Category Archives: Non-traded REITs

Investors in the Behringer Harvard Strategic Opportunity Fund I were given news last week news that they likely never thought they would hear. Their investment, which many investors had purchased on the recommendation of brokers who characterized the product as a low risk, safe investment, is now underwater.

The Strategic Opportunity Fund I’s “liabilities are greater than its assets,” said Michael O’Hanlon, chief executive of the funds comprising Behringer Harvard’s opportunity platform, in an Aug. 26 story in Investment News.

First offered in 2005, the Behringer Harvard Strategic Opportunity Fund I raised $65 million and invested in six properties, including an office building in Amsterdam and a hotel on Wilshire Boulevard in Los Angeles.

Non-traded real estate investment trust (REITs) like the Strategic Opportunity Fund have encountered a number of problems over the past year. Among them: Disclosure issues, high front-end fees of sometimes up to 15%, complex fee structures, lack of a secondary market, and restrictions or suspensions of distributions.

Maddox, Hargett & Caruso, P.C. currently is investigating claims by investors who suffered significant losses in the Behringer Harvard Strategic Opportunity Fund I, as well as in other non-traded REITs. If you have a story to tell regarding your experiences, please contact us.

Investors in non-traded real estate investment trusts (REITs) have had to face some unpleasant news recently – from inaccurate valuations to suspended dividends. Now, Behringer Harvard Holdings LLC is preparing to inform clients that its Behringer Harvard Strategic Opportunity Fund I is under water.

As reported Aug. 22 by Investment News, Behringer reportedly will inform investors about the demise of the REIT tomorrow, Aug. 24.

Launched in 2005, the Behringer Harvard Strategic Opportunity Fund I raised $65 million and invested in six properties. Among them: a hotel on Wilshire Boulevard and an Amsterdam office building.

Another Behringer fund, the Strategic Opportunity Fund II, raised $62 million during that same time period. The Strategic Opportunity Fund I’s “liabilities are greater than its assets,” stated Michael O’Hanlon, chief executive of the funds comprising Behringer Harvard’s opportunity platform. The fund is negotiating with banks over one property, the hotel in Los Angeles, that is a “swing issue,” he said in the Investment News story.

The Strategic Opportunity Fund I isn’t the only Behringer Harvard REIT to face problems. At the end of 2011, the Behringer Harvard Opportunity REIT I saw its estimated value decline 46% to $4.12 a share from $7.66 a year earlier. In June, one property in that REIT entered into bankruptcy protection.

Another Behringer REIT has had similar problems. The Behringer Harvard Short-Term Opportunity Fund I LLP had approximately $130 million in assets when it saw its valuation drop to 40 cents a share from $6.48 a share as of Dec. 31, 2010.

Failed deals involving private placements, non-traded REITs and high-risk investments like inverse and leveraged exchange-traded funds (ETFs) shed new light on why investors need to be as informed as possible about their financial investments. And the Financial Industry Regulatory Authority’s BrokerCheck database is a good place to start.

BrokerCheck is designed to help investors quickly and easily search the professional backgrounds of brokers and investment firms. This month – partly in response to address recommendations made in a January 2011 study by the Securities and Exchange Commission (SEC) – FINRA announced the addition of several new features to its BrokerCheck system.

With the latest improvements, investors and others now have:

• Access to more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm. In addition, new Help icons are designed to clarify commonly referenced terms throughout the system and within BrokerCheck reports.

• Centralized access to licensing and registration information on current and former brokers and brokerage firms, and investment adviser representatives and investment adviser firms.

• The ability to search for and locate a financial services professional based on main office and branch locations, as well as the ability to conduct ZIP code radius searches in increments of five, 15 or 25 miles.

In 2011, individuals used BrokerCheck to conduct 14.2 million reviews of broker or firm records. Investors can access BrokerCheck here.

When the non-traded Inland Western REIT went public recently, investors who owned previously purchased shares got their first look at the investment’s true value. What they discovered wasn’t pretty. Shares that were valued in June 2011 at $6.95 were valued at the IPO for $3.20 – a price that required a complex reverse stock split. For investors who bought Inland Western at its original share price of $10 a decade ago, the new price meant they lost some $65% of their original investment.

Other investors in non-traded REIT are in the same boat. Robert Block, a 74-year-old retiree in Florida, invested more than $400,000 in several non-traded REITs from 2006 to 2008 on the advice of investment adviser who told him the investment’s dividends were attractive and the REITs were “about as safe as anything you could get.”

