REIT Attorneys - Helping Investors with non-traded REIT losses and frozen investments

Vernon Healy Urges Investors to Ask Questions before Investing in Non-traded REITs

Non-traded REITs, also called non-listed REITs, continue to be pushed and marketed by brokers across the United States as attractive, low-risk investments tailored for people who want to avoid market volatility while gaining an alternative source of income. But not only are these products packed with obscene fees and commissions, unfortunately they are also burdened with managers who have conflicts of interest that oftentimes lead them to make decisions that are not in the best interests of investors. 

Before investors decide to buy into any of these highly illiquid investments, we believe they ought to ask these five due diligence questions:

1.    What are the REIT’s upfront fees, and what other fees will be charged throughout the life of the REIT? In other words, determine exactly how much of your money will actually go towards investing in real estate and how much goes into the pockets of the REIT managers.

Most non-traded REITs charge a substantial commission, which is directly passed on to the broker who sold the non-traded REIT, causing many brokers to push these products very aggressively. In most cases, brokers receive between seven and nine percent of the total investment amount.

In addition, many non-traded REITs charge on-going fees of approximately 3 percent of the REIT’s entire earnings. It is important to understand that all these fees are, for the most part, charged by parent companies and/or subsidiaries, meaning that all monies end up in the pockets of the REIT owners.

2.    What is the non-traded REIT’s proposed exit strategy? In other words, approximately how long will the REIT managers expect it would take to achieve liquidity?

Most non-traded REITs claim that their main goal is to achieve a liquidity event. Although non-traded REITs could achieve liquidity through a number of avenues, the most promoted goal is to eventually list the REIT in the stock market. Historically, however, only a handful of non-traded REITs have successfully achieved public listing. 

Although most non-traded REITs offer a redemption program, oftentimes that program is suspended indefinitely. In other words, prior to the non-traded REIT achieving a liquidity event, the shareholder’s entire investment is, for the most part, illiquid.

Most non-traded REITs claim that liquidity events usually occur 7 to 10 years after inception. Investors should be aware, however, that non-traded REIT managers can (and oftentimes do) extend the liquidity event date by a number of years. Additionally, a liquidity event does not mean that investors will receive any profits from their investment or even get their money back.

3.    Who owns the sponsor company, who are the managers who will be servicing the REIT and what are their fees?

As mentioned above, many non-traded REITs employ their own subsidiaries, managers, brokers and employees to service the REIT. In turn, these services are paid a pre-determined percentage fee outlined in the prospectus. A clear example that sheds light to this structure is the Cole Credit Property Trust I. Below is a chart filed by Cole with the SEC:

 
The chart above reflects that Christopher H. Cole owns all the companies hired by the REIT to do appraisals, acquisitions, make investment decisions etc. This means that all the fees charged by the REIT go back to the same individual or small group of individuals. A number of other REITs have similar structures.

4.    If it is an existing REIT, from where exactly are dividends being paid?
Many non-traded REITs outline in their prospectuses that they reserve the right to fund dividends and distributions from 1) loans made by the REIT; 2) returning the investor’s capital; and worst of all, 3) utilizing new investor’s money to pay current investors. For example, below is language found in Behringer Harvard REIT I filings with the SEC:

“We have paid all or a portion of our distributions from the proceeds of our final offering or from borrowings and may continue to pay all or a portion of our distributions from borrowings. For tax purposes, 100 percent of the amounts distributed by us in both 2010 and 2009 represented a return of capital.” (Annual Statement filed March 8, 2011)

Similar language is found in filings by Cole Credit Property Trust, Wells REIT II, Hines REIT and Apple REIT Ten.

5.    Has the issuer of the non-traded REIT operated and/or offered other non-traded REITs in the past?

This question is important because several of these REITs have previously launched REITs that have caused tremendous losses for investors. Many non-traded REITs currently have other REITs closed to investors in which they have significantly reduced their dividends; re-priced the share value, causing tremendous investor losses and even suspended redemptions indefinitely. For example, on Dec. 30, 2011, Behringer Harvard Opportunity REIT I sent a letter to shareholders, announcing yet another devastating decline in value per share to $4.12 – a drop in value of almost 60 percent from its original price of $10 a share. Nevertheless, despite having three different REITs reporting huge losses to investors, Behringer Harvard has launched yet another REIT currently open to investors: the Behringer Harvard Opportunity REIT II.  

We believe that previous performance of a particular REIT can serve as an indication of how the new REIT might perform. It is important to remember that, in most instances, the new REITs are managed by the same group of individuals who manage the poor performing REITs.

In addition to asking the above questions, it is also important for investors to inquire about the broker-dealers selling non-traded REITs. Non-traded REITs are so defectively designed that big wire houses such as UBS, Wells Fargo, Merrill Lynch and Morgan Stanley Smith Barney do not sell them.

