Category Archives: Behringer Harvard REIT

Their names include Behringer Harvard REIT I. Inland Western. Cole Credit Property Trust I.  Wells Real Estate Investment Trust II. Desert Capital. These and other non-traded REITs have become a bone of financial contention for countless investors.

The Financial Industry Regulatory Authority (FINRA) issued an investor alert on non-traded REITs in September in which it outlined potential risks of the products. Among the downsides cited: illiquidity, lack of transparency, and high commissions and other upfront fees.

Another risk associated with non-traded REITs concerns dividends, which are a key component to attracting investors. Known as “distributions” in the industry, these dividends “are not guaranteed and may exceed operating cash flow,” according to FINRA.

As a result, distributions can be suspended for a period of time or halted altogether.

That’s exactly what happened to some of the biggest non-traded REITs, including Apple REIT 10, Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Wells Real Estate Investment Trust II.

A posting on REIT Wrecks, a Web site that follows the non-traded REIT industry, describes what many investors are feeling these days about their non-traded REIT investments.

“I’ve been burned by Behringer Harvard. I sent my request for distribution in on February 10th of 2009. They denied me (and others) without any notice at their next board meeting (after making me resend the damn thing because I needed a special medallion signature stamp from my bank!). I wasn’t getting my money for any reason other than I’d been unemployed since June of 2008 and needed money to live! To find out I could only get my money out if I died was so morose and in bad taste that I wrote appeal after appeal to the board…only to be told to die or become disabled…and then ‘get in line with everyone else’.!

No one ever told me that this thing wasn’t liquid or would ever have these kinds of issues. No one ever told me that the valuation was completely a fiction. They just raised another few hundred million and then closed the doors on everyone!”

More investors are finding themselves steeped in financial losses because of misguided investing advice in non-traded or unlisted real estate investment trusts (REITs). The issue with these complex, illiquid and risky investments has to do with their statement value – which in many instances is inaccurate and based on outdated data.

In 2009, the Financial Industry Regulatory Authority (FINRA) issued a notice to broker/dealers of non-traded REITs prohibiting them from using data that was more than 18 months old to estimate the value of the products.

The problem is this: Some broker/dealers apparently did not abide by FINRA’s notice and, instead, provided artificial and/or misleading per share values on their clients’ account statements.

In other instances, broker/dealers showed the value of a client’s non-traded REIT at par – typically $10 a share. The price was inaccurate, however, because upfront fees, commissions and other expenses were never taken into account.

Other investors in non-traded REITs are facing suspended redemption policies, meaning they are literally stuck in an illiquid investment that they thought was safe, conservative and low risk. That list is long and getting longer, and includes such names as Behringer Harvard REIT I, Cole Credit Property Trust I, Desert Capital, and Inland Western.

The non-traded REIT industry is a big business, raising nearly $20 billion in 2009. For many non-traded REIT investors, these investments are causing more pain than gain.

If you’ve experienced financial losses in a non-traded REIT such as Behringer Harvard REIT I, Cole Credit Property Trust I, Desert Capital, or Inland Western, please contact us to tell your story.

The following is an online post by an obviously unhappy investor who put his money in a non-traded real estate investment trust known as Behringer Harvard.

“I’ve been burned by Behringer Harvard. I sent my request for distribution in on Feb. 10 of 2009. They denied me (and others) without any notice at their next board meeting (after making me resend the damn thing because I needed a special medallion signature stamp from my bank!).

“I wasn’t getting my money for any reason other than I’d been unemployed since June of 2008 and needed money to live! To find out I could only get my money out if I died was so morose and in bad taste that I wrote appeal after appeal to the board…only to be told to die or become disabled…and then ‘get in line with everyone else.’!”

That investor – who signs his post as “Larry” – goes on to write that “no one ever told him that this thing wasn’t liquid or would ever have these kinds of issues. No one ever told me that the valuation was completely a fiction. They’d just raised another few hundred million and then closed the doors on everyone!”

Larry’s situation is shared by a growing number of investors who put their faith and money in non-traded REITs. In the past year, non-traded REITs such as Behringer Harvard REIT I have become front-page news, with investors filing complaints over what their brokers failed to disclose about the investments.

