Articles Tagged with REIT losses

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Securities Litigation Consulting Group of Fairfax, Virginia has estimated that shareholders of non-traded REITs are about $50 billion worse off for having put money into non-traded REITs rather than exchange-traded REITs. The estimate is based on the difference between the performance of more than 80 non-traded REITs and the performance of a diversified portfolio of publicly-traded REITs over a period of twenty years. According to research by the consultancy, the difference in performance between the two asset groups is largely due to the relatively high up-front expenses associated with non-traded REITs.

15.6.15 money whirlpoolNon-traded real estate investment trusts (REITs) are investments that pose a significant risk that the investor will lose some or all of his initial investment. Non-traded REITs are not listed on a national securities exchange, limiting investors’ ability to sell them after the initial purchase. Such illiquid and risky investments are often better suited for sophisticated and institutional investors, rather than retail investors such as retirees who do not wish to have their money tied up for years, or risk losing a significant portion of their investment. Non-traded REITs usually have higher fees for investors than publicly-traded REITs and can be harder to sell.

A partial list of non-traded REITs is as follows (not all of the REITs listed have performed poorly):

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Investment fraud lawyers are currently investigating claims on behalf of investors who suffered significant losses in CommonWealth REIT. Allegedly, between January 10, 2012, and August 8, 2012, CommonWealth issued false and misleading statements regarding its financial standing and prospects which, if proved to be true, would be a violation of the Securities Exchange Act of 1934.

CommonWealth REIT Investors Could Recover Losses

The CommonWealth real estate investment trust primarily owns and operates real estate, such as industrial buildings, office buildings and leased industrial land. Allegations currently being investigated by securities arbitration lawyers are that CommonWealth failed to disclose certain facts, including the fact that leased office spaces had fallen below expectations, existing tenants were receiving concessions which were eroding CommonWealth’s income and, as a result, CommonWealth’s positive statements about its occupancy rate, dividend payout and leverage ratio were not reasonably founded.

An announcement on August 8, 2012, stated that CommonWealth would likely be reducing its dividend payment. Among the reasons cited for this reduction were that its available cash for distribution payout ratio had increased and its occupancy rate had decreased. Following this announcement, the per share price of CommonWealth fell $1.57, or 9 percent, closing at $16.48 that day. Investment fraud lawyers say that by October 26, 2012, shares were trading at $13.58, a 52-week low. Furthermore, while CommonWealth REIT’s annual revenue increased from 2008 to 2011, its net income fell in that same period from $244.65 million to $109.98 million, a decline of $134.67 million.

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Stock fraud lawyers are currently investigating claims on behalf of investors who suffered significant REIT losses as a result of unsuitable recommendations of non-traded REITs. Recently, new arbitration claims have been filed on behalf of investors in Inland Western REIT, KBS REIT I and other risky investments.

More Arbitration Claims Against Brokers, Firms in Inland Western REIT and KBS REIT I

In one recent claim, securities arbitration lawyers say the claimants opened accounts with Multi-Financial and, despite the fact that the claimants indicated to the adviser they wanted to generate principal while protecting their income, the adviser proceeded to recommend a substantial investment in speculative and illiquid Real Estate Investment Trusts, or REITs and Limited Partnerships, or LPs. Based on the Multi-Financial adviser’s recommendation, the Claimants invested in Inland Western REIT, Wells REIT II, PDC 2005-B Oil & Gas, Reef Global Energy VII Oil & Gas, Cronos Containers Partners I, Hines REIT, Reef Global Energy VI Oil & Gas, Crowne Hattiesburg Bluffton Holdings, Mewbourne 2008-A, Oil & Gas, LEAF Commercial Finance Fund LLC, Atlas Resources 2008, Oil & Gas and Behringer Harvard Strategic Opportunity Fund II REIT.

Another recent filing was against one of the brokerage firms responsible for the supervision and actions of Paul Larsen, a former broker with VSR, ProEquities and six other firms before being permanently barred by FINRA in 2011. According to the allegations, Larsen made unsuitable recommendations of non-traded REITs, coal and natural gas speculation and other risky investments. A claim filed on November 21, 2012 alleges Larsen made improper recommendations of KBS REIT I, Atlas 14 and Atlas 15. Atlas 14 and 15 are both speculative natural gas and oil drilling ventures. For more information on KBS REIT I, see the pervious blog post, “KBS REIT I Investors Could Recover Losses.” Stock fraud lawyers say the brokerage firms could be held liable for REIT losses suffered by Larsen’s clients because they have a responsibility to adequately supervise their brokers.

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Investors of Whitestone REIT are attempting to recover their REIT losses through Financial Industry Regulatory Authority securities arbitration. First offered in 2004 as a public, non-traded REIT under the name Hartman Commercial Properties REIT, shares of the investment were offered at a per share price valuation of $10. Until a statement in 2009, which informed investors that the value of Whitestone REIT had declined to a per share price of only $5.15, investors were unaware of any problems with the REIT.

