would be laundered through property deeds to inflate the properties' fair value subsequently reported on audited financial statements.
According to land deed records and WLF4 financial statements, WLF4 bought 95% of six properties from Walton entities for $64,073,467 - 39.1% more than the $46,054,931 which Walton had nearly simultaneously paid for 100% of the properties in arms-length transactions. This amounts to a 46.4% markup per acre.
Table 7 WLF4 Property Holdings, December 31, 2014
The Southern Trails transactions illustrate how Walton laundered expenses through property records into inflated financial statement values. Walton Arizona, LLC acquired 416.93 acres of vacant land located in Pinal County, AZ from I-10 & Korsten L.L.L.P. in March 2013 for $9,797,879 ($23,500/ac). See Figure 1a). Walton Arizona, LLC sold 95% interest in the same 416.93 acres of vacant land to Walton U.S. Land Fund 4 for $13,237,936 ($33,422/ac) in two transactions. See Figure 1b).
Figure 1 Pinal County Records Reflecting Southern Trails Transactions
a) Arms-Length Transaction for $23,500 per acre
b) Related-party transaction for $33,422 per acre
Walton LF4 Financial Statements
Financial statements covering inception in 2013 to December 31, 2023 illustrate the devastating WLF4 economics for investors. Investors contributed over $94,469,210 by the end of 2014. WLF4's 2014 financial statements show $70,835,786 in assets - an immediate $23,633,424 investor loss reflecting $12.1 million write down and $11.5 million in payments to brokers and to Walton.
Table 8 Consolidated Balance Sheets
WLF4's true financial condition was much worse than the financial statements reflect. The land was not worth $52,500,000. It had recently been purchased for $46,054,931 and nearly coincidental with the purchases of the six properties WLF4 paid Walton $18,000,000 in Sponsor/Acquisition Fees and for Walton Group USA' general operating expenses unrelated to the specific properties, all of it laundered through the property records.
PWC audited the WLF4 financial statements from 2013-2016; EY audited the WLF4 financial statements from 2016-2023. It is unclear what work, if any, PWC did to verify the $64 million fair value assigned to properties which had changed hands in arms-length transactions for $46 million, on average 48 days earlier. The $64 million valuation was based on the simultaneous non-arms-length transactions between entities controlled by Walton which included an $18 million markup unrelated to any improvement in the six properties bought for $46 million.
Truthful financial statements would have shown the December 31, 2014 property fair value to be $46,000,000 or less and the total assets, $64,000,000 or less. Even this would overstate the value of investors' interest in WLF4 since $18,331,566 is pledged to Walton and segregated in a non-interest bearing account to be drawn out over time. When Walton was done fleecing investors in 2014, there was really only $43,654,220 in assets available for investors who paid $94,469,210 in 2013 and 2014 for their interests. That is, WLF4 investors immediately lost 54% of their invested capital.
Table 9 Consolidated Statements of Operations
Table 10 Partnership Accounts
Conclusion
Walton has set up at least 24 Reg D issuers. Walton's website touts a superficially impressive breath of experience and claims decades of profitable real estate management on behalf of its clients.[2] Actual investor experience with Walton's Reg D offerings seems dramatically at odds with Walton's representations.
We previously analyzed Walton Land Fund 3, LP and found that its purpose was to aggressively fleece uninformed investors, laundering half of Walton's expropriation through inflated related party real estate transactions. Walton Land Fund 4, LP is a near carbon copy of WLF3. Walton bought undeveloped land, held it for 48 days on average and sold it to LF4 investors at 47% markups. Walton also set aside 20.2% of investors' capital for Walton to draw on for unaccounted services in non-arms-length transactions.
In an upcoming post, we will compare returns investors experienced in LF3 and LF4 with the nearly $100 million Walton and the brokerage industry kept of investors' contributed capital.
Table 11 contains a listing of Walton's Reg D issuers. Please let us know if you, or someone you know, invested in one of these issues.
