Category Archives: Non-traded REITs

Another non-traded REIT has landed in hot water with regulators. The Financial Industry Regulatory Authority (FINRA) imposed a $300,000 fine against Wells Investment Securities over misleading marketing tied to Wells Timberland REIT.

In reaching the settlement, Wells Investment Securities neither admitted nor denied the charges.

According to FINRA, communications from Wells Securities about Wells Timberland contained misleading statements regarding its portfolio diversification, as well as its ability to make distributions and redemptions.

“By approving and distributing marketing materials with ambiguous and equivocal statements, Wells misled investors into thinking Wells Timberland was a REIT at a time when it was not a REIT,” said FINRA executive vice president and chief of enforcement Brad Bennett in a statement.

FINRA also found that Wells failed to have proper supervisory procedures in place to ensure that sensitive customer and proprietary information stored on laptops was adequately safeguarded.

As reported Nov. 22 by Investment News, this is not the first time that Wells Securities has had a run-in with regulators over REITs. In October 2003, FINRA’s precursor, NASD, sanctioned Wells Investment Securities for improperly rewarding broker/dealer representatives who sold the company’s REITs. Those rewards included lavish entertainment and travel perquisites. FINRA also censured Leo Wells, founder and chairman of Wells Real Estate Funds, suspending him from acting in a principal capacity for one year.

Wells Real Estate Funds is one of the largest sponsors of investments in the non-traded REIT industry, with $11 billion in assets and 250,000 investors.

An analysis of the “distributions” of non-traded REITs sold by broker/dealer David Lerner Associates reveals that the property investments of the REITs in question largely underperformed at the level required to pay promised dividends to investors, according to an Oct. 16 story by Investment News.

The analysis went on to show that the products, known as Apple REITs, consistently “borrowed from a line of credit and used distributions that investors were recycling back into the REITs to meet the targeted dividend payout.”

A class-action lawsuit has since been filed against Lerner over the Apple REITs. According to the Financial Industry Regulatory Authority (FINRA), Lerner allegedly provided misleading performance figures for Apple REITs and implied that future investments could be expected to achieve similar results.

The Apple REIT lawsuit also sheds light on some of the potential problems concerning non-traded REITs in general. As in the case of the Apple REITs, a number of investors who have purchased non-traded REITs thought they were getting into safe, conservative investments that would protect their savings from the volatility of the stock market.

In reality, non-traded REITs can be highly risky. The products do not trade on a national stock exchange and are therefore illiquid. They also lack transparency, include limited and lengthy redemption periods, and come with exceptionally high commissions and other upfront fees and charges.

Another potential risk of non-traded REITs concerns their dividends, which are not guaranteed to investors. In the past year, a growing number of non-traded REITs have either suspended their dividends or halted them altogether.

Among those that did just that: Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Wells Real Estate Investment Trust II.

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!”

High fees and a lack of liquidity are just two reasons that non-traded REITs are in the hot seat with the Financial Industry Regulatory Authority (FINRA). Yesterday, the regulator issued an alert to investors, outlining the potential drawbacks and risks that non-traded REITs contain.

Non-traded REITs do not trade on a national exchange, are generally illiquid and sold exclusively through independent broker/dealers. In addition, early redemption of shares in a non-traded REIT is extremely limited, and commissions for non-traded REITs can be as high as 15%.  By comparison, front-end underwriting fees in the form of a discount may be 7% or more of the offering proceeds for exchange-traded REITs.

Despite these drawbacks, non-traded REITs have become increasingly popular in recent year, as investors search for alternative investment vehicles that can offer high yields. As reported Oct. 4 by Investment News, investors bought close to $4.6 billion in non-traded REITs through June 30.

In September, FINRA issued a rule proposal aimed at changing how the value of non-traded REITs appear on client account statements, as well as brokers’ commissions and other upfront costs.

FINRA’s recent investor alert on non-traded REITs outlined several issues with the products, including the fact that the periodic distributions that help make non-traded REITs so appealing can, in some instances, be heavily subsidized by borrowed funds and include a return of investor principal. This is in contrast to the dividends investors receive from large corporations that trade on national exchanges, which are typically derived solely from earnings.

Lack of a public trading market creates illiquidity and valuation complexities. As their name implies, non-traded REITs have no public trading market. However, most non-traded REITS are structured as a “finite life investment,” meaning that at the end of a given timeframe, the REIT is required either to list on a national securities exchange or liquidate, says FINRA.

Moreover, even if a liquidity event takes place, there is no guarantee that the value of your investment will have gone up-and it may go down or lose all its value. Indeed, valuation of non-traded REITS is complex. Many factors affect the pricing, including the portfolio of real estate assets owned, strength of the trust’s balance sheet (assets versus liabilities), overhead expenses, cost of capital and more. The boards and managers of non-traded REITs might even rely on third-party sources to estimate a per-share value.