Consequently, based on our experience speaking to investors seeking legal representation, non-traded REITs are usually sold by lower tier brokerage firms that normally do not carry enough insurance nor maintain enough capital to compensate investors who pursue claims related to the inappropriate promotion and recommendation of these products.

Vernon Healy’s investment fraud attorneys continue to represent investors nationwide who have collectively suffered millions of dollars in REIT losses from REITs such as Behringer Harvard, Desert Capital, Inland, KBS, Wells, Cole and other non-traded REITs.

Vernon Healy Again Warns Investors About Pitfalls of Non-Traded REITs

Securities attorneys at Vernon Healy continue to warn investors about buying into non-traded REITs as they watch those who bought shares in Behringer Harvard Short-Term Opportunity Fund I LP join the growing ranks of investors – many of them retirees -- suffering REIT losses.

According to an Investment News article about Behringer Harvard losses, “At the end of December, investors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share Dec. 31, 2010.”

Some of those investors have begun to seek the help of regulators, contacting the Financial Industry Regulatory Authority and stepping forward with questions for the SEC.

Most investors are sold non-traded real estate investment trusts with the promise of “steady income.” However, Vernon Healy’s investigation of non-traded REITs has uncovered that the dividends received by investors every month are often made up of new investors’ money or from loans made to the REIT.

The investigation identified more than 10 non-traded REITs that have either severely restricted, or suspended all distributions indefinitely. This means that many non-traded REIT investors are currently stuck in the investment, and their only way out is to sell their shares in an inefficient secondary market at a deep discount.

Investors considering non-traded REITs should be aware that FINRA Regulatory Notice 09-09 requires REITs to re-assess the value of their shares no later than 18 months after the conclusion of the offering. Consequently, many non-traded REITs are now re-assessing share value and notifying investors that their shares are worth far less than what they paid for them, despite the initial sales pitch of price stability. Quarterly reports reviewed by Vernon Healy, reveal that this re-pricing has caused billions of dollars in investor losses. Despite the free-fall in value, many investors cannot sell their shares because the REIT has frozen redemptions.

Vernon Healy continues to urge investors to seek second opinions from investment professionals before investing in these very complex non-traded REIT products.  In October 2011, The Financial Industry Regulatory Association (FINRA), issued an investor alert cautioning investors on the dangers of non-traded REITs, including illiquidity risks, valuation methods, and excessive fees.

Be Wary of Sales Pitch Used by Financial Advisors Selling Non-Traded REITs

Many sellers of non-traded REITs tout their list of top high profile tenants, using them as a vehicle to convey to investors and potential investors a sense of investment security. In reality, however, the existence of high profile tenants in a large real estate holdings pool is by no means an assurance against REIT losses.

The above is true with Cole Credit Property Trust III. According to its 2009 and 2010 annual statements, Cole Credit Property Trust III reported an occupancy rate of 99 percent of its properties. Cole’s website shows pictures of current tenants such as Walmart, Home Depot, Walgreens, and Staples, to name a few. On Cole’s own YouTube channel, the head of Real Estate Investments for Cole Capital Acquisitions accentuates high profile tenants as a crucial strategy “to be able to pay dividends on a monthly basis.”  It is therefore understandable that investors might feel that investing in this non-traded REIT is a safe undertaking. 

But even with almost 100 percent of its properties fully occupied and leased, Cole Credit Property Trust III managed to report losses of almost $8 million in 2009.  Despite the reported losses, the Chairman and President of Cole Properties Christopher H. Cole decided that it was proper to announce in a letter to stockholders dated April 6, 2010, that the REIT was increasing its distribution rates from 6.5 percent to 7 percent.  From our perspective, the increased rate of distribution and the source of the distributions raise concerns, given the losses reported by this non-traded REIT.

We continue to have concerns about Cole Property Trust III in 2010 and 2011, year to date. To this day, public records reflect that Cole is far from covering its dividends with funds coming from operations. In its third quarter report for 2011, Cole Credit Property Trust III reported total revenues for $81,414,000 and operating expenses for $52,079,000; leaving a net income of $10,491,000. Nevertheless, Cole paid dividends to its shareholders of $46,755,845 or $36 million in excess of its net income. In other words, Cole Credit Property Trust III continues to pay most of its dividends with loans or proceeds from new investor’s money.

    Cole Credit Property Trust III’s business practices could be accentuated when its offering concludes on Sept. 22, 2012.  As a reference for investors, below is the 2010 year-end status of the other two Cole REITs now closed to new investors, according to annual reports filed by Cole with the SEC.

--   Cole Credit Property Trust  -approximately 100 percent of all properties leased-

--   Initial offering 2004. Now closed to investors.