In the case of Behringer Harvard, as well as the Cole REIT III, Inland Western, Inland American, and other REITs, investors found themselves totally caught off guard after discovering, like Larry, that their investments were high-risk, illiquid and contained highly complex and lengthy exit clauses.

By the way, Larry’s post – and others like it – can be found on the REIT Wrecks forum. In addition to online discussions about non-traded REITs, the Web site provides in-depth data, news and analysis about the non-traded REIT industry.

Maddox Hargett & Caruso currently is investigating sales of non-traded REITs, including those associated with Behringer Harvard, Hines REIT I, Cornerstone, Inland American, and Inland Western. If you’ve suffered financial losses of $100,000 or more in a non-traded REIT and believe those losses are the result of inadequate information on the part of your broker/dealer, please contact us.

Non-traded real estate investments trusts (REITs) like Behringer Harvard REIT and Inland Western are a big hit with independent broker/dealers and financial advisors for their high commissions – sometimes up to 15%. Meanwhile, investors who buy non-traded REITs often find themselves in the dark, unaware of how the products actually work and the potential risks they hold.

Non-traded REITs, or unlisted REITs, do not trade on national stock exchanges. When an investor wants to redeem his or her shares in a non-traded REIT, there is a specific window of time in which to do so. In most instances, the holding period associated with non-traded REITs is at least seven years.

One of the biggest challenges of non-traded REITs is a lack of transparency, as well as a lack of any publicly available analysis. Prospectus language, too, is typically vague, especially when it pertains to getting out of a non-traded REIT.

In the past year, a number of well known non-traded REITs have either slashed dividends or drastically limited their redemption programs. In response, more investors are coming forth with complaints that they were sold non-traded REITs when, in fact, they were actually looking for a safe, conservative investment – something that a non-traded REIT is most definitely not. In reality, non-traded REITs are considered high risk and illiquid.

When a non-traded REIT program decides to suspend redemptions it, in turn, will no longer buy back an investor’s shares in the REIT. This leaves investors – many of whom are counting on consistent dividends from their investment – empty-handed.

Maddox Hargett & Caruso continues to investigate the selling practices of independent broker/dealers and investment firms such as UBS, Merrill Lynch, Citigroup, Morgan Keegan & Company, as well as others that may have recommended unsuitable investments in non-traded REITs to clients. If you have a story to tell about your investment losses in non-traded REITs, we encourage you to contact us.

Medical Capital Holdings. Securities America. Behringer Harvard REIT I. Main Street Natural Gas Bonds. Tim Durham. Fannie Mae, Freddie Mac Preferred Shares. Goldman Sachs CDO Fraud. Lehman Structured Notes. These names were among the hot topics that dominated the investment headlines in 2010.

In January, Securities America was accused by Massachusetts Secretary of State William Galvin of misleading investors and intentionally making material misrepresentations and omissions in order to get them to purchase private placements in Medical Capital Holdings. Medical Capital was sued by the Securities and Exchange Commission (SEC) in July 2009 and placed into receivership. Its collapse ultimately created about $1 billion in losses for investors throughout the country.

According to the Massachusetts complaint, as well as other state complaints that would follow, many investors were unaware of the risks involved in their Medical Capital private placements. They also didn’t know about the crumbling financial health of the company. Securities America, on the other hand, was fully aware of both, regulators allege.

In February, non-traded real estate investment trusts like the Behringer Harvard REIT I became front-page news, as investors filed complaints over what their brokers did and did not disclose about the investments. In the case of Behringer and other non-traded REITs, including Cornerstone, Inland Western and Inland American, investors found themselves blindsided after discovering their investments were high-risk, illiquid and contained highly specific and lengthy exit clauses.

In March, rogue brokers Bambi Holzer faced charges in connection to sales of private placements in Provident Royalties. Like Medical Capital Holdings, the SEC charged Provident with securities fraud, citing $485 million in private securities sales. In March 2010, the Financial Industry Regulatory Authority (FINRA) formally expelled Provident Asset Management LLC, the broker-dealer arm of Provident.

