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Adam Gant (left) and Emanuel Arruda, the founders of League Assets Corp., met when Arruda was running an errand in Victoria (Ian Keltie)

Adam Gant (left) and Emanuel Arruda, the founders of League Assets Corp., met when Arruda was running an errand in Victoria

(Ian Keltie)

REITs are supposed to be safe: Why this one’s flirting with bankruptcy Add to ...

It didn’t take much to trigger Rachelle Berube’s BS detector. League Assets Corp.’s investment strategy baffled her from the get-go.

In 2008, the plain-spoken property manager was researching real estate investing, hoping to make some serious money, when she came across League’s ads touting returns of 10 per cent to 15 per cent annually. Intrigued, she ordered a copy of “The Blue Book of Real Estate Syndication,” a “plain-language” bible of the League approach to investing.

But the scripture didn’t teach her much; nor did it instill confidence. It read more like a sales pitch, and a woolly one at that, than a strategy. The “Blue Book” suggested that investing in real estate would help “improve the quality of human lives worldwide,” and declared that every time League brought wealth to a new investor or bought a new property, “we add strength to the fabric of our free society.”

The guide glossed over the risks of investing in real estate. It also painted the company’s co-founders as sophisticated–without explaining how they acquired their expertise. When putting money in League, “you can be sure that your investment is in experienced and reliable hands,” the “Blue Book” states. “If somebody says ‘trust me,’ I’m immediately extremely suspicious of anything they say after that,” Berube says.

As Berube learned more about League, which eventually touted assets under management of more than $1-billion, her doubts were heightened–and she wasn’t shy about expressing her views on the website she runs and on other online forums. At her most pointed, she accused League, headed by co-founders Adam Gant and Emanuel Arruda, of running a Ponzi scheme that amounted to “thievery.” League responded by denying her allegations and filing a $2.6-million defamation lawsuit in May, 2013.

It was a rare and little-noticed outbreak of rancour in a national real-estate scene that had been scorching hot since the financial crisis. As the rising tide lifted all boats, both quality companies and risky bets saw their valuations soar. Investors hungry for yield in an era of rock-bottom interest rates flocked to the sector, especially real estate investment trusts (REITs) like League’s, which paid monthly distributions, and are widely viewed as safe investments.

Regulators had to work hard to stay on the ball as valuations skyrocketed. REITs owe their secure reputation to the fact that they normally buy income-producing properties and then pay out most of their monthly rental income to investors. But the frothy market added a new dynamic: A slew of new real estate companies were going public, and many firms already in the market were bulking up by either acquiring additional properties at a fast clip or, in select cases, adding development projects. That latter strategy entailed new risks and years of waiting for cash flow, in contrast to the safer model of banking on existing bricks and mortar.

The trend toward development was particularly worrisome for neophyte management teams that had yet to live through a bust. “Real estate is highly cyclical,” says Shant Poladian, a former Bay Street real estate analyst who heads FAM REIT. “Over these cycles, the two things that keep coming back to haunt the industry are too much debt and too much development.”

League had an appetite for both—and it would have $363-million of investors’ money to play with.




Created in 2005, League was designed to help individuals invest in large-scale commercial, industrial and residential real estate across Canada. The company often upgraded the strip plazas and apartment buildings it acquired, and then brought in new tenants who paid higher rents – a common industry practice.

League’s largest investment vehicle is IGW REIT, which owns numerous properties. The company also offered investments in single-property projects. But IGW is the investment that took off, thanks to the federal government’s decision in October, 2006, to stamp out the tax advantages enjoyed by income trusts. Although REITs, like income trusts, pay out most of their income to shareholders as distributions, they were spared the pain.

League faced stiff competition, but IGW had some unique attractions. Most importantly, its 10.05 per cent annual distribution paid investors more than most rivals in 2007. RioCan REIT, an industry stalwart, paid roughly a 6 per cent distribution at that time. And instead of being listed on a public stock exchange, like the vast majority of its peers, IGW was held privately, with only a handful of other REITs in the same boat.

Gant and Arruda played up this feature, arguing in their literature and advertisements that IGW “doesn’t succumb to the fluctuations of the market.” They didn’t dwell on the problems that could arise if investors in a private REIT rushed for the exit. Since such a firm doesn’t have a stock exchange listing, investors wanting to get out could only sell their shares back to the company. Moreover, since it was private, League didn’t have to disclose financial information nearly as frequently, or in as much detail, as its publicly traded peers. Nor was it followed by research analysts on Bay Street.

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