--   Re-priced shares from $10 to $7.65 (34 percent decline in price assigned by the REIT)

--    Declared a net income loss of $2,626,000.

--    Distributions reduced from 7 percent to 5.5 percent. More than 67 percent of all distributions were treated by this REIT as a return of the investors’ capital.

--    Redemptions suspended indefinitely.  As a practical matter, investors cannot redeem their shares unless they sell them in the secondary market at a deep discount.

--    Leverage ratio of the REIT’s portfolio: 60 percent, i.e. the ratio of debt to total gross real estate assets.

--  Cole Credit Property Trust II  -approximately 94 percent of all properties leased-

--    Initial Offering 2005. Now closed to investors.

--    Re-priced shares from $10 to $8.05 (20 percent decline in price assigned by the REIT).

--    Distributions suspended and then reinstated in Sept. 2010 at 6.25 percent More than 64 percent of all distributions were treated by the REIT as a return of the investors’ capital.

--    2010 distributions included return of capital from unconsolidated joint ventures of $1.6 million, proceeds from the Offerings of $3.4 million, and borrowings of $18.7 million.

--    Redemptions were suspended indefinitely, and then reinstated with several amendments. Now, the REIT will not redeem in excess of 3 percent of the weighted average number of shares outstanding during the prior calendar year and the cash available for redemption is limited to the proceeds from the sale of shares pursuant to their share re-investment program (DRP) during such calendar year.

--    Leverage ratio of the REIT’s portfolio: 50 percent (i.e. the ratio of debt to total gross real estate assets).

Based on the performance of the two Cole REITs described above, investors may want to have an objective and competent investment professional closely evaluate Cole Credit Property Trust III, especially because 1) it is run and managed by virtually the same group or individuals, and 2) it is similarly promoted as seeking and having high-profile and reliable tenants.  

Vernon Healy continues to urge investors to seek second opinions from investment professionals before investing in these very complex non-traded REIT products.  Just three weeks ago, The Financial Industry Regulatory Association (FINRA), issued an investor alert cautioning investors on the dangers of non-traded REITs, including illiquidity risks, valuation methods, and excessive fees.

Wells REIT II investors see share price plunge 25 percent

In an event that now seems to be the norm in the realm of non-traded REITs, Wells REIT II announced a decline in its estimated value per share from $10 to $7.47 — a drop of more than 25 percent in value. This sharp decline in share value of this non-traded REIT occurred despite its properties having a 94.3 percent occupancy rate, and according to Wells, “some of the most prestigious office addresses and tenant corporations in the U.S.”

Although this price decline is not accompanied by a decline in distributions, we believe investors should take a hard look at the basis for these distributions. In a letter dated November 10, 2011, the Chairman of Wells REIT II, Leo F. Wells, notified investors that despite the decline in value per share, quarterly distributions will not be affected.

However, we believe that Wells failed to fully address the reasons why shares are worth 25 percent less than their initial value.  Instead, Wells directed investors to watch this video at the Wells website.

In the video, Wells addresses two topics: quarterly distributions and new estimated value per share. Before addressing share re-pricing, Wells emphasizes to investors that their quarterly distributions for Wells REIT II have not changed. The value of quarterly distributions is among the strongest selling points for non-traded and private REITs. But we believe investors in non-traded REITs need to ask: Where are these distributions coming from?

Wells has indeed paid investors quarterly distributions of about 5 percent, which represents a reduction from 6 percent effective February 2011.  However, according to the Wells REIT II 2010 annual report filed with the Securities and Exchange Commission, Wells distributed to investors approximately $313.8 million, a figure which includes investors who decided to redeem their shares. This came at a time when Wells II was reporting a net income of a little more than $23 million. Even accounting for the REIT’s total cash from operating activities ($270.1 million), the distribution amount exceeded funds from operations by almost $44 million.

In reality, Wells REIT II has continuously combined a return of the investors’ initial investment with REIT borrowings in order to cover its distributions.  Consequently, 3.3 percent — more than half of the 6 percent distribution — was treated by the REIT in 2010 as a return of capital. In other words, the distributions investors received throughout the end of 2010 were partially covered by investors’ own investment and by loans and borrowings made to the REIT.

In its third quarter report for 2011, Wells REIT II reported that since its inception in 2004 and as of September 30, 2011, the non-traded REIT has paid more than $1.1 billion dollars in cumulative distributions in excess of earnings.