Recovery of Whitestone REIT Losses

On May 1, 2009, Jack L. Mahaffey, Independent Trustee, Chairman of Compensation Committee and Chairman of Special Committee for Whitestone REIT, issued a letter to shareholders. This statement revealed the $5.15 valuation was considered by Western Reserve Partners, a real estate investment banking firm which was engaged to review Whitestone’s internal management analysis, to be “on the high side of the range of reasonableness for current valuation.”

The letter to shareholders also addressed the question of why investors’ dividends had been reduced despite the fact that they were led to expect a dividend of 7 percent. In addressing this question, Mahaffey stated that “Whitestone had established a pattern of making cash distributions in excess of its FFO and available cash flow, a practice generally avoided by listed REITs.”

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Many investors who suffered significant REIT losses in KBS REIT I and KBS REIT II are exploring their options for loss recovery through a Financial Industry Regulatory Authority arbitration claim. KBS REIT I is a non-traded real estate investment trust with a focus on commercial real estate. It has raised around $1.7 billion from investors. Current estimations indicate that investors’ interests in KBS REIT I are worth $5.16 per share. The last change in valuation occurred in late 2009, at which time the investment was valued at $7.32 per share; the new valuation represents a 29 percent decline from that value and a drop of almost 50 percent from the investment’s initial offering price of $10 per share.

Recovery of KBS REIT Losses

In addition, investors of both KBS REIT I and KBS REIT II have been informed that they would not receive any more distributions. Prior to this announcement, KBS REIT I investors were receiving annual distributions of 5.3 percent. Reportedly, KBS REIT I has also suspended redemptions. This means that investors who hold shares in this investment may have trouble selling their investment or could face serious losses by selling on the secondary market. Secondary market buyers are very unlikely to pay for shares of KBS REIT I at the appraised value.

Typically, REITs carry a high commission, which motivates some brokers to make the recommendation to investors despite the investment’s unsuitability. The commission on a non-traded REIT is often as high as 15% percent. Non-traded REITs carry a relatively high dividend or high interest, making them attractive to retired investors. However, non-traded REITs are inherently risky and illiquid, which limits access of funds to investors. Arbitration claims have already been filed, or are in the process of being filed, against Ameriprise on behalf of KBS REIT investors who were allegedly led to believe that the REIT was safe, similar to investing in a bond, could be liquidated, provided guaranteed monthly distributions, and that the value of the investment would not fall below the initial purchase price of $10 per share.

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Recovery of Desert Capital REIT Losses

INVESTORLAWYER_6Q17_2012-11-12_Mon_Recovery of Desert Capital REIT Losses

Many investors who purchased Desert Capital REIT, a non-traded REIT, are consulting securities fraud attorneys in order to recover their REIT losses. Claims by investors include unsuitable recommendations and misrepresentations of Desert Capital REIT. In addition, many investors suffered losses as a result of overconcentration of funds in Desert Capital REIT.

Typically, REITs carry a high commission which motivates some brokers to make the recommendation to investors despite the investment’s unsuitability. The commission on a non-traded REIT is often as high as 15 percent. Non-traded REITs carry a relatively high dividend or high interest, making them attractive to retired investors. However, non-traded REITs are inherently risky and illiquid, which limits access of funds to investors. The most common complaints regarding the recommendation of Desert Capital REIT mention valuations, prospects, performance, liquidity, redemption and distribution of the investment. Many investors assert that they were not aware of the truth regarding these aspects and their decision to invest would have been affected if they’d had all of this information.

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Individuals who suffered significant REIT losses in Wells Timberland REIT and Wells REIT II could recover their losses through securities arbitration. In the latter part of 2011, the Financial Industry Regulatory Authority fined an affiliate of Wells Real Estate Funds, Wells Investment Securities Incorporated, for the use of misleading marketing materials. The $300,000 fine was related to the sales practices of the firm in relation to Wells Timberland REIT from May 2007 until September 2009. According to FINRA, 116 “improper, unwarranted or exaggerated statements” were included in the advertising literature. Some of these statements were about the distributions, redemption and diversification of the non-traded REIT. As a result, many of the individuals who invested in this REIT were investing in a product that was unsuitable for them, given their age, risk tolerance and investment objectives.

Recovery of Wells REIT Losses

Furthermore, in June of 2011, Wells REIT II was allegedly offered as a “safe, income-producing” investment. But by November of that year, it had reportedly lost over 25 percent of its initial value with its estimated per share value dropping from $10 to $7.47. Reportedly, this decline occurred even though the REIT’s properties are “some of the most prestigious office addresses and tenant corporations in the U.S.,” according to Wells officials, and despite the fact that these properties had an occupancy rate of 94.3 percent.

