Apple REITs: A Thorn in Investors’ Side

Apple REITs, sold by David Lerner & Associates, are causing investors to stay awake at night. The non-traded illiquid real-estate investment trusts have been in the news since May, when the Financial Industry Regulatory Authority (FINRA) filed a complaint against David Lerner, accusing the firm of misleading investors and marketing unsuitable investment products to them.

Specifically, FINRA questioned Lerner’s valuation of the Apple REITs, noting that investors had been consistently told that their shares were worth $11 a piece when in reality that was no longer the case. In fact, clients of David Lerner Associates who owned shares in the Apple REITs received account statements last month showing the listed value of their investments as “not priced.” One of the REITs – the Apple REIT 8 – reportedly has a book value of about $7.50 per unit, according to a June 21 story by Market Watch.

FINRA also alleges that in its most recent Apple REIT sales, David Lerner failed to do an adequate job of ensuring that an illiquid REIT was a “suitable” investment for unsophisticated and elderly customers.

Since 1993, more than 120,000 accounts have been opened in 10 different real-estate investment trusts underwritten by David Lerner Associates, according to the Market Watch article. With each account, the promise was basically the same: Steady income and possible capital appreciation. The Apple REITs opened in the late 1990s. The most recent offerings – Apple REITs 6 through 9 – are collections of full-service, “select” service – i.e. discount – and extended-stay hotel properties that each drew at least $1 billion from investors.

The founder, chairman of the board and chief executive officer of four REITs – Apple REIT Six, Apple REIT Seven, Apple REIT Eight and Apple REIT Nine – is Glade M. Knight. Knight also founded and served as the chairman and chief executive officer of Apple Hospitality Two and Apple Hospitality Five, two hotel REITs, until they were sold during 2007.

The twist to the Apple REIT saga is this: An unsolicited tender offer was made in June to owners of Apple REITs 7 and 8 by a group of entities affiliated with MacKenzie Patterson Fuller, LP of California. Fuller’s offer was for $3 per unit of the REITs.

As reported by Market Watch, the pitch is similar to those associated with structured settlements in which an investor is expecting a cash payout from a lawsuit or annuity and wants to get a lump-sum payment immediately.