In addition to the foregoing, we have concerns regarding the liquidity risks of Wells REIT II.  If investors elect to redeem their shares, they will find out that Wells has modified its redemption policy. Although Wells REIT II still technically offers a share redemption program, it is limited to DRP proceeds (dividend re-investment plan) or 5 percent of the total shares outstanding.  Moreover, with respect to the amount paid upon redemption, the REIT made the following disclosures in its 2011 third quarter report:

Effective November 8, 2011, the price paid for shares redeemed under the SRP [share redemption program] in cases of death, disability, or qualification for federal assistance for confinement to a long-term care facility (i.e. a nursing home), will change from 100 percent of the price at which we issued the share (typically, $10.00) to 100 percent of the estimated per-share value ($7.47); and the price paid for all other redemptions (“Ordinary Redemptions”) will change from 60 percent of the price at which we issued the share (typically, $6.00) to $5.50.

This means that, if investors decide to redeem their shares through the Wells REIT II share redemption program without extraordinary circumstances such as death or disability, and if they are lucky enough to make their request when the limitations have not been reached yet, investors could lose up to 45 percent of their money.

Vernon Healy continues to urge investors to do considerable research before investing in non-traded REITs.  In October, the Financial Industry Regulatory Association, also known as FINRA, issued an investor alert cautioning investors on the dangers of non-traded REITs, including liquidity risks, valuation methods, and excessive fees.

Many clients come to Vernon Healy because they were misled by a company or professionals focused on their own best interests.  They overpromised and under delivered on the product or service they pitched. We believe our job is to assist clients in analyzing the likely net benefit of pursuing litigation and arbitration as well as aggressively pursuing the client’s claims. 

For more information, contact Vernon Healy at 239-649-5390 to discuss your possible options regarding a non-traded REIT claim.

Dilemma for Investors in Non-Traded Reits: Sell for Big Loss or Hold

Investors who find themselves trapped in an unproductive and illiquid non-traded REIT investment and stiff REIT losses are now faced with an emerging and confusing trend: lowball tender offers made by third parties who target REITs like KBS REIT I and Behringer Harvard REIT I. 

Recently, it has become common for third-parties to send letters to non traded REIT holders offering to purchase the investors’ REIT investments at very deep discounts of up to 80 or 90 percent. 

In deciding whether to sell or hold, investors are torn between the two very bad choices of either liquidating their positions on their REIT holdings for what is likely less than the REITs are now worth or continuing to hold unproductive and illiquid REITs which have not performed at all the way disreputable financial advisors told investors they would at the time of purchase. 

If you have invested in any of these products and have received a third party tender offer, we strongly suggest that you contact an attorney or trusted real estate professional who can assist you with exploring the options you may have before you decide whether to sell or hold.

The Financial Industry Regulatory Association, in a strongly worded investor alert issued today, cautioned investors about the dangers of investing in non traded REITs and included warnings about risks associated with illiquidity, valuation and fees. At Vernon Healy, we’ve been warning investors about these very dangers here on reitattorneys.com for more than two years. 

An example of the increasingly unfavorable situations REIT investors find themselves in is Behringer Harvard REIT I. This particular REIT commenced public offerings in 2003 at a price of $10 per share. As part of the offering, Behringer Harvard REIT I charged investors the following fees and commissions:

Selling Commissions and Dealer Manager Fees = 9.5 percent
Organization and Offering Expenses = 2.6 percent
Acquisition and Advisory Fees = 3.0 percent
Acquisition Expenses = 0.5 percent
Initial Working Capital Reserve = 1.0 percent


The above fees and commissions, a large portion of which went to the trusted investment advisors who recommended this REIT, demonstrate that only a little over 80 percent of the initial funding was actually available to be invested in real estate. In other words, the investment had been diluted by 16.6 percent before any monies were invested in real estate. And regrettably, the fees and commissions investors are obligated to pay did not stop there. To this day, Behringer Harvard REIT I has the right to collect 4 percent of the gross revenue for property management and leasing fees and  3 percent of the total transactional value each time the REIT acquires or sells a property. Additionally, if this REIT were to ever go public, Behringer advisors would be entitled to up to 10 percent of the entire net asset value of the REIT.

Behringer Harvard REIT I initially began paying investors a 7 percent distribution in 2004. However, according to the 2004 annual report, all or a substantial amount of the dividend amount investors were receiving then was coming from new investors’ money or from loans made to the REIT. Furthermore, the annual report also reveals that the REIT treated more than 91 percent of the distribution as a “return of capital.” This practice of using new investors’ money or borrowed funds to pay prior investors continued all the way until 2008, when the annual report disclosed that “none of the distributions….were distributions from the taxable earnings of real estate operations.” In other words, 100 percent of the distribution came from new investors’ money and/or loans made to the REIT.

Behringer Harvard REIT I closed share offerings to the public on Dec. 31, 2008.  Since new money stopped coming in, distribution amounts plummeted from 7 percent to 3.3 percent, and more recently down to 1 percent.  In addition, just three months after the offering of new shares was closed to the public, redemptions were suspended indefinitely.  This means that most investors are currently stuck in this illiquid investment. 