Ponzi schemes were big news, as well, in March. Heading the list of offenders was Rhonda Breard, a former broker for ING Financial Partners. State regulators contend Breard scammed nearly $8 million from investors in a Ponzi scheme that allegedly had been going on since at least 2007.

In April, Goldman Sachs and its role in the financial crisis faced new scrutiny by Congress. Internal emails became the driving force behind the interest. Eventually, charges were filed by the SEC over a synthetic collateralized loan obligation – Abacus 2007-ACI – that produced about $1 billion in investor losses. Goldman later reached a settlement with the SEC, paying a $550 million fine. The fine remains the biggest fine ever levied by the SEC on a U.S. financial institution. Goldman also acknowledged that its marketing materials for Abacus contained incomplete information.

In May, FINRA stepped up its own scrutiny of non-traded REITs. On its watch list: Behringer Harvard REIT I, Inland America Real Estate Trust, Inland Western Retail Real Estate Trust, Wells Real Estate Investment Trust II and Piedmont Office Realty Trust. In particular, FINRA began to probe the ways in which broker/dealers marketed and sold non-traded REITs to investors.

In June, 49 broker/dealers found themselves named in a lawsuit involving sales of Provident Royalties private placements. The lawsuit, filed June 21 by the trustee overseeing Provident – Milo H. Segner Jr. – charged the broker/dealers of failing to uphold their fiduciary obligations when selling a series of Provident Royalties LLC private placements. Among the leading sellers of private placements in Provident Royalties were Capital Financial Services, with $33.7 million in sales; Next Financial Group, with $33.5 million; and QA3 Financial Corp., with $32.6 million.

In July, Fannie Mae and Freddie Mac were back in the news, as a rash of investors began filing lawsuits and arbitration claims over preferred shares purchased in the companies. In 2007 and 2008, investment firms like UBS, Morgan Stanley, Citigroup, Merrill Lynch and others sold billions of dollars in various series of preferred stock issued by the two mortgage giants. According to investors, however, the brokerages never revealed key information about the preferred shares, including the rapidly deteriorating financial health of Freddie Mac and Fannie Mae and the fact that both companies had a growing appetite for risky lending, excessive leverage and investments in toxic derivatives.

In August, new issues regarding retained asset accounts (RAAs) came to light. Specifically, RAAs allow insurers to earn high returns – 4.8% – on the proceeds of a life insurance policy. Meanwhile, beneficiaries often receive peanuts via interest rates as low as 0.5%. Adding to the issues of RAAs is the fact that the products are not insured by the Federal Deposit Insurance Corp. (FDIC).

In September, new concerns about the suitability of leveraged, inverse exchange-traded funds (ETFs) for individual investors began to crop up. Among other things, regulators cautioned investors about the products and stated that they may be inappropriate for long-term investors because returns can potentially deviate from underlying indexes when held for longer than single trading day.

In October, the ugliness associated with some non-traded REITs gained new momentum. A number of non-traded REIT programs eliminated or severely limited their share repurchase programs. At the same time, some non-traded REITs continued to offer their shares to the public. As of the first quarter of 2010, this group included Behringer Harvard Multi-family REIT I, Grubb & Ellis Apartment REIT, Wells REIT II, and Wells Timberland REIT.

In November, sales of structured notes hit record highs of more than a $42 billion. Leading the pack in sales of structured notes was Morgan Stanley at $10.1 billion, followed by Bank of America Corp., which issued $7.9 billion.

Because of their complexity, structured products are not for those who don’t fully understand them. Moreover, once an investor puts money into a structured product, he or she is essentially locked in for the duration of the contract. And, contrary to promises of principal by some brokers, investors can still lose money – and a lot of it – in structured notes.

Case in point: Lehman Brothers Holdings. Investors who invested in principal-protected notes issued by Lehman Brothers lost almost all of their investment when Lehman filed for bankruptcy in September 2008.

Also big news in November 2010: Tim Durham and Fair Finance. The offices of Fair Finance were raided by federal agents of Nov. 24. On that same day, the U.S. Attorney’s Office in Indianapolis filed court papers alleging that Fair Finance operated as a Ponzi scheme, using money from new investors to pay off prior purchasers of the investment certificates. According to reports, investors were defrauded out of more than $200 million.

