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

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.

SEC Charges Ameriprise with fraud for secret REIT payments

The Securities and Exchange Commission charged Ameriprise Financial Services, Inc. with fraud today and accused the Minneapolis-based broker-dealer of receiving millions of dollars in secret payments as a condition of offering and selling certain REITs to its brokerage clients.

Ameriprise agreed to settle the charges without admitting wrongdoing and pay $17.3 million, the SEC said.

According to the SEC order: “Ameriprise received approximately $30.8 million in undisclosed compensation in connection with Ameriprise’s offer and sale to its brokerage customers of certain real estate investment trusts (‘REITs’) between 2000 and May 2004 ... Ameriprise demanded this undisclosed compensation, which it referred to as ‘revenue sharing,’ in exchange for including the REITs on Ameriprise’s brokerage platform.”

 

Download SEC_Ameriprise_33-9051

Ameriprise also sold more than $100 million of unregistered shares of one REIT in violation of the registration provisions of the federal securities laws, the SEC said.

"Few things are more important to investors than getting unbiased advice from their financial advisers," Robert Khuzami, Director of the SEC's Division of Enforcement, said in a statement. "Ameriprise customers were not informed about the incentives its brokers had to sell these investments."

The SEC said its investigation is continuing.

The Vernon Healy law firm is currently investigating claims on behalf of investors surrounding misrepresentations about the safety and liquidity of unlisted REITs and the suitability of marketing of these products to certain investors, including older, risk-averse investors. For more information, contact Vernon Healy by phone at 239-649-5390 or by e-mail at info@vernonhealy.com.