In FINRA Regulatory Notice 09-09, now requires REITs to re-assess the value of their shares no later than 18 months after the conclusion of an offering. Per FINRA Rules, Behringer Harvard had to re-assess share value last year and notified investors that their shares are now worth $4.55. A disastrous 54.5 percent decrease in value.

In its September 2010 quarterly report Behringer Harvard REIT I disclosed that approximately 271 million shares were issued through public offering. Before the shares were re-priced on May 17, 2010, the REIT was priced at approximately $2.8 billion ($10 per share plus the value of shares issued through distribution reinvestments). The re-pricing of shares to $4.25 reflects a stunning decline in investor value of more than $1.4 billion.
 
Despite this precipitous drop in share value, most investors cannot redeem their shares. Behringer Harvard REIT I announced in its last quarterly statement dated June 30, 2011, that even exceptional redemptions, such as  redemptions requests due to death or disability,  will be limited to a cap of a little over $1 million per quarter -- far less than 1 percent of the total value of the REIT:

“[T]he board determined to suspend until further notice redemptions other than those submitted in respect of a stockholder’s death, disability or confinement to a long-term care facility (referred to herein as “exceptional redemptions”).  In November 2010, the board set a funding limit of $4.25 million for exceptional redemptions considered in 2011 proportional to each redemption period, or $1,062,500 per period.”

Because of the tremendous losses suffered by Behringer Harvard REIT I and the fact that the REIT is not currently accepting any redemptions, “vulture” third-party firms are now attempting to purchase investor shares at more than 80 percent discounts, or $1.80 per share from the purchase price.

Contact Vernon Healy at 239-649-5390 or info@vernonhealy.com if you have information for the Vernon Healy investigation or if an investor in this REIT and you want information about your legal options. 

Vernon Healy is a Naples, Florida law firm that represents investors nationwide who are victims of stock fraud and investment losses due to securities fraud and broker misconduct. Vernon Healy’s investment fraud attorneys were among the first to caution investors about the dangers of non-traded REITs. They are currently representing investors nationwide who have collectively suffered millions of dollars in REIT losses in REITs such as Behringer Harvard, Desert Capital, Inland, KBS, Wells, and other REITs. 

FINRA moves in right direction on non-traded REITs sold by David Lerner Associates

In a sudden move in the right direction, the Financial Industry Regulatory Authority (FINRA) filed a Complaint against David Lerner Associates, the sole underwriter for Apple REITs.

The complaint alleges, among other things, several violations in David Lerner’s due diligence and suitability obligations. FINRA contends that although Apple REITs are illiquid and heavily concentrated in one sub-sector, namely extended stay hotels, a substantial number of David Lerner Associates customers own two or more Apple REITs.

Since 1992, David Lerner Associates has sold investors more than $6 billion dollars’ worth of Apple REITs shares. Since most non-traded REITs, including Apple REITs, offer commissions that range between 10 percent and 15 percent, David Lerner Associates has seen profits from the sale of Apple REITs of approximately $600 million since 1996, according to FINRA.

The FINRA Complaint also warns that all Apple REITs have not adjusted their $11 per share valuations despite “substantial market fluctuations;” especially in the area where Apple REITs invest, namely commercial real estate. This is particularly troubling due to the fact that performance on these REITs has declined considerably. For example, according to the 2009 annual report, Apple REIT Six showed a 27 percent decrease in its funds from operations compared to 2008; Apple REIT Seven’s funds from operations declined 20 percent in 2009.

But even more shocking is the fact that the FINRA Complaint acknowledges that a substantial portion of distributions paid by all Apple REITs comes from loan proceeds. To top it off, all Apple REITs also include, as part of the distribution, a return of capital. In other words, part of the distribution all Apple REITs promote as income, is actually a return of the investor’s initial investment.

Even though there is no formal relationship between the Apple REIT companies and David Lerner Associates, it is hard to understand why Apple REITs continue to conduct business exclusively with David Lerner.  For the past 20 years, David Lerner Associates has received numerous penalties and fines.

In May 2004, the Securities and Exchange Commission issued a cease and desist order, which included a $50,000 fine for the recommendation and sale of illiquid Lerner-underwritten REIT securities that were unsuitable for customers on margin. Just a year later, David Lerner Associates was fined $115,000 by the NASD (now FINRA) for misleading advertising and sales literature that did not have factual support, making the statements “exaggerated, unwarranted, or misleading,” according to the NASD order of settlement.

At Vernon Healy we continue to investigate non-traded REITs sold by David Lerner Associates and others and we’ve filed a number of claims on behalf of investors.

To see the FINRA release about Tuesday’s complaint, click here.

