Category Archives: Behringer Harvard News

Blau & Malmfeldt is a securities law firm investigating the Behringer Harvard non-traded REITs. Learn how Blau & Malmfeldt can help recover investment losses.

More Bad News for TIER REIT, Inc.

On November 5, 2013, TIER REIT, Inc. (formerly known as Behringer Harvard REIT I, Inc.) filed its report for the third quarter with the Securities and Exchange Commission.   Behringer Harvard REIT I changed its name to TIER REIT in June 2013.

TIER REIT’s recently filed 10-Q  states that shareholder equity has slid from $781 million at the end of 2012 to $773 million at the end of September 2013.  With 299,191,861 shares of stock outstanding, the book value of TIER REIT’s shares stands at $2.58 per share.

Despite this slide in book value, TIER REIT revised its estimated share value upwards from $4.01 to $4.20.  Investors should keep in mind that the estimated share value in no way reflects the market value of the shares.  There is no public market for TIER REIT shares.  The shares have recently traded on a secondary market for $1.91.

Many brokerage firms that sold Behringer Harvard REIT I/TIER REIT have urged investors to be patient and have promised that they will eventually recover a substantial portion of their investment when TIER REIT restructures itself and becomes a traded REIT.  Given the continued downward slide of the book value of TIER REIT shares, it does not appear likely that investors will ever recover a significant portion of their principal.

According to the operator of one prominent non-traded REIT secondary market – where investors can sell their shares in this company at a discount to book value — speculators have avoided TIER REIT because “it is a failed company.”

In 2012, a class-action lawsuit was filed on behalf of TIER REIT shareholders against the company’s directors and former management company.  The lawsuit relates to alleged misrepresentations concerning the value of the stock through the company’s dividend reinvestment program.  Essentially, the complaint alleges that the defendants sold stock to the shareholders through the dividend reinvestment program for $10 per share despite their knowledge that the stock was worth considerably less than this because of the company’s poor performance.

While some investors may receive something from the class-action lawsuit, investors’ best chance at achieving a meaningful recovery requires filing an arbitration action against the broker-dealer firms that sold the investment.  Many brokerage firms misrepresented the risks of this investment and concealed the massive up-front commissions and fees that both the brokerage firms and TIER REIT’s sponsor received.

TIER REIT investors are encouraged to contact the law firm of Blau & Malmfeldt at 312-443-1600 for a free initial consultation.  Blau & Malmfeldt is a law firm that represents investors across the country in securities, commodity futures, partnership, and shareholder rights disputes.

FINRA Proposes Rule Change for Reporting of Non-Traded REIT Valuations

In March 2013, FINRA submitted a proposed rule change to NASD Rule 2340 (Customer Account Statements) and FINRA Rule 2310 (Direct Participation Programs) to the Securities and Exchange Commission that would “modify the requirements relating to the per share estimated values for unlisted DPP and REIT securities included in customer account statements.”

Through its proposed rule change, FINRA hopes to require brokerage firms that have sold such non-traded REITs as Behringer Harvard, CNL Lifestyle Properties, KBS, NetREIT, and Dividend Capital, to provide their customers more reliable estimates of the current value of their holdings.  Specifically, FINRA proposes to require brokerage firm to choose one of three valuation methods:

  1. for two years after breaking escrow, “net investment,” consisting of gross offering price less any cash distributions to investors and “organization and offering expenses” (as defined by Rule 2310) that are funded through borrowing or offering proceeds (a firm may rely on the issuer’s periodic reports for this information);
  2. at any time, a valuation performed by an independent valuation service, which (under a proposed amendment to Rule 2310) the issuer must commit to provide and must perform at least once every three years; and
  3. a periodic valuation by any program that provides them according to a methodology disclosed in the prospectus.

Unfortunately, FINRA’s proposal is not calculated to make any difference whatsoever as most every firm already uses option 3 and would continue to do so.  Option 3 is problematic because the operators of non-traded REITs have every incentive to use a methodology that overstates the current value of the REIT stock: the more the operator says the stock is worth, the more stock the operator will be able to sell going forward, and the more up-front commissions the REIT’s sponsor will get paid.

