Sierra Real Estate Trusts’ Poor Showing Spawns Anger, Suits : Property: Present and former managers say allegations of wrongdoing and excessive fees are unfounded.

Bolstered by the booming 1980s real estate market, Sierra Capital Cos. became one of the biggest real estate investment trust funds in the nation during the decade--with 43,000 investors holding shares in properties worth as much as $600 million.

But today, at a time when many other REITs are holding their own despite a nationwide real estate slump, the Sierra funds are compiling one of the worst performance records since the giant Dallas real estate concern Southmark Corp. was forced to seek protection in federal bankruptcy court in 1989.

Since 1990, the value of the 134 properties owned by the seven REITs has dropped 18%. The funds’ stock prices have collapsed. And the funds’ shareholders--an estimated one-third of whom live in California--have filed at least two class-action lawsuits seeking to oust managers of the trusts. Among other things, the suits allege that some officers of the funds paid themselves excessive advisory fees and engaged in unjustified transactions that benefited only them financially.

Sierra was started in the early 1980s by Thomas B. Swartz, a San Francisco lawyer who served as president of the National Assn. of Real Estate Investment Trusts from 1989 to 1990. Sierra brought commercial property in the western United States, including a shopping complex in ritzy Rolling Hills Estates near Los Angeles, and put them in seven trusts: Sierra Trusts, ‘82, ‘83, IV, VI and VII (which have been renamed the Meridian Trusts) and Sierra Trusts ’84 and VIII (which are managed by Meridian but have not been renamed).

Milton K. Reeder, president of San Francisco-based Meridian Point Properties Inc., which took over the management of Sierra Funds last March, said through a spokeswoman that his management team is cutting overhead but that allegations of wrongdoing are “completely false.” He added that the trust has been audited annually since it began and that no irregularities have been found.

Reeder and Swartz say the former Sierra funds have fallen out of favor primarily because their shares are thinly traded and undervalued on Wall Street.

But lawyers, shareholders and independent analysts who have examined the funds contend that some of the company’s present and former managers designed real estate transactions to generate commissions and other fees for themselves rather than profits for their investors.

“Extremely high fees and commissions” have left the seven former Sierra funds “dead in the water,” said Jon Forsheim, a principal in Green Street Advisers of Newport Beach, Calif., which researches public real estate companies for investors. “They’re certainly in the hall of shame of REITs,” he added.

Investors in the seven Sierra REITs saw their share prices plummet as much as 79.4% in 1991, according to the National Assn. of Real Estate Investment Trusts, a Washington-based trade group. By contrast, all 136 REITs tracked by the association posted an average total return of 35.7% in 1991. Total returns include both share prices and dividends.

Sierra’s lackluster performance has been especially disheartening for retirees and other small investors such as Ruth Hale, a 71-year-old Santa Paula resident who in 1984 invested $4,000 of her savings in the Sierra ’84 fund.

“We expected to have some return on our investment, but it’s been horrible,” said Hale. “I don’t even look at the paper to read the (stock) price any more. I’ve decided that it’s dead.” Trust managers, Hale complained, “don’t have the interest of investors at heart.”

During the 1980s, REITs caught on as an especially attractive way for small investors to cash in on the decade’s surging property values. REITs are liquid securities that are traded on exchanges like other stock. They are managed by professionals who pool investors’ money in order to buy portfolios of profitable commercial property and/or commercial real estate mortgages.

Besides heading the trusts he created, Swartz--who parted company with the original Sierra funds last March to start a new real estate investment firm--said he also ran three companies that provided services to the Sierra REITs: Sierra Capital Services, an accounting, legal and transfer agent service; Capital Realty Advisors, which managed the trusts; and Sierra Capital Realty Services, which managed and leased trust holdings.

Those companies had multimillion-dollar contracts with the former Sierra REITs. Between 1987 and 1990 they were paid $46.7 million in fees and commissions, according to the funds’ annual reports. The fees, commissions and other compensation paid by some of the funds amounted to as much as 132% of their annual revenue, a suit filed in San Francisco Superior Court by two Sierra shareholders contends.

What’s more, Swartz and the companies he controlled received millions of dollars last March after Sierra paid out $7.2 million to terminate its management and advisory contracts even though those contracts could theoretically have been allowed to expire a short while later with no financial penalty, according to the funds’ annual reports.

“Why pay anything when you could have just let the one-year management and advisory agreements expire,” the trustees wrote in a letter to shareholders last year. Because “the owners of Sierra Capital indicated that if they received such notice, Sierra Capital would declare bankruptcy. We were advised and we agreed that the Trusts would then become involved in a complicated . . . and very expensive proceeding under the direction of a bankruptcy court.”

Swartz denies threatening to file bankruptcy. He said there was an arm’s-length relationship between his companies and the former Sierra trusts, and he adds that the fees his companies charged were not out of line with industry norms.

“Theoretically, it may look like there’s self-dealing, but there’s nothing wrong with that if it’s fully disclosed,” said Swartz, who is now president of his own Oakland-based real estate investment fund. He added that “we are as chagrined by the stock market’s evaluation of the (slumping Meridian) shares as anyone else. We’ve lost money as shareholders . . . I don’t believe the allegation of excessive fees is correct.”

A report by the National Assn. of REIT indicates that some of Sierra’s stated fees were lower than the industry average: The association reported that the average fee for 25 equity REITs surveyed in 1989 was 1.15% of the invested assets of the trust. Sierra’s advisory fees ranged between 0.5% and 1%, Swartz said.

But advisory agreements often allow the adviser to receive additional compensation for the acquisition and disposition of property as well as a portion of any realized capital gain, the association’s report on fees notes.

Swartz said those other fees “were competitive and no higher than industry average.” However, the additional compensation angered many shareholders of the former Sierra trusts, who say such fees virtually wiped out any profits in many transactions.

Last year, for example, Meridian announced a $2.6-million profit from the sale of property in Buena Park. But trustees said they used the proceeds to pay down the loan on another property, “pay off trust administrative expenses” and put aside money in escrow for performance guarantees.

“It’s mind boggling, the money that they’ve taken,” said New York investor Arthur L. Dann, who owns 85,100 shares in Sierra Real Estate Equity Trust ’84 and has filed suit in U.S. District Court in San Francisco to oust the fund’s management. “If shareholders don’t act soon, there won’t be anything left.”