Cottonwood Communities – Non-Traded REIT Investigation
Cottonwood Communities Inc., a publicly registered non-traded REIT specializing in multifamily real estate investments, has reportedly temporarily halted subscriptions for its common stock public offering and private preferred equity offerings. This decision follows the discovery of errors in their quarterly and annual financial reports for 2022, according to filings with the SEC.
The company’s audit committee found inaccuracies in the presentation of cash flow changes related to financing and operating activities in the consolidated statement of cash flows for 2022. Specifically, deferred commissions linked to Class T and Class D shares, sold during 2022, were incorrectly categorized as financing cash outflows. This error also impacted the operating activities section, leading to an overstatement of cash provided by operating activities for the year.
Cottonwood noted that this financial reporting error did not affect their overall cash flows, cash balances, or any other financial metrics such as their balance sheet, statement of operations, revenues, net income, or non-GAAP measures like net operating income or funds from operations.
For their preferred equity offerings, Cottonwood plans to resume accepting subscriptions on September 11, 2023, after updating offering materials to reflect the correction. Regarding their common stock offering, they will update their offering materials and expect to accept subscriptions in October, with a closing date of November 1, 2023, contingent upon the filing of an amended 10-K and SEC approval of the corrected registration statement.
Additionally, as part of the restatement process, Cottonwood has reviewed its internal controls and implemented measures to prevent similar errors in the future.
In July 2023, the company reported a 1.9% decrease in monthly NAV per share.
As of June 30, 2023, Cottonwood Communities held a portfolio worth $2.6 billion in total assets, primarily allocated to operating properties (82.4%), development (5.4%), land held for development (6.5%), and real estate-related structured investments (5.7%). They also have an ownership interest in four land sites earmarked for development.
Cottonwood Communities Inc. Merges with Affiliated REITs
Cottonwood Communities Inc. completed its mergers with Cottonwood Multifamily REIT I Inc. and Cottonwood Multifamily REIT II Inc, according to filings with the SEC on July 20, 2021.
Cottonwood Multifamily REIT I noted that it was negatively impacted by the Covid-19 global pandemic in August 2020. The company noted that because of shutdowns, quarantines or actual viral health issues, some of the tenants at the multifamily apartment communities of the properties “owned by our joint ventures have experienced job loss or reduced income and have or may be unable to make their rental payments.”
How Does a Merger Affect Shareholders?
Companies often merge as part of a strategic effort to boost shareholder value, often by creating new business lines and/or gaining greater market share. However, the economic environment at the time of the merger, size of the companies and management of the merger process all play a part in future returns for shareholders.
Shareholders may experience a significant loss of voting power, and while the spike in trading volume tends to inflate share prices, if economic conditions are not favorable at the time of the merger, shareholders may see significant losses.
Potential Lawsuits to Recovery Financial Losses
Non-traded REITS are considerably more complex than traditional investments and usually involve a high degree of risk. Unfortunately, many investors were unaware of the risks and liquidity problems associated with non-traded REITs, when they were sold the investments. They also may come with high fees and commissions.
Broker dealers are required to perform adequate due diligence on any investment they recommend and to ensure that all recommendations are suitable for the investor. Recommendations should be in line with the investor’s age, risk tolerance, net worth, and investment experience.
If a broker dealer fails to adequately disclose risks or make unsuitable investment recommendations, it can be held liable for investment losses.
If you are concerned about your investment in Cottonwood Communities or another Cottonwood REIT, the securities attorneys at The White Law Group may be able to help you. Please call The White Law Group at 1-888-637-5510 for a free consultation with an experienced securities attorney.
For more information on the firm’s investigation please see: Cottonwood Multifamily REIT I, Inc. Impacted by Covid-19
The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois.
For more information on The White Law Group and its representation of investors, please visit our website at www.whitesecuritieslaw.com
Tags: Cottonwood Communities, Cottonwood Multifamily Opportunity REIT, non-traded REITs Last modified: September 11, 2023