A rule that would actually help provide more transparency would require brokerage firms to employ a standardized methodology for determining estimated value based upon the entities’ financial data.  To be of any real value, the formula would need to take into account the REIT’s performance in a far more sophisticated manner than method 1 above, but there is no doubt that an adequate formula could be developed.

Blau & Malmfeldt is a law firm that represents investors across the United States in disputes with financial industry members.  If you have suffered losses through non-traded REITs, please call us at 312-443-1600 for a free consultation.

 

 

 

 

Valuations of Non-Traded REIT Stock

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For many investors holding shares of stock in non-traded REITs, the value of their holdings remains a mystery.  This is due to the absence of public markets.

In February 2009, the Financial Industry Regulatory Authority (FINRA) issued a notice to its members firms (NTM 09-09) notifying them that they would be required to discontinue their practice of listing the value of non-traded REIT stock on their customers’ brokerage statements as the offering price regardless of the performance of the underlying REITs.  In response, the operators of non-traded REITs began providing estimated valuations which the brokerage firms then began reporting on their customers’ statements.

Unfortunately for investors, the valuations that non-traded REIT operators provide is arbitrary and often overstated.

We believe that the book value non-traded REIT stock — the remaining shareholder equity divided by the number of shares outstanding – provides a far more objective and realistic estimate.

It is worth noting, however, that shares of non-traded REIT stock often trade at substantial discounts to book value on secondary markets.  For Example, TIER REIT, Inc. (f/k/a Behringer Harvard REIT I, Inc.) stock currently trades on secondary markets for approximately $1.70/share.  The book value of the stock, according to TIER REIT’s 10-Q report for the second quarter of 2013, is currently $2.56/share.   TIER REIT currently reports an estimated share value of $4.01/share.

In August 2013, many non-traded REITs filed reports for the second quarter of 2013 with the Securities and Exchange Commission (SEC).  Book value can be calculated from the data contained within these reports.  Here’s how the book values of several non-traded REIT stocks have changed since the end of 2012:

TIER REIT, Inc. (f/k/a Behringer Harvard REIT I, Inc.): $2.56/share (down from $2.62).

NetReit, Inc.: $5.59/share (unchanged).

KBS REIT I, Inc.: $3.94/share (down from $4.03).

CNL Lifestyle Properties, Inc.: $4.97/share (down from $5.42).

Dividend Capital Diversified Property Fund, Inc.: $4.00/share (down from $4.38).

Blau & Malmfeldt is a law firm that represents investors across the United States.  If you believe that your broker misled you with respect to the risks associated with non-traded REITs, please call us at 312-443-1600 for a free consultation or email Paul Malmfeldt at pmalmfeldt@blau-malmfeldt.com.

 

 

Non-Traded REITs Still a Popular Choice Among High Commissioned Brokers

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Blau & Malmfeldt has tracked the performance of every public, non-traded real estate investment trust (“REIT”) for the period 2006 through the present as reported in these companies’ filings with the Securities and Exchange Commission (“SEC”).  What we have learned through our research is that there have been very few success stories and many failures, notably Behringer Harvard REIT I, Inc.,  KBS REIT I, Inc., NetREIT, Inc., CNL Lifestyle Properties, Inc., Dividend Capital REIT, Inc., and Inland American Real Estate Trust, Inc.

Given the fundamental problems inherent to the non-traded REIT industry, the multitude of failures should come as no surprise.  Investors typically pay up-front commissions of between 10-15% on their purchase of the securities.  The forfeiture of 10-15% of the initial investment results in a substantial impairment to the REIT.  Non-traded REITs typically pay annual dividends between 6-10%.  Even under the best real estate market conditions, it is virtually impossible to acquire real estate to support these returns given the 10-15% up-front fees and the other fees associated with the investment.

To sustain “dividends” of 6-10%, the REIT’s manager will typically return capital that has been raised from new shareholders back to the shareholders in the form of dividends.  In other cases, the REIT manager raises money through the sale of notes to retail investors in order to raise cash to pay the dividends to shareholders.  So, the “dividends” that non-traded REITs pay are often not profits but are rather borrowings or proceeds from new investors.

