Category Archives: REITs

Even though sales of alternative investments, especially non-traded real estate investment trusts (REITs), are experiencing a major upswing this year, investors are wise to remember the dark days of the past before completely jumping on the alternative investment bandwagon.

Specifically, those days relate to some of the bad decisions made by a number of broker/dealer firms – many of which are now out of business or mired in legal issues and investor lawsuits – and the alternative financial products they sold to clients. Those products were tied to sponsor names like Medical Capital Holdings, Provident Royalties and DBSI Inc.

Medical Capital and Provident were charged with fraud by the Securities and Exchange Commission (SEC) in 2009, while DBSI, which raised $1 billion from investors by selling real estate investments via independent broker/dealers, filed for bankruptcy.

In the aftermath of those failed deals, some broker/dealers ramped up their due-diligence of alternative investments and began working with regulators to establish standards for valuation and account statement reporting. Their attempts to alter the public’s perception of such products may be working.  As reported by Investment News, alternative investments like non-traded REITs are estimated to bring in $20 billion of capital flows by the end of this year. That is twice as much as 2012.

Still, investors may be wise to proceed with caution before totally singing the praises of alternative investments. After all, many of these products – including non-traded REITs – continue to have the same issues as before: illiquidity, unreliable distributions, complex redemption structure and pricey commissions and fees.

The bottom line: History can and often does repeat itself. It’s a lesson perhaps worth remembering.

Sales involving alternative investment products sold to elderly investors has an unleashed an investigation by Massachusetts securities regulators into 15 brokerage firms. The firms include LPL Financial LLC, Morgan Stanley, Merrill Lynch, UBS Securities LLC, Fidelity Brokerage Services LLC, Charles Schwab & Co. Inc., Wells Fargo Advisors, TD Ameritrade Inc., ING Financial Partners Inc.,  Commonwealth Financial Network, MML Investor Services LLC, Investors Capital Corp., Signator Investors Inc., Meyers Associates LP, and WFG Investments Inc.

As reported yesterday, the Massachusetts securities division has sent subpoenas to the firms being targeted, asking for information on sales of the products to state residents who are 65 or over.  Among the non-traditional investments included on the list:  Oil and gas partnerships, private placements, structured products, hedge funds and tenant-in-common offerings.

Massachusetts is demanding information on any such products that have been sold over the past year, the investors who purchased them, the commissions generated, how the sales were reviewed, and all relevant compliance, training and marketing materials used for marketing and sales purposes.

The firms have until July 24 to respond.

This isn’t the first time that Massachusetts has come down hard on broker/dealers for alleged improper sales of certain alternative investments. In May, the state settled cases involving non-traded REITs with Ameriprise Financial Services; Commonwealth Financial Network; Lincoln Financial Advisors Corp., Royal Alliance Associates; and Securities America. The five firms agreed to pay a total of $6.1 million in restitution to investors, as well as fines totaling $975,000.

In February, Massachusetts reached a similar settlement with LPL Financial, which agreed to pay at least $2 million in restitution and $500,000 in fines related to sales of non-traded REIT investments.

The REIT investigations “heightened my concern that the senior marketplace is being targeted for the sales of these high-risk, esoteric products,” said Massachusetts Secretary of the Commonwealth William F. Galvin in a statement yesterday.

“While these products are not unsuitable in and of themselves, they are accidents waiting to happen when they are sold to inexperienced investors by untrained agents who push the products to score … large commissions.”

Real estate powerhouse Tony Thompson and the independent directors of a non-traded real estate investment trust are going head to head over why the dividend of the TNP Strategic Retail Trust was cut last month and what the management of the REIT is going to be moving forward.

As reported April 12 by Investment News, Thompson is known among independent broker/dealers for his role as a leading seller of tenant in common 1031 exchanges before the real estate crash of 2007-08.

Earlier this year, Thompson and the broker/dealer manager of the TNP Strategic Retail Trust, TNP Securities LLC, found themselves at the center of an investigation by the Financial Industry Regulatory Authority (FINRA) for failing to deliver documents in a FINRA inquiry.

In a letter to investors dated March 27, Thompson, who is chairman and co-chief executive of the TNP Strategic Retail Trust, said the three independent directors on the board, Jeffrey Rogers, Phillip Levin and John Maier, “voted to not pay [first] quarter 2013 dividends. I opposed this decision and was not part of the board meeting.”