The effects of Lehman Brothers’ bankruptcy continued to unfold in December 2010 for many investors who had investments in Main Street Natural Gas Bonds. Main Street Natural Gas Bonds were marketed and sold by a number of Wall Street brokerages as safe, conservative municipal bonds. Instead, the bonds were complex derivative securities backed by Lehman Brothers. When Lehman filed for bankruptcy protection in September 2008, the trading values of the Main Street Bonds plummeted.

Many investors who purchased Main Street Natural Gas Bonds did so because they were looking for a safe, tax-free income-producing investment backed by a municipality. What they got, however, was a far different reality.

Their names may be different – Cornerstone Core Property, Inland American, Inland Western and Behringer Harvard REIT I – but these non-traded real estate investment trusts (REITs) have produced similar financial woes for their investors.

Non-traded REITs can be tricky investments. The products do not trade on national stock exchanges. Redemptions in them are limited at best; most non-traded REITs entail a lengthy holding period – in some instances, up to eight years.

The biggest fault concerning non-traded REITs is one of transparency. Non-traded REITs generally provide no independent source of performance data for investors. Instead, investors must rely on the broker/dealer responsible for pitching and selling the the investment.

And therein lies the problem.

In recent months, numerous complaints have come to light concerning non-traded REITs and, specifically, the broker/dealers behind the deals. Investors allege that they were never given complete details about their investment, as well as the many risks associated with non-traded REITs in general.

The lack of disclosure may have something to do with the high commissions and fees that broker/dealers take in from sales of non-traded REIT shares. In many cases, these fees are 15% or more.

This year, many investors in non-traded REITs have had to face a harsh reality. Instead of getting the stability, liquidity and a reliable source of income they were initially promised by their broker/dealers, they received dividend cuts and elimination of shareholder redemption programs.

Earlier this year, the Financial Industry Regulatory Authority (FINRA) began to take a keen interest in non-traded REITs by conducting a sweep of the promotion practices and sales of broker/dealers associated with the products.

Maddox Hargett & Caruso currently is investigating sales of non-traded REITs, including Cornerstone, Inland American, Inland Western and Behringer Harvard. If you’ve suffered financial losses of $100,000 or more in a non-traded REIT and believe those losses are the result of inadequate information on the part of your broker/dealer, please Contact Us.

Inland American Real Estate Trust has reset the value of its common shares to $8.03. For investors, it isn’t good news; the price is down from the $10 that the shares sold for when the non-traded REIT was first launched in 2005.

Inland announced the reset on Sept. 21 in an 8-K filing with the Securities and Exchange Commission (SEC). Inland also stated in the filing that it “gives no assurance that a stockholder would be able to resell his or her shares at the new estimated value.”

“We believe the current downturn in the economy has depressed the value of our assets and hence the estimated value of our shares,” Inland said. “The value of our shares will likely change over time and will be influenced by changes to the value of our individual assets as well as changes and developments in the real estate and capital markets.”

Other non-traded have followed Inland lead in resetting their values. Among them: Behringer Harvard REIT I, which reset its shares to $4.25 earlier this summer, and KBS REIT, which reset its value to $7.17 in late 2009.

Maddox Hargett & Caruso is investigating sales of non-traded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning non-traded REITs, please contact us.

Behringer Harvard REIT I, which raised $2.9 billion from its 2003 launch to the end of its final offering in December 2008, has reduced its share value as of May 17 to $4.25, plus cut its annualized dividend rate to 1%, according to a regulatory filing. For countless investors, this revaluation has been a crushing blow financially.

Nontraded real estate investment trusts (REITs) are now capturing the attention of regulators, who want to know exactly what brokers did and did not disclose to investors about the products. In March 2009, the Financial Industry Regulatory Authority (FINRA) officially opened an investigation into nontraded REITs with an examination of documentation and data from various brokers who sell the investments.

Among other things, FINRA’s focus is on whether the sales were suitable and whether the firms made misleading statements to investors regarding fees, dividends and liquidity.