As a result of the obvious problems inherent to this industry, Forbes recently dubbed non-traded REITs as an “unnecessary niche.”

Despite all of these past failures, many high commissioned brokerage firms continue to push these investments upon unsuspecting retail customers.  A recent article in the Wall Street Journal describes that one non-traded REIT, American Realty Capital Trust IV, Inc. (“ARCT IV”) has managed to raise $3.6 Billion in the first half of 2013 through the sale of common stock.  The non-traded REIT industry as a whole is on pace to raise $17 Billion in 2013.  

It appears that ARCT IV has been unable to invest all of the capital that it has raised prudently — it has resorted to filling its new property acquisitions with tenants of low credit quality.  ARCT IV’s incentive is to raise as much capital as possible — its sponsor receives an up-front commission on the sale of every share of stock — regardless of whether all of this capital can be invested prudently and regardless of whether it makes sense for existing shareholders.

Blau & Malmfeldt is representing numerous investors in disputes against broker-dealer firms relating to their sale of non-traded REITs.  If your broker misrepresented non-traded REITs to you, concealed its commissions from you, or recommended that you concentrate your savings in real estate investments, please call us at 312-443-1600 or email Paul Malmfeldt at pmalmfeldt@blau-malmfeldt.com for a free consultation.

  

 

Behringer Harvard REIT I Investors Face Losses

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Blau & Malmfeldt is presently representing Behringer Harvard REIT I, Inc. (“Behringer Harvard”) investors in FINRA arbitration proceedings against various broker-dealer firms that sold this investment.  Behringer Harvard changed its name to TIER REIT, Inc. (“TIER REIT”) in June 2013.

Behringer Harvard/TIER REIT is a non-traded REIT.  What this means is that its stock does not trade on any formal stock exchange.  The absence of a formal exchange for the stock has caused severe liquidity problems for investors.

In March 2013, Behringer Harvard announced a devaluation of its shares to $4.01 per share.  Behringer Harvard stock was originally sold for $10 per share.

Investors should keep in mind that Behringer Harvard/TIER REIT’s self-reported valuation does not accurately reflect the current value of the shares.  As of June 2013, the shares were trading for approximately $1.70/share on private, secondary markets.  According to an operator of one of the secondary markets who we spoke with recently, Behringer Harvard/TIER REIT is a “failed company” and as a result, there are very few prospective buyers for its stock.  The book value of the shares – the company’s remaining equity divided by the number of shares outstanding – was approximately $2.60/share at the close of 2012.  Given the company’s downward spiral in recent years, it is questionable whether investors will ever have the ability to liquidate their shares at the present book value.

There are fundamental problems inherent to non-traded REITs and these entities have come under a great deal of scrutiny in recent years.  These products have extremely high commissions: investors typically pay up-front commissions of between 10-15% on their purchase.  The forfeiture of 10-15% of the initial investment results in a substantial impairment to the REIT.

Non-traded REITs typically pay annual dividends between 6-10%.  Even under the best real estate market conditions, it is virtually impossible to acquire real estate to support these returns given the 10-15% up-front fees and the other fees associated with the investment.

To sustain “dividends” of 6-10%, the REIT’s manager will typically return capital that has been raised from new shareholders back to the shareholders in the form of dividends.  In other cases, the REIT manager raises money through the sale of notes to retail investors in order to raise cash to pay the dividends to shareholders.

Non-traded public REITs are designed to be enormously profitable for their sponsors, who direct the sale of stock, the REITs’ managers, and the broker-dealer firms who sell the stock to their retail brokerage customers.  For unsuspecting investors, however, they are poor investments with a great likelihood of failure.  Over the course of this multi-billion dollar industry’s history, there have been few success stories.

Many brokerage firms misrepresented the risks and liquidity of Behringer Harvard and other non-traded REITs, and concentrated their customers’ savings in these poor investments.  If your broker sold you an investment in a non-traded REIT and you would like to explore your recovery options, please contact Blau & Malmfeldt at 312-443-1600 or email Paul Malmfeldt at pmalmfeldt@blau-malmfeldt.com.