Non-traded real estate investment trusts (REITs) known as Apple REITs are facing a mountain of legal complaints by investors and regulators alike. In June, the Financial Industry Regulatory Authority (FINRA) filed a disciplinary action against broker/dealer David Lerner Associates in connection to the investments.
For months, clients of Lerner have been receiving account statements showing the value of several Apple REITs as $11 each. Unfortunately, those account statements failed to reveal the true problems behind the investments.
As reported June 2 by the New York Times, Apple REIT No. 8 had to make mortgage payments on four hotels it owns, and may have to surrender the properties to the lenders. Yet, it had not written down the values of those hotels on its financial statements.
In its disciplinary action against Lerner, FINRA accuses the company of misleading investors in selling the current Apple REIT, No. 10. It said Lerner was “targeting unsophisticated and elderly customers with unsuitable sales of this illiquid security” and misled them regarding the record of earlier Apple REITs. FINRA further stated that shares were sold to customers for whom such risky investments were unsuitable; it also claims there was deception in the way the shares were marketed.
In 2009, FINRA issued a notice to broker/dealers on non-traded REITs and the fact that they were being listed at original value long after the values should have been changed. As a result, amendments were made requiring the investments to be valued based on information no more than 18 months old.
One day following FINRA’s most recent action against Lerner, an investment management company announced a tender offer to buy up to 5% of the outstanding Apple No. 8 shares. The offer wasn’t for $11, however. It was for $3.
Non-traded REITs are registered with the Securities and Exchange Commission (SEC), but they are not publicly traded. The Apple REITs will repurchase a small number of shares each year, but most investors must wait five years or more to get their money back. That happens when the REIT either liquidates or begins to trade publicly.
In 2010, sales of non-traded REIT shares by sponsors raised $8.3 billion from investors, according to figures compiled by Blue Vault Partners, a research firm.
Shares of non-traded REITs are sold by broker/dealers like Lerner, which gets big commissions from the sales. In the case of the Apple REITs, 10% of the purchase price went to Lerner, according to the New York Times story. Meanwhile, Glade M. Knight, chief executive of the Apple REITs, collected a 2% commission for every hotel purchased by the REIT. That’s on top of the advisory fees he was paid. He can collect another 2% when the hotels are sold.
David Lerner Associates gets the majority of its income from selling the Apple REITs.
If you are an investor in the Apple REITs through David Lerner Associates, please contact us to tell your story.