As reported June 1 by Bloomberg, nontraded REITs often appeal to unsophisticated investors who may not understand the extent of risks that the products present. Those risks can include huge broker fees and commissions, unexpected share devaluation, dividend cuts and suspension of buyback programs.

Many investors with nontraded REITs have experienced significant financial losses because of the fraudulent representations made by their broker. Specifically, investors who’ve filed arbitration claims allege that the products were presented as low risk and that critical information was never disclosed.

Behringer Harvard REIT I and Inland Western Retail Real Estate Trust are among a number of nontraded REITs that have reduced dividends to shareholders in the past year. Other firms such as Cole Credit Property Trust II, Hines Real Estate Investment Trust Inc. and Wells Real Estate Investment Trust II suspended or limited redemptions this year and in 2009.

Maddox Hargett & Caruso currently is investigating sales of nontraded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning a nontraded REIT, please Contact Us.

Highly leveraged REITs like Behringer Harvard REIT I, Inland Western Retail Real Estate Trust and others have produced hundreds of thousands of dollars in losses for investors in the past year. As non-traded REITs, the products are not listed on an exchange; they also come with high commissions and fees. Many investors bought into non-traded REITs based on their broker’s sales pitches, which touted steady dividends and a stock price that wouldn’t fluctuate with the market.

That didn’t happen, however. Instead, investors like Robert and Davida Wendorf lost big. As reported June 1 by Bloomberg, the Wendorfs invested $100,000 in 2004 in Inland Western Retail Real Estate Trust. In 2009, Inland cut its payout by 70%. Prior to that, the company had suspended a program under which the Wendorfs could have sold back their shares at the same $10 apiece they initially paid. By the end of 2009, however, the company had reset the stock price to $6.85.

“You can say I was stupid,” said Robert Wendorf, 69, a retired psychotherapist in San Juan Capistrano, California, in the Bloomberg article. “In all honesty you don’t think people sit down and really read all of those papers? Most people do what I did. They trust the guy as he points where to sign.”

The Wendorfs eventually sold their shares in Inland Western at a $45,000 loss.

Regulators are now taking a closer look at the brokers who sell unlisted REITs – which have raised nearly $60 billion since 2000. Specifically, regulators want to know if investors are being properly informed about the products at the time they buy into them.

Maddox Hargett & Caruso is investigating sales of non-traded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning non-traded REITs, please Contact Us.

Non-traded REITs such as Behringer Harvard REIT I, Behringer Harvard Opportunity, Wells Real Estate Investment Trust II, Inland America Real Estate Trust and Inland Western Retail Real Estate Trust may become more transparent thanks to a new platform under development by the Depository Trust and Clearing Corporation (DTCC).

As reported June 6 by Investment News, the intent of the platform it to provide standards, centralize data and automate transactions for alternative investments like private placements, non-traded real estate investment trusts, limited partnerships and hedge funds. Through the new platform, the DTCC will operate as a go-between among firms that create alternative investments and the broker/dealers and companies selling them.

The platform – called the Alternative Investment Product (AIP) – currently is being used by Pershing LLC. The Charles Schwab Corp. is testing it, according to the Investment News story, and National Financial Services LLC, a clearing unit of Fidelity Investments, plans to have it operating by 2011.

In the interim, about 15 DTCC- affiliated sponsors of alternative investment products are testing the platform.

Alternative investments like non-traded REITs and private placements have come under fire by regulators in recent months for their lack of transparency. In July 2009, the Securities and Exchange Commission (SEC) filed fraud charges against the Tustin, California, lender Medical Capital Holdings in connection to private placements that the company issued to more than 20,000 investors nationwide.

Non-traded REITs also faced intense scrutiny lately. Last year, some of the most prominent non-traded REITs, including Behringer Harvard REIT I, Inland America Real Estate Trust, Inland Western Retail Real Estate Trust and Piedmont Office Realty Trust slashed dividends to investors and/or shut down their redemption programs.

The AIP is intended to standardize the way the alternative investment industry communicates information about these types of investments, providing more new clarity.

“The challenge for many alternative investments is that they’re non-standardized,” said one anonymous industry executive in the June 6 Investment News story. “They’re not always priced and valued on a regular basis. This is an investor need, a broker/dealer need.”