The Apple REITs have long been an enigma in the non-traded REIT industry – a sponsor that has consistently raised substantial capital apparently through a single broker-dealer, David Lerner & Associates, Inc. (DLA). Now FINRA has charged DLA with soliciting investors to purchase shares in Apple REIT Ten without conducting a reasonable investigation to determine whether it was suitable for investors, and with providing misleading information on its website regarding Apple REIT Ten distributions. FINRA’s complaint also alleges that:
- Since at least 2004, the closed Apple REITs have unreasonably valued their shares at a constant price of $11 notwithstanding market fluctuations, performance declines and increased leverage, while maintaining outsized distributions of 7 to 8 percent by leveraging the REITs through borrowings and returning capital to investors; as sole distributor, DLA did not question the Apple REITs’ unchanging valuations despite the economic downturn for commercial real estate;
- DLA failed to sufficiently investigate the valuation and distribution irregularities of the closed Apple REITs prior to selling Apple REIT Ten; as the sole underwriter of all of the Apple REITs, DLA was aware of the Apple REITs’ valuation and distribution practices; rather than conduct due diligence into those valuations and distribution irregularities to determine that they were reasonable and that the Apple REITs were suitable, DLA accepted the valuations and continued to record them on customer account statements;
- In its solicitation of customers to purchase Apple REIT Ten, DLA’s website provided distribution rates for all of the previous Apple REITs that were misleading and omitted material information because they did not disclose recent distribution rate reductions or that distributions far exceeded income from operations and were funded by debt that further leveraged the REITs;
- DLA’s due diligence into Apple REIT Ten was inadequate and has not rebutted the concerns underlying the issue of suitability; and
- The Apple REIT’s unsupported valuations, which are and have been inaccurate, substantially affected the financial condition and performance of the REITs; customers purchasing additional shares under the DRIP either overpaid or underpaid, and customers redