Welcome to the sixth edition of our monthly newsletter, with all the real estate crowdfunding gossip and scuttlebutt that’s fit to print.
February’s a short month, so this newsletter will be shorter than usual, but there were some major news items that rocked the industry.
Landa Ordered to Surrender 119 Properties Amid Legal Battle
A New York judge has ordered real estate crowdfunding platform Landa to hand over 119 properties to an independent manager following a lawsuit from lenders Viola Credit and L Finance over $35 million in loans.
The startup, founded in 2019 with the mission of "democratizing real estate investment" through $5 fractional shares (certainly not the only company with that goal), is accused of violating a December injunction by diverting $724,000 from property accounts and instructing tenants to pay rent to new accounts.
CEO Yishai Cohen, an Israeli entrepreneur in his late twenties with no real estate experience, must appear in court in March. Recent financial disclosures show Landa's portfolio is losing money, with losses quadrupling to $1.8 million in the first half of 2024. Three board members resigned in December, and investors fear losing their investments.
Landa owns over 200 properties primarily in Atlanta and the Southeast, plus some Brooklyn buildings, but many are reportedly vacant and in disrepair. Investor Dane Moreton, who put $7,000 into 13 Landa properties, doubts he will recover his investment. Judge Jennifer Schecter has threatened to hold Landa in contempt of court if they continue to violate the injunction. The company has disputed the allegations through their recently hired attorney. Here’s one of Landa’s grossly neglected properties in Georgia:
SEC Files Civil Lawsuit Against Nightingale CEO After Guilty Plea
The Securities and Exchange Commission has filed a civil lawsuit against Nightingale Properties CEO Elie Schwartz, seeking a permanent injunction that would bar him from selling or issuing securities after he misappropriated more than $52 million in investor funds. The lawsuit comes just a week after Schwartz pleaded guilty to wire fraud charges, for which he faces up to 20 years in prison. (We originally discussed Schwartz’s legal issues back in December.)
Schwartz raised approximately $54 million from investors on the CrowdStreet platform in 2022 for the purchase of the Atlanta Financial Center office complex, and an additional $8.8 million to recapitalize a vacant Miami Beach office building. According to the SEC's complaint, Schwartz began diverting funds to other accounts just three days after receiving the first investments.
The SEC alleges Schwartz used the misappropriated funds to prop up struggling Nightingale properties, build a luxury condo in Miami, purchase $12 million in stocks and options, buy luxury watches, and pay off credit card bills. In total, 821 CrowdStreet investors suffered $52.5 million in losses.
CrowdStreet has maintained that it discovered the fraud, alerted federal authorities, and provided millions of dollars to help recover investor funds. In addition to the permanent injunction, the SEC is seeking full accounting of the embezzled proceeds and repayment with interest, plus civil penalties. Schwartz has already agreed to pay full restitution as part of his criminal plea agreement. His sentencing is scheduled for May 19.
The Connection: Anna Phillips Tackles Two Major Real Estate Investment Failures
Both troubled real estate investment platforms share a common figure working to salvage investor assets: independent manager Anna Phillips. Her dual role highlights the growing challenges facing "democratized" real estate investments, where investor protections can be limited.
In the Landa case, Phillips was appointed to manage 119 properties after the startup allegedly violated loan agreements with lenders Viola Credit and L Finance. The properties can be sold to satisfy the $35 million debt, likely leaving fractional investors with losses.
In the more severe Nightingale Properties case, Phillips represents 821 investors who lost $52.5 million after CEO Elie Schwartz diverted funds raised through the CrowdStreet platform. She placed Schwartz's entities into bankruptcy in July 2023 and has been cooperating with both SEC and Department of Justice investigators.
Phillips' work on both cases offers a rare window into the challenges of fractional real estate investing. While hustling to recover what she can for investors in each situation, her dual role showcases just how important solid oversight and transparency really are. Though different in nature, these parallel situations remind us that when pooling investor money in property ventures, the quality of management and governance makes all the difference.
See You Next Month
Thanks for reading. Stay tuned for more gossip, slander, and scuttlebutt.