Written by The White Law Group• February 4, 2023• 7:00 pm• Blog, Investment Loss Recovery

NP Skyloft DST: Investment Losses and Lawsuits

Investor Alert: NP Skyloft DST (UPDATED)

The White Law Group is investigating potential securities claims involving broker dealers who may have improperly recommended NP Skyloft DST to its clients.

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Investors in Nelson Partners Skyloft, a luxury student housing complex near the University of Texas, are seeking to recover $74 million after the building was reportedly sold by a hedge fund.

Nelson Partners reportedly solicited investors—many of whom invested in 2019, before the pandemic’s impact on the rental real estate market. Promotional materials highlighted Skyloft’s state-of-the-art gym, stunning views, and proximity to the UT campus. The promotions also claimed that dorms were pre-leased and that demand for student housing was strong.

Nelson Partners has reportedly denied any wrongdoing, attributing the firm’s troubles to the COVID-19 pandemic, and has pointed to the hedge fund, which provided a $35 million loan, as the root of the investors’ problems. The hedge fund reportedly decided to sell the building after Nelson Partners allegedly failed to meet the loan’s terms.

Investors’ Allegations Against Nelson Partners

In lawsuits filed, some investors have allegedly accused Nelson Partners of operating a Ponzi-like scheme and of moving funds into offshore accounts.

It is also alleged in those suits that Nelson Partners promised to repay the $35 million loan from the hedge fund using funds raised from investors, but that did not happen.

In May 2020, the hedge fund reportedly declared Nelson Partners in default, taking control of the Skyloft property. Investors reportedly saw their monthly payouts suspended in April 2020.

Court filings reveal that Nelson Partners claimed it needed to conserve funds as parents had stopped paying rent during the pandemic. Investors allege they were unaware of the dispute between Nelson Partners and the hedge fund until they received letters from the hedge fund, informing them of the takeover and impending sale of the dorm.

NP Skyloft DST – Unsuitable Investment?

Unfortunately, many of NP Skyloft’s investors are retirees who sought a stable income from their investment. Some report using a 1031 exchange—a method allowing the swap of one property for another without triggering capital gains tax—to invest in NP Skyloft. These retirees may face severe financial hardship if they relied on this investment for regular income.

If a broker dealer or sales agent recommended Skyloft shares without fully explaining the associated risks, those investors might have grounds to recover their losses.

Risk Factors related to a 1031 Exchange

1031 Delaware Statutory Trusts, or DSTs, are an alternative for 1031 exchange investors seeking replacement properties, allegedly offering the potential for monthly income and diversification without any on-going landlord duties.

The following is a list of risk factors to be aware of:

Property Value Loss – All real estate investments have the potential to lose value over time.

Tax Status Changes – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

Possibility of Foreclosure – All financed real estate investments have potential for foreclosure.

Illiquid Investments – 1031 exchanges are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.

Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions.

Fees/Expenses – Investors’ returns may be affected by the costs associated with the transaction. and may outweigh the tax benefits.

Investigating Potential Claims – NP Skyloft DST

Despite the risks of investing in 1031 DSTs, The White Law Group has seen a number of instances where brokerage firms continue to push this type of investment because of the high commissions associated with their sale and creation.

Fortunately, FINRA does provide for an arbitration forum for investors to resolve disputes if a broker or brokerage firm makes an unsuitable investment recommendation or fails to adequately disclose the risks associated with an investment. It is possible that they could be found liable for investment losses in a FINRA arbitration claim.

Class Action vs. Individual FINRA Arbitration Lawsuit

Investors may still be able to bring claims directly against the sales agents and brokerage firms that sold the investments, as these claims are distinct from a class action lawsuit.

You may wonder whether a large class action lawsuit is a better litigation option than an individual FINRA arbitration case. The answer depends on many factors, but typically if the loss sustained is large (say larger than $100,000), an individual arbitration claim is likely a better option. Class actions as a recovery option are more appropriate for grouping large numbers of individuals who have small claims – too small to generally pursue individually.

Free Consultation

If you are concerned about your investment in a NP Skyloft DST, please call the securities attorneys at The White Law Group at 888-637-5510 for a free consultation.

The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Seattle, Washington.