Inland American Real Estate Trust Faces Shareholder Backlash

Inland American Real Estate Trust, one of the biggest non-traded real estate investment trusts (REITs), revealed earlier this week that some investors are accusing the REIT’s management of failing in their fiduciary responsibilities and causing false valuations and excessive fees to be paid to the business manager of the REIT.

As reported March 13 by Investment News, Inland American stated in its annual report that “two separate groups of shareholders were piggybacking on a Securities and Exchange Commission (SEC) investigation. Last year, the SEC launched a fact-finding inquiry into Inland American to determine if violations regarding the REIT’s management fees, transactions with affiliates and distributions to investors had occurred.

Both shareholder groups are asking the REIT’s board to formally investigate their concerns.

According to the Investment News story, the first group of shareholders alleges that Inland American’s management “falsely reported the value of our common stock until 2010, caused us to purchase shares of our common stock from stockholders in excess of their value, and disguised returns of capital paid to stockholders as REIT income, resulting in the payment of fees to the business manager to which it was not entitled.”

Meanwhile, an Inland American spokesperson contends that the investors looking to investigate the REIT represent only a small number of shareholders.

Inland American is one of several well-known non-traded REITs that was sold during the real estate crisis at $10 per share and whose valuation has since then fallen dramatically. As of the end of 2012, Inland American estimated a per share value of $6.93 per share, down from $7.22 per share at the end of the previous year.

Allegations of inaccurate valuations and excessive fees are at the center of a number of complaints filed by investors with the Financial Industry Regulatory Authority (FINRA), said Steven Caruso, a partner at Maddox Hargett & Caruso P.C., in the Investment News article.

“We are aware of those allegations surrounding Inland and other REITs the past few years. It’s been the crux of most investor complaints – that valuations are not accurate and the misrepresentation of the liquidity of the shares they purchased,” says Caruso, whose firm is handling about a dozen investor complaints regarding Inland American.

Many of these complaints involve investors who are retirees – a fact that compounds the problems, according to Caruso.

Indeed, non-traded REITs typically charge high commissions, often as much as 15 %. In many instances, these high commissions can be a motivating factor for some brokers to recommend REITs to investors for whom a non-traded REIT is entirely unsuitable. Recently, regulators put non-traded REITs on their 2013 priority watch list, reviewing how the products are sold and whether advisers and broker/dealers may be misrepresenting the investments to clients.