As reported in a story by the Wall Street Journal, Block’s $400,000 investment was valued at about $300,000 based on REIT share valuations earlier this year.

“I needed income that I could count on and wasn’t risky,” said Block, who is seeking damages from his investment adviser in an arbitration case with the Financial Industry Regulatory Authority (FINRA), in the WSJ story.

Dividend cuts also have been an issue for non-traded REIT investors. In April, KBS Real Estate Investment Trust I told shareholders it was suspending its monthly dividend of 5.25%. It also marked down its share price by 30%, to $5.16.

Inland American Real Estate Trust, one of the industry’s biggest non-traded real estate investment trusts (REIT), is facing an investigation by the Securities and Exchange Commission (SEC) over potential violations of federal securities laws concerning fees and its administration.

News of the investigation was made public by Inland American in its quarterly report. As in other recent regulatory investigations into non-traded REITs, the SEC is focusing on specifics of Inland American’s fee structure.

According to a May 10 article by Investment News, Inland American stated in its quarterly report that the . . . “SEC is conducting a nonpublic, formal fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws.”

The report went on to reveal that the potential violations include “business manager fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the company might become a self-administered REIT.”

Inland American is one of five REITs to be sponsored by The Inland American Real Estate Group of Companies. A related REIT, Retail Properties of America (formerly known as Inland Western Retail Real Estate Trust) also has been in the news lately. In early April, the REIT went public with an initial share price listed at an equivalent of $3.20 per share. For investors who bought Inland Western at its original share price of $10 a decade ago, the new price means they have lost some $65% of their original investment.

Investors who bought a non-traded real investment trust (REIT) called Inland Western at $10 a share are less than pleased these days. That’s because the REIT went public earlier this month at $8 a share. Now called Retail Properties of America (RPAI), the split-adjusted value of the stock is worth less than $3 per share for investors who originally purchased it at $10. By any measure, that’s a huge loss.

By many accounts, it was expected that the pre-IPO target price would be in the $12 range. Even at $11, however, investors in the non-traded REIT were expected to be holding public stock valued at well below their original investment, according to an April 8 article by REIT Wrecks, a Website that tracks the REIT industry.

Most analysts estimated a split-adjusted value of between $4 and $4.80 per share if the company went public at $11.

Even after including the total dividend distributions of nearly $4 per share, accumulated over the full length of the investment period, investors were “only getting 80 cents back on every dollar they invested,” said Michael Stubben, president of MTS Research Advisors, in the REIT Wrecks story.

Problems with the Inland Western/Retail Properties REIT have been in the making for some time now, starting back in 2005 when the fund stopped taking in capital. When the market crashed in 2008, prices of the properties held in the REIT’s portfolio were extremely overvalued. As a result, dividend yields were cut from 6.4% to 1% by 2010.

Meanwhile, investors in the Inland REIT had little recourse. Unlike publicly traded REITs, non-traded REITs are not traded daily on a stock exchange. Non-traded REITs also have limited liquidity, unreliable market valuations, hefty upfront fees and commissions of up to 15%, dividend cuts and suspension of buyback programs. Moreover, an investor’s money in a non-traded REIT is tied up a long, long time, usually up to seven years.

Market valuation and lack of transparency are key sticking points for critics of non-traded REITs. As reported in the REIT Wrecks story, this issue is made all the more apparent in Inland Western’s September 2011 filing with the Securities and Exchange Commission.

Earlier this month, Inland Western Retail REIT, now known as Retail Properties of America, went public, giving investors a first-time look at the value of their investment at a publicly set price. And the news wasn’t what they expected. The Oak Brook, Illinois-based real estate investment trust priced its offering of 31.8 million Class A shares at $8. It had been hoping to sell the shares at between $10 and $12.

Investors in Inland Western have now lost significant amounts of money, about 65% by some reports. Unfortunately, it’s a reality that many non-traded REIT investors know only too well. Several high-profile non-traded REITs also have seen their valuations plummet over the past 12 months, including Cornerstone Core Properties and Behringer Harvard REIT.

Issues surrounding non-traded REITs have met with increased scrutiny in recent years, raising red flags and questions among regulators. In March 2009, the Financial Industry Regulatory Authority (FINRA) officially opened an inquiry into non-traded REITs and the broker/dealers responsible for marketing and selling the products to investors. Among other things, FINRA wanted to determine the suitability of non-traded REIT sales to retail investors and the disclosures made regarding fees, dividends and liquidity.