Retiree loses much of $1.2 million nest egg on Behringer Harvard REITs, Vernon Healy Claim Asserts

A financial advisor looking to line his own pockets with high commissions rather than protecting the hard-earned $1.2 million nest egg of his Illinois businessman client improperly sold high risk Behringer Harvard REITs and other unsuitable investments to the man’s Trust, according to a claim filed today by Vernon Healy, the investor rights law firm. 

The non-traded REIT investments, which are now illiquid and worth far less than when the financial advisor sold them to the man, have robbed him of a secure retirement and left him wondering if he must now return to work, the claim asserts.

The man, who now lives in Florida, chose a financial advisor who he believed understood his need for protecting his nest egg for his upcoming retirement. 

The advisor recommended that the best course for his $1.2 million from the sale of his business was diversification in secure financial vehicles with the intention of wealth protection and growth, according to the claim. But the advisor failed to follow his own recommendations, instead concentrating more and more of the man’s Trust in ultra-high commission, high-risk, non-traded REITs, specifically in only one company – Behringer Harvard, according to the claim.

The financial consulting relationship that began with plans for diversification and wealth protection ended in 2007 with more than $830,000 of the $1.2 million nest egg invested in high risk Behringer Harvard REITs, the claim states. These REITs have suspended distributions and redemptions and are currently worth roughly 25 cents on the dollar on the limited secondary market. As well another $85,000 was also invested in Ridgewood Energy, another illiquid and in appropriate investment for the Trust, according to the claim.

As it now stands, the Trust that was put in place to provide a secure retirement for Vernon Healy’s client will be insolvent by 2012 due to the advisor’s investment recommendations, according to the claim.

The Vernon Healy Law Firm is conducting ongoing investigations into the sales of non-traded REITS, including Behringer Harvard, Cole REITs, Inland REITs and Apple REITs offered by David Lerner & Associates, to clients who need stability and wealth protection. Vernon Healy believes its investigations have revealed that non-traded REITs are one of the most defectively designed investment products on the market.

The Financial Industry Regulatory Authority (FINRA) filed a complaint Tuesday against David Lerner & Associates and charged the firm with selling shares in Apple REIT Ten, a $2 billion non-traded REIT, to elderly and unsophisticated investors without investigating whether it was suitable for them. The firm was also charged with giving misleading information about Apple REIT Ten distributions.

Vernon Healy has found that some non-traded REITs are financial engineering schemes that falsely entice new, often conservative investors with the promise of owning a piece of real estate that they would never otherwise be able to own while receiving a stream of income for years. Such sales pitches are bolstered by claims that these investments are not affected by stock market volatility. 

Part of the enticement comes from the robust returns that investors initially see. What they don’t know is that the distributions are often actually coming from more recent investors. Some REITs are actually borrowing to provide returns rather than generating them from the REIT’s operations.

In carrying out this operation of paying old investors with new investors’ money, Behringer Harvard was creating a false yield simply to make investing in its REITs more attractive to the investor seeking income from his investments, according to the claim.

Chris Vernon, founder of Vernon Healy, has spoken to and warned regulators in several states regarding the sale of these high-risk, ultra-high commission investments that unscrupulous financial advisors are pushing on traditionally risk averse clients, many of them retirees with irreplaceable nest eggs.

Vernon Healy is a Naples, Florida law firm that represents investors nationwide who are victims of stock fraud and stock losses due to broker fraud and brokerage firm fraud and misconduct.

Vernon Healy’s investment fraud attorneys were among the first to caution investors about the dangers of non-traded REITs. The firm’s REIT attorneys have written about the dangers of these products in numerous articles. They are currently representing investors who have collectively suffered millions of dollars in REIT losses, and they have warned regulators about them.

CONTACT:  Vernon Healy
Christopher T. Vernon, attorney at law
Susan R. Healy, attorney at law
(239) 649-5390
Toll Free: (877) 649-5394
info@vernonhealy.com
http://www.vernonhealy.com
http://www.reitattorneys.com
http://www.protectinginvestors.com

Lawyers at Vernon Healy have fought for decades on behalf of investors in non-traded REITs

With a revived popularity and a renewed sales pitch, non-traded REITs are once again in the spotlight and brokers continue to target investors looking for a good yield, low risk investment.   The attorneys at Vernon Healy have been on the forefront of the fight against the broker-dealers who have been promoting and selling these defective products for more than a decade.

Sadly, in the midst of the recent financial crisis, non-traded REITs have now caught a second wind and are more popular than ever. Based on Vernon Healy’s past and present experience, many non-traded REITs continue to show fatal flaws, massive conflicts of interest, and excessive fees and commissions that, in the long run, expose investors to unnecessary risks and expenses in light of the likely returns.

If you are an investor considering non-traded REITs, we strongly urge you to seek a second opinion before investing in a non-traded REIT.

For investors who have already purchased non-traded REITs, the securities attorneys at Vernon Healy can help you evaluate a potential claim. What follows is one example of many showing how the law firm of Vernon Healy assisted an investor client with a non-traded REIT claim. In 1998,  securities attorney Chris Vernon exposed the flaws of non-traded REITs through multiple FINRA arbitration cases (formerly NASD arbitration).  Vernon successfully recovered losses suffered by retirees as a consequence of their investments in the defunct Inland Monthly Income Fund III REIT.

In one of the cases, a Florida retired couple, looking for a source of steady income that would fit their conservative approach, contacted a lower-tier broker-dealer. The brokerage firm recommended the retired couple invest in the Inland REIT, which, unbeknownst to the couple, charged very high commissions — of up to 8 percent — in connection with the sale.

On top of the very high fees and commissions, the Non-traded REIT was packed with conflicts of interest. For example, 7 percent of the gross offering proceeds were paid to the advisor of the company, Inland Real Estate Advisory Services Inc., which is a wholly-owned subsidiary of Inland Real Estate Investment Corp., the issuer of this investment. Regrettably, the investigation conducted by Vernon revealed disconcerting transactions and dealings that occurred within the Inland REIT sold to the retired couple, and most of these problems continue to occur inside many non-traded REITs today.

With respect to the investment described above, two of the Inland REIT properties were lost through foreclosure. Four of the 38 Inland sponsored partnerships, which in turn were owned by 21 other Inland-sponsored partnerships, gave up their properties by providing the mortgage holders deeds in lieu of foreclosure. The possibility of cash-flow distributions to limited partners in those 21 partnerships was precluded. In addition to the 38 partnerships, other Inland partnerships experienced problems and much of the property owned by the limited partnerships was lost to first mortgage lenders who seized control of the property. Despite the distressing events cited above, the Inland REIT continued to offer unsustainable distributions that exceeded its net income, as its 1996 annual statement showed.

The brokerage firm alleged that the Florida retired couple —despite having a profile and investment objectives of “fixed income” and “long term growth” — received written materials that fully disclosed the risks involved in purchasing this type of investment and that any losses were caused by unforeseeable events.  

During the course of the arbitration, Chris Vernon was able to demonstrate to the panel that these types of investments should not be pitched to, or sold to retirees because of the high risk involved. At the end of a five day arbitration hearing, the panel sided with the retired couple and rendered an award not only against the brokerage firm, but also against the branch manager and the owner of the brokerage firm.

For more information, contact Vernon Healy about how the firm may be able to help you with a non-traded REIT claim.

Vernon Healy is a Naples, Florida law firm that represents investors nationwide who are victims of stock fraud and stock losses due to broker fraud and brokerage firm fraud and misconduct. Vernon Healy's investment fraud attorneys are experienced in arbitration and litigation, and the firm assists clients in attempting to recover losses caused by all manner of financial fraud and negligence. It focuses its practice on complex financial litigation and arbitration as well as other complex business litigation and arbitration.

Financial Advisor Improperly Sold High Risk, Non-Traded REITs, Vernon Healy Claim Asserts

A financial advisor seeking high commissions for himself instead of the financial well being of his widowed school teacher client improperly sold her high risk non-traded REITs and other unsuitable investments that caused significant losses and locked up her retirement nest egg, according to a claim filed today by Vernon Healy, the investor rights law firm.

Despite the investor’s aim of reasonable income from conservative investments, the financial advisor steered the widow toward high risk non-traded REITs and other real estate-related and alternative investments, the claim seeking FINRA arbitration states.

Following the death of her husband, the woman found herself for the first time handling the family investments, including a brokerage account. Not having the expertise to invest in individual stocks, the woman had the majority of her funds invested in mutual funds and municipal bonds. She then sought an expert to help protect her irreplaceable assets while investing them to gain a retirement income. Instead, the financial advisor failed to put his client’s interests above his own, steering her to high commission, alternative investments that caused significant losses and essentially froze her assets.

Between 2006 and 2009, the financial advisor converted almost $700,000  of the woman’s liquid investments into high risk non-traded REITs and other real estate-related investments and alternative investments, which by 2009 accounted for nearly 60 percent of the woman’s assets. Those investments robbed the woman of liquid assets and left her with illiquid investments that, while steadily losing value, she may not be able to sell – other than at a huge discount – to meet upcoming minimum distribution requirements of her IRA.

The high commission investments that this advisor used to line his own pockets at the expense of his school teacher client include: AmREIT, NetREIT, Inland REIT, KBS REIT and Behringer Harvard REIT, all of which have either severely curtailed or suspended investor redemptions. As well, the advisor recommended other alternative investments such as venture capital schemes and oil and gas investments that will not be liquid for 15 to 20 years. These investments weren’t suitable for the client in violation of industry rules because the woman clearly needed access to her funds sooner.

