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American Farmland Company

Kurta Law is investigating a 2015 offering of a REIT called   (NASDAQ: AFCO). American Farmland Company is a Real Estate Investment Trust (REIT), which is a company that acquires a portfolio of income-producing real estate and distributes at least 90% of its taxable income to investors. Our investment fraud attorneys believe recommendations of these risky REITs may have violated securities rules and regulations.

Risks Associated with REITs

REITs’ required distributions are part of what may make these investments attractive, but REITs also feature their own unique risks that make them unsuitable for many investors. Besides the risks disclosed in the American Farmland prospectus, financial professionals should also have considered the following before recommending this REIT to their clients:

  • The REIT identified itself as an “emerging growth company,” which means it does not have to report its executive compensation, and its executive compensation was not subject to a shareholder vote.
  • REITs always impose a level of risk due to their illiquid nature. If an investor wants to get out of their investment, they may have to pay a significant fee to access their funds.

More Risks of American Farmland REIT

The prospectus identifies a long list of risks specific to American Farmland. The following are just a few examples:

Lack of Farms Under Contract

American Farmland Company planned to buy more farms, and investors would not have the opportunity to evaluate the acquisitions before purchase.

Ability to Qualify as a REIT

The company faced risks related to its ability to qualify as a REIT. The requirements to qualify as a REIT are complex, and while American Farmland believed it met those requirements, that belief was based on the opinion of their tax counsel. If their counsel proved incorrect and the company could no longer qualify as a REIT, it would be subject to entity-level income tax, and the company would no longer be required to make distributions.

Geographic Location

At the time of the prospectus filing, 70% of the REIT’s farmland was in California. The concentration of farms in one geographic area increased the level of risk – the region is susceptible to problems like drought, windstorms, and temperature extremes. With a more geographically diverse portfolio, the weather conditions in one area would not have such an outsize impact on the REIT’s returns.

Limited Number of Properties

At the time of the prospectus, the American Farmland REIT only owned 18 farms. The small number of properties means that one underperforming property could drastically affect the returns.

Types of Crops

As of the date of the prospectus, American Farmland REIT had 28% of its acreage planted with a majority mature permanent crops, such as trees and vines. Mature crops are more expensive to replace and are also more susceptible to the ravages of disease and bad weather.

Dependency on Tenants

American Farmland relied on its tenants to pay their rent. In the event of their bankruptcy and inability to pay rent, the REIT would still be on the hook for expenses like farm maintenance and real estate taxes.

Crop Prices

Prices of crops can fluctuate for several reasons, including demand, technological developments, and changes of governmental policies regarding agriculture – among other, impossible-to-predict factors.

Limited Operating History

American Farmland had a limited operating history and could not assure investors that the past experience of senior management qualified them to operate a REIT or a publicly traded company. Companies that have longer operating histories can more confidently assert that they have relevant management experience.

Recommendations of American Farmland REIT May Violate Securities Rules

Investors may be tempted to buy REITs in order to participate in the real estate market without having to manage a property. Financial professionals may also tout REITs as a way to introduce diversification into a portfolio. As with any investment, however, representatives of brokerage firms have a duty to understand both the investment’s risks and their customers’ financial needs and risk tolerance.

If brokers recommended these investments to ordinary investors with a conservative or moderate risk profile, they may have violated FINRA Rule 2111 and Regulation Best Interest.

Underwriters and Potential Conflicts of Interest

The following firms served as underwriters for this REIT. Our firm has learned that these firms received significant fees in exchange for their underwriting services. This may have created a conflict of interest when they agreed to bring the securities to the public.

  • Deutsche Bank Securities
  • CitiGroup
  • Raymond James
  • RBC Capital Markets
  • FBR & Co (Now Riley)
  • Wunderlich (Now B. Riley)
  • Oppenheimer & Co.
  • Janney Montgomery Scott

What Can I Do to Recover My American Farmland Investment?

Investors may be able to recover losses they suffered following a purchase of American Farmland REIT shares. Securities attorneys help investors recover losses through a process called FINRA arbitration. FINRA arbitration can hold brokerage firms accountable. Our attorneys only collect a fee if they win your case. Contact us today for a free case evaluation: (877) 600-0098 or