Finally, properties may not be specified in a non-traded REIT. Most non-traded REITS start out as blind pools, which have not yet specified the properties to be purchased. Others may specify a portion of the properties the REIT plans to acquire, or they may be in various stages of acquisition.

Once the darling investment product of broker/dealers, some B-Ds are cutting back on the number of REIT products they intend to sell to investors. Their concerns have to do with several issues, including the risk levels of certain REITs, various expenses and how the REITs actually pay for their dividend.

Non-traded REITs have been in the news for some time now, with names like Behringer Harvard REIT, Apple REITs, Inland American Real Estate Trust and Desert Capital garnering top space in the headlines for the financial problems they’ve caused investors.

Non-traded REITs are considered public companies, whose shares are registered with the U.S. Securities & Exchange Commission, but they don’t trade publicly. In recent months, this lack of transparency has been thrust into the spotlight, along with problems tied to inaccurate valuation estimates, excessive broker fees, complex redemption policies, illiquidity and distribution issues.

In late May, the Financial Industry Regulatory Authority (FINRA) filed a complaint against David Lerner Associates related to distribution and valuation issues. In the complaint, FINRA questioned the value of various Apple properties, noting that investors were consistently told that their shares were worth $11 each when that was no longer the case. Some of the Apple REITs had to return investor capital – maintaining the perceived payout, but “eating the seed corn that normally grows those dividends,” according to a July 21 article by MarketWatch. That money, at the very least, should have been deducted from the share price, the MarketWatch article says.

In response, more broker/dealers are taking a new look at non-traded REITs. As reported Sept. 18 by Investment News, National Planning Holdings, a network of four broker/dealers with 3,663 affiliated reps and advisers, has reduced the number of non-traded REITs on its platform to 10 from 15 so far this year.

Other B-Ds like Next Financial Group are following a similar path. Next Financial, which maintains 923 affiliated reps and advisers, cut its number of non-traded REIT products to five from seven. Two years ago, the firm offered twice as many non-traded REITs for its reps to sell.

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.

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.

An Apple REIT a day is keeping investors at bay. With apologies to the childhood saying, investors who own shares in Apple Real Estate Investment Trusts are finding out their investments may be worth far less than they ever imagined.

A disciplinary complaint was filed last month by the Financial Industry Regulatory Authority (FINRA) against David Lerner Associates, the sole brokerage that sells Apple REIT shares. In its complaint, FINRA says that Lerner failed to comply with the industry’s stringent due-diligence standards when it sold shares in the $2 billion Apple REIT 10, which launched in January.

FINRA goes on to say that Lerner targeted unsophisticated and elderly customers to buy Apple 10 shares. Moreover, FINRA says Lerner cited the distributions of previous Apple REIT companies on its Web site but failed to reveal that many of the distribution rates had dropped and distributions had exceeded funds from operations at Apple REITs 6 through 9.

As reported July 20 by the Virginia Business Journal, those distributions totaled $118.1 million in 2010 at Apple REIT Nine, while its funds from operations totaled only $60.2 million.

FINRA also stated in its complaint against Lerner that shares in Apple REITs 6 through 9 had been valued at $11 a share since their initial offerings. However, after a California firm made a tender offer of $3 a share for shares of Apple REITs 7 and 8 in June, the Apple REITs revised the $11 figure – stating in a filing that the shares had a book value of $7.57 each.

Glade M. Knight is the founder, chairman, and CEO of Apple REIT Cos. His company has issued nearly $6.8 billion in securities to about 122,600 customers, according FINRA. Both Knight and Apple REIT Cos. have been named in at least two class action lawsuits filed in June 2011 against David Lerner Associates.

If you are an investor in the Apple REITs through David Lerner Associates, please contact us to tell your story.

Scrutiny is growing for Apple REITs – securities sold exclusively through David Lerner Associates. The products and Lerner have been in the hot seat for more than a month, after the Financial Industry Regulatory Authority (FINRA) filed a complaint stating that shares in Apple REITS had not been re-priced in years.

Meanwhile, Apple REIT investors have been under the impression that their shares were valued at the $11/share purchase price listed on their account statements. As it turns out, Lerner is now telling a different story. In a recent notice to Apple 7 and Apple 8 REIT investors, the value of the shares was $7.83 and $7.57 per share, respectively.

As reported June 15 by Investment News, FINRA stated in its complaint in May that it was misleading to investors not to reflect the updated value of the REITs on the David Lerner Associates Web site, especially in cases where the REITs pay dividends with principal and borrowed funds instead of operating income.

Accurate pricing of shares of illiquid, long-term non-traded REITs has been a bone of contention for nearly two years. Previously, the common practice in the brokerage industry was to list the share price on client account statements at par value, or the amount at which the broker/dealer sold it, with the product typically priced at $10 or $11 a share.

If you are concerned about your investment in Apple REITs, 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.