Category Archives: Non-traded REIT News

Blau & Malmfeldt, a Chicago securities law firm, provides the latest non-traded REIT news, and assistance to investors who lost funds through non-traded REITs.

FINRA Fines LPL Financial, LLC for Failure to Supervise Alternative Investment Sales

Last month, FINRA hit LPL Financial, LLC with a $950,000 fine for failing to supervise its registered representatives’ sale of alternative investments.  FINRA also ordered LPL to conduct a comprehensive review of its “policies, procedures, and training and remedy failures.”

FINRA determined that between 2008 and 2012, LPL representatives often recommended that their customers concentrate savings in alternative investments such as non-traded REITs, and in doing so, ignored state regulations that impose concentration limits on the sale of such investments, as well as concentration limits specified in the offering documents of certain investments.

Many alternative investments carry with them very high commissions.  As these commissions are paid from offering proceeds (and therefore do not appear on the customers’ brokerage statements), they are not readily apparent to the customers.  These high commissions often impair the entity and make it ultimately difficult for many alternative investments to succeed.  Despite these problems, and despite the fact that many alternative investments sold between 2006 and 2009 have failed, many brokerage firms such as LPL are pushing more of these investments on their customers.  2013 in fact saw more alternative investment sales than any prior year.

Blau & Malmfeldt is a law firm headquartered in Chicago, Illinois that represents investors nationwide in securities, commodity futures, and shareholder rights disputes.  Contact us at 312-443-1600 to learn more about the services that we offer.

 

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.

Non-Traded REIT Sales Skyrocketing at Broker-Dealer LPL

The Wall Street Journal is reporting that commissions from alternative investments at broker-dealer firm LPL Financial, LLC are up 75% in the third quarter of 2013 due in large part to LPL’s sales of securities in non-traded real estate investment trusts (REITs).  Alternative investments now account for 12% to 14% of LPL’s securities sales.  With more than 13,000 registered representatives, LPL is the largest independent securities broker-dealer in the United States.

Brokerage firms generally receive commissions of 7% to 10% on the sales of alternative investments such as non-traded REITs.  Another 5% to 10% typically goes to the investment company’s “sponsor” as a placement fee.  These sponsors are typically controlled by the same individuals that are ultimately in charge of the investment companies.

The commissions are typically paid by the investment company in which the securities were issued using investor proceeds.  In other words, when you purchase $10,000 in non-traded REIT securities, $700 of your money is paid to your broker and another $500 to $700 might go to the non-traded REIT’s sponsor as a placement fee.  These commissions do not show up on brokerage statements but are rather typically buried in the fine print of offering documents. Many  brokers falsely represent to their customers that “they do not make anything” by selling alternative investments.

Obviously, when up to 15% of investor proceeds is used to pay commissions, the investment company is impaired.  To make matters worse, non-traded REITs often pay astronomical management fees to an outside business manager.  In addition, non-traded REITs often pay “dividends” that are above and beyond the cash available from the entities’ operations.  Money is often borrowed, or worse cash is used from the sale of securities to new investors, to pay these “dividends.”  These illusory returns  give the entities the appearance of viability so that even more money can be raised from new investors, which results in more up-front commissions to the brokers and sponsors.

Non-traded REITs are huge cash cows for the sponsor company’s that receive up-front placement fees and for brokers like LPL that make huge commissions on the sales of securities in these entities, but they are generally very poor investments for brokerage customers.  Even when real estate markets perform well, it is very difficult for non-traded REITs to overcome the massive fees that they are subjected to.  The bottom line is that these often illiquid investments rarely make any sense for brokerage customers.

Blau & Malmfeldt expects that LPL will face many customer complaints and arbitration actions in years to come as a result of its sale of securities in non-traded REIT and other alternative investments today.

Blau & Malmfeldt is a law firm that represents investors in securities, commodity futures, partnership, and shareholder rights disputes.  Contact us at 312-443-1600 to learn more about the services we offer.

 

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

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.