“This woman was led to believe that her portfolio was well diversified and safer than being exposed to market risk,” said Chris Vernon, founder of Vernon Healy. “In truth, the majority of her portfolio was exposed to significant risk, was largely concentrated in real estate-related investments, and was illiquid.”

Vernon Healy is a Naples, Florida law firm that represents investors nationwide who are victims of stock fraud and stock losses due to broker fraud and brokerage firm fraud and misconduct. Vernon Healy's investment fraud attorneys are experienced in arbitration and litigation, and the firm assists clients in attempting to recover losses caused by all manner of financial fraud and negligence. It focuses its practice on complex financial litigation and arbitration as well as other complex business litigation and arbitration.

CONTACT:  Vernon Healy
Christopher T. Vernon, attorney at law
Susan R. Healy, attorney at law
(239) 649-5390
Toll Free: (877) 649-5394
info@vernonhealy.com
http://www.vernonhealy.com
http://www.reitattorneys.com
http://www.protectinginvestors.com

Non-traded REITs improperly sold by financial advisor, legal claim by Vernon Healy contends

Naples, FL— A financial advisor improperly sold multiple high-risk non-traded REITs and other alternative investment products to a risk averse Minnesota teacher and caused her dramatic losses, according to a claim filed today by investment fraud attorneys at Vernon Healy, the investor rights law firm.

The financial advisor repeatedly recommended high-risk and illiquid investments despite  the divorced teacher’s clear and repeated calls for caution.  The advisor answered questions about risk with promises of safety and dismissed the teacher’s concerns about unsuitable products with reassurances that later proved false. All the while, the financial advisor earned high commissions on the products he was pushing, the claim states.

Vernon Healy firm founder Chris Vernon said the retired teacher, who invested more than $500,000 in REIT investments as well as on other real estate related and alternative investments, sought financial management specifically because she felt unqualified to safely invest the limited nest egg that was to provide retirement income for her following her divorce.

But instead of carrying out his duties as a financial professional, the financial advisor repeatedly recommended products that lined his own pockets with high commissions and put the client’s assets at risk, according to the claim. Products sold to the teacher included non-traded REITs and other real estate related investments such as Inland American Real Estate Trust, Inc., Summit CRA Multi-Family Housing II, LLC, IMH Secured Loan Fund, United Development Funding II, and a Wells/Piedmont REIT. 

While the typical sales pitch for non-traded REITs centers on owning income-producing  real estate without the headache and sidestepping market volatility, the truth is that these products often do not perform as anticipated. Non-traded REITs sidestep market volatility only because there is no liquid secondary market to price them.  This same lack of liquidity gives investors no way out of a bad situation if the non-traded REIT reduces or suspends payments to investors and then suspends redemptions.  In that all too frequent case, investors cannot sell their shares back to the REIT but must instead sell in a very thin secondary market at a very deep discount.

Although the client in today’s claim requested diversified, safe, income-producing investments, the financial advisor did just the opposite; he concentrated her assets in more and more non-traded REITs and other alternative, illiquid, and high risk products.

For example,  in addition to the REIT and other real estate investments, the financial advisor also inappropriately recommended and sold the Minnesota School teacher high risk and illiquid health related investments such as U.S. Preventative Medicine and Medical Capital Notes. 

The claim requesting FINRA arbitration alleges that the financial advisor:

* Failed to perform due diligence on investments that would have revealed glaring problems with principals who had been sued for fraud and embezzlement and immediately ruled out those investments for the client.

*Failed to diversify the retired teacher’s portfolio and instead loaded it with real estate investments such as highly risky non-traded REITs that saw vanishing disbursements and then became illiquid when redemptions were suspended.

*Put the retired teacher’s money in products that were not traded on the open market, leaving her with no place to sell her investments.

Vernon Healy is a Naples, Florida law firm that represents investors nationwide who are victims of stock fraud and stock losses due to broker fraud and brokerage firm fraud and misconduct. Vernon Healy's investment fraud attorneys are experienced in arbitration and litigation, and the firm assists clients in attempting to recover losses caused by all manner of financial fraud and negligence. It focuses its practice on complex financial litigation and arbitration as well as other complex business litigation and arbitration.

CONTACT:  Vernon Healy
Christopher T. Vernon, attorney at law
Susan R. Healy, attorney at law
(239) 649-5390
Toll Free: (877) 649-5394
info@vernonhealy.com
http://www.vernonhealy.com
http://www.lehmannotes.com

Keywords: REIT losses, non-traded REITs, Wells REIT, Inland American REIT, REIT investing, Medical Capital