That same year, FINRA issued a regulatory notice requiring REITs to publish their valuations no later than 18 months following the conclusion of an offering. Then, in October 2011, FINRA issued an investor warning on non-traded REITs, citing the products’ lack of transparency, illiquidity, potential conflicts of interest, risks to an investor’s principal, and high fees.

An April 1 article by Investment News offers insight into the potential downside of non-traded real estate investment trusts (REITs).  Shortly after investor Susan Fox, 63, bought a non-traded REIT – Inland American Real Estate Trust – for her IRA from her broker, it began to decline in value. Her broker, however, dismissed the losses and went on to sell her a second non-traded REIT.

The second REIT, Cornerstone Core Properties REIT, also is tanking in value. In March 2012, the Cornerstone REIT had fallen more than 70% in value – to $2.25 per share, from $8.

Adding to Fox’s financial woes is the fact that the REITs are part of her IRA, which in 2008 had $105,000 in it. The REITs accounted for $56,616 of her account, or almost 54%, according to the Investment News article.

In July 2010, she instructed her broker to sell her non-traded REITs but learned she was unable to do so. That’s because non-traded REITs have specific redemption policies; in most cases, money in non-traded REITs is tied up for seven or more years.

Fox’s dilemma strikes a familiar and painful chord with many non-traded REIT investors.  Non-traded REITs can be highly risky. Because they do not trade on a national stock exchange, non-traded REITs are considered illiquid investments – a fact that many investors, including Fox, are often unaware of until it’s too late.

Non-traded REITs also lack transparency, have limited and lengthy redemption periods, and come with exceptionally high commissions and other upfront fees and charges.

Another potential downside of non-traded REITs concerns dividends, which are not guaranteed to investors and can be halted at any time. In the past year, a growing number of non-traded REITs have either suspended their dividends or stopped them altogether. Among them: Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Apple REITs.

Investors of non-traded real estate investment trusts (REITs) have taken a financial beating over the past year, and now another non-traded REIT – Cornerstone Core Properties REIT – joins a growing list of REITs to face an unexpected decline in value.

As reported March 28 by Investment News, the Cornerstone REIT has fallen in value by more than 70%. Investors in the non-traded REIT were informed earlier this month via a letter from the REIT’s chairman that shares of Cornerstone, once priced at $8, are now worth $2.25.

“The estimated per-share value has been adversely affected by the recent global economic downturn, negatively impacting our small business tenant base, which has resulted in approximately $43 million of previously announced impairment charges recorded in the second and third quarters of 2011,” according to the letter.

The Cornerstone REIT isn’t the only non-traded REITs facing issues. Investors in Behringer Harvard Short-Term Opportunity Fund I LP saw their investment’s value fall to 40 cents a share in December 2011, down from $6.48 a share just one year earlier.

The Behringer Harvard Opportunity REIT I also has experienced major declines in its valuation. As of December 2011, the REIT was valued at $4.12 a share, compared to $7.66 a year ago.

Sometimes it takes awhile to learn a lesson. Just ask David Lerner. With his firm, David Lerner Associates, already facing a disciplinary complaint by the Financial Industry Regulatory Authority (FINRA) for misleading investors and selling shares in illiquid real estate investment trusts (REITs) to unsophisticated and elderly customers, owner David Lerner apparently continued to improperly pitch the products.

FINRA is now taking aim at Lerner personally. In an amended filing, the regulator added new allegations to the complaint it previously filed in May 2011 against Lerner’s firm. As reported on Jan. 30 by Reuters, FINRA’s latest complaint focuses on statements Lerner allegedly made to investors following the regulator’s actions against his company this past summer.

In the amended complaint, FINRA states that Lerner sent letters to more than 50,000 customers in July 2011 to “counter negative press” regarding FINRA’s action. That action concerned sales of Lerner’s Apple REITs and, specifically, the fact that Lerner’s firm reportedly mislead investors with information that failed to show distributions of the REITs exceeded income and were financed by debt.

In the letter that Lerner later issued to customers, FINRA says he also discussed a possible opportunity for Apple REIT shareholders to participate in a sale or listing on a national exchange as a way to dispose of their shares at a reasonable price.

FINRA says Lerner further made misleading, exaggerated statements to investors during a seminar that his brokerage firm hosted, including statements suggesting that closed REITs were a potential “gold mine.”

The case against Lerner and his Apple REITs has put non-traded REITs in general on shaky ground with broker/dealers throughout the country.  In October 2011, FINRA issued an investor alert about non-traded REIT investments, calling attention to the inconsistent dividends, illiquidity and inaccurate valuations associated with the products.