According to the Investment News article, Thompson stated in the letter – which was not filed with the Securities and Exchange Commission (SEC) – that the distribution cut was the result of the directors inflating expenses.

“I believe extraordinary expenses are one of the primary causes for the independent directors’ decision not to pay a current distribution,” Thompson wrote. “These expenses include attorney fees related to the independent directors’ ‘special committee’ activities, the special committee’s director fees, default interest” and other costs, including salaries of accountants.

The board has since filed a shareholder letter with the SEC refuting Thompson’s assessment and that his letter was riddled with errors, including the actual number of properties owned by the REIT.

The board also is trying to fire as the REIT’s manager another company controlled by Thompson, TNP Strategic Retail Advisers LLC, and find a new adviser.

Non-traded real estate investments trusts, or REITs, have come back to bite brokers/dealers and investors alike in recent years. Most recently, LPL Financial announced that it would pay a multimillion-dollar settlement connected to allegations by Massachusetts’ securities regulator that it failed to supervise representatives who sold investments in the products.

Secretary of the Commonwealth William Galvin filed a complaint against LPL in December 2012. In the complaint, Galvin alleged that LPL was in violation of both state limitations and the company’s rules. The Securities Division also charged LPL with dishonest and unethical business practices.

The Massachusetts complaint focused on seven REITs: Inland American, Cole Credit Property Trust, II, Cole Credit Property Trust, III, Cole Credit Property 1031 Exchange, Wells REIT II, W.P. Carey Corporate Property Associates 17 and Dividend Capital Total Realty.

As part of the Massachusetts settlement, LPL will pay restitution of $2 million to Massachusetts investors who bought the seven non-traded REITs in question, as well as a $500,000 administrative fine.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

The non-traded real estate investment trust known as the Wells Timberland REIT recently lowered its stock valuation by 35% to $6.56 per share. When shares of the REIT were offered to the public in 2006, the price was $10 a share.

As reported Dec. 17 by Investment News, the company blames the REIT’s 35% drop in value on the economic downturn and continued problems in the housing industry.

Wells Timberland REIT is sponsored by Wells Real Estate Funds, one of the biggest players in the non-traded REIT industry. According to Wells’ corporate Web site, the company has invested more than $11 billion in real estate for more than 300,000 investors.

As noted in a letter sent to stockholders last week by Wells President Leo Wells III, the $6.56 estimate for common shares was based on information as of Sept. 30. However, investors in the Wells Timberland REIT might find it hard to actually get that price in the market based on the illiquid nature of non-traded REITs.

Last October, the trust suspended redemptions of shares until the new estimate of share values was completed. Beginning in January, shareholders should theoretically be able to redeem shares for 95% of the estimated value – or $6.23. The REIT, however, funds redemptions out of its “distribution reinvestment plan,” and because it has made no cash distributions, it also has not made any ordinary share redemptions, according to the Investment News article.

The Financial Industry Regulatory Authority (FINRA) is calling out David Lerner Associates in a big way over alleged unfair sales practices and excessive markups concerning a non-traded real estate investment trust (REIT) known as Apple REIT 10. On Monday, the regulator ordered Lerner to pay $12 million in restitution to clients who bought shares of the non-traded REIT.

David Lerner Associates was the sole distributor of the Apple REITs. According to FINRA, the company solicited thousands of customers and, specifically, targeted unsophisticated investors and the elderly. FINRA says that as Lerner sold the illiquid REIT, it failed to perform adequate due diligence to determine whether the product was suitable for investors.

FINRA noted that in order to sell the Apple REIT 10, David Lerner Associates used misleading marketing materials in which performance information for the closed Apple REITs had been presented without also disclosing that income from those REITs was insufficient to support the distributions to unit owners.

In addition to the $12 million in restitution to clients, FINRA fined David Lerner Associates more than $2.3 million for charging unfair prices on municipal bonds and collateralized mortgage obligations (CMOs) that the company sold over a 30-month period.

The firm’s founder and chief executive, David Lerner, was fined $250,000 and suspended from the securities industry for one year, followed by a two-year suspension from acting as a firm’s principal.  William Mason, the firm’s head trader, was ordered to pay $200,000 and suspended for six months.

“David Lerner and his firm targeted unsophisticated and elderly customers, grossly failing to comply with basic standards of suitability in selling Apple REIT 10 to thousands of customers,” said Brad Bennett, FINRA’s chief of enforcement.

In concluding the settlement, David Lerner Associates and Lerner neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

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.

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.

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.