“People want to be diversified in commercial real estate, and would look elsewhere” if they can’t access ARC or Cole products, said Kevin Hogan, chief executive of the Investment Program Association, which represents product sponsors.

RCS Capital Corp. (RCAP), the Schorsch-affiliated broker-dealer and the dealer-manager for ARC products, has taken a hit. On a November 13 earnings call, RCAP officials declined to give future guidance for the direct-investments wholesaling business due to the disruptions caused by ARCP’s problems.

Officials at ARCP and ARC were not available for comment.

What the long-term impact on the non-traded REIT market will be is hard to predict, said Keith Allaire, also a managing director at Stanger.
       
“If there is a continual flow of issues, it will have a significant impact, simply because [ARC and Cole] represent about 50 percent of the entire market,” Allaire said.

Direct-investment providers need the trust of investors and advisors to gather money and deploy it in what is essentially a blind pool. The ARCP situation could hurt perceptions of the entire industry.

“What we may see out of this is more focus on operating controls at the sponsor level,” said Scott Smith, chief executive of FactRight LLC, a due diligence consultant for the industry.

Many advisors have gotten used to seeing money in non-traded REITs turn over every few years––generating both new commissions and happy investors, observers say. Those days may be gone, especially if Schorsch has to cool his buyout activity.

Even prior to the ARCP accounting fiasco, sales of non-traded REITs and other products were already slowing from 2013’s liquidity event-driven record pace.

Year-to-date through October, sales of non-traded REITs, which account for three-quarters of the direct investment industry, were off 20 percent compared to the same period a year ago. In 2013, REIT sales were up 89.5 percent, according to Stanger.

The ARCP issue “is certainly not going to have a positive effect” on sales, Allaire said. “It will be tearing [the Schorsch companies] apart for awhile.”