The 2010 annual report filed with the SEC for Wells REIT II stated that during that year, distributions to investors totaled approximately $313.8 million. This number includes monies paid to investors who decided to redeem their shares. However, Wells REIT II reported a net income of just over $23 million and total cash from operations of $270.1 million. With distributions exceeding cash from operations by nearly $44 million, investors should be asking themselves where the financing for distributions is coming from. According to the investment’s third quarterly report for 2011, Wells REIT II has paid over $1.1 billion in excess of earnings for cumulative distributions since its beginnings in 2004.

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Since the August announcement that CNL Lifestyle Properties REIT I’s value significantly dropped, investors of this product have been seeking avenues for recovering their REIT losses. In many cases, the answer may be Financial Industry Regulatory Authority securities arbitration. The $7.31 adjusted price per share, which is down from the original $10 per share price, represents a decline of over 25 percent of the investment’s value. The REIT had raised around $3.2 billion at the time the public offering was closed, so the decline in value represents investor losses of more than $870 million.

Recovery of CNL Lifestyle Properties REIT I Losses

According to a letter to CNL Lifestyle Properties shareholders, James Seneff, the CHL Lifestyle Properties Chairman, and Stephen Mauldin, CEO, indicated that the loss in value was primarily a result of their “discontinued mezzanine program” and a $2.3 million reduction of income in their “golf and lodging portfolios.” This reduction in income is reportedly a result of a lower operating net income and lease modifications. However, a press release filed with the Securities and Exchange Commission indicates that the value decline was also a result of a $1.9 million increase in asset management fees and general administrative expenses, a $0.5 million increase in bad debt expenses, a $2.6 million increase in depreciation expenses and a $1 million increase in loan costs amortizations and interest expenses. Reportedly, these increases are due to the increase in the number of properties.

Because CNL Lifestyle Properties is managed and advised by CNL Lifestyle Advisor, its own affiliate, management fees, advisory fees and other administrative expenses are paid to another CNL entity. In fact, an annual report stated that in 2011, $74.1 million was paid to CNL Lifestyle Advisor in asset management fees, acquisition fees and other expenses. Meanwhile, net income losses were reported for three years in a row.

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Many investors are seeking avenues for recovery of REIT losses sustained in Behringer Harvard REIT I. This is only one of the Behringer Harvard REIT investments currently under investigation by stock fraud lawyers. Retired investors in particular have suffered unnecessary losses due to the unsuitability of this investment.

Recovery of Behringer Harvard REIT I Losses

Recently Behringer Harvard itself discovered it was being sued when an investor filed a class action in the U.S. District Court for the Northern District of Texas in September. The investor, Lillian Hohenstein, purchased 1,275 shares between 2004 and 2008. The case alleges breach of fiduciary duty and negligence by the trust, members of its board and its executives. In addition to the class action, many brokerage firms who sold the investment are facing arbitration panels for their unsuitable recommendation of Behringer Harvard REIT I.

The main problem with Behringer Harvard REIT I is that many investors were led to believe the investment was safe and similar to high quality, fixed income securities and chose to invest because they believed it was a low-risk, income-producing investment. However, these investors were not aware of the high risks and illiquidity associated with non-traded REIT investments. Many investors also did not realize that they were not guaranteed distributions and some of the distributions that were made before distributions ceased came from loans, and not cash flows generate by the REIT. Furthermore, many retired individuals were overconcentrated in this investment because of its perceived income-producing feature. As a result, many investors have suffered significant REIT losses.

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Many investors are currently seeking recovery of their Inland American REIT losses through Financial Industry Regulatory Authority securities arbitration. Following Inland American’s 10Q Securities and Exchange Commission Q1 filing, investors were made aware of a current investigation being conducted by the SEC. According to this 2012 quarterly report, which was issued in May, Inland American had “learned that the SEC is conducting a non-public, formal, fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws regarding our business manager fees, property management fees, transactions with our affiliates, timing and amount of distributions paid to our investors, determination of property impairments, and any decision regarding whether we might become a self-administered REIT.”

Recovery of Inland American REIT Losses

Inland American’s prospectus, initially filed in August 2005, shows fees and commissions including a .5 percent due diligence expense allowance, a 2.5 percent marketing contribution and a 7.5 percent selling commission. Furthermore, Inland American’s 2011 annual report indicates that a $40 million business management fee and a $1.6 million investment advisory fee to be paid to its business manager.

Other concerns related to the Inland American REIT that investors should be aware of include the fact that even though it was recognized as the largest non-traded REIT, with real estate assets totaling over $11 billion, nearly 30 percent of the REIT’s properties are located in only four cities. The quarterly report cited above states that “Geographic concentration of our portfolio may make us particularly susceptible to adverse economic developments in the real estate markets of those areas or natural disasters in those areas.” Furthermore, the report discloses the fact that around 16 percent of the properties owned by the REIT are leased by SunTrust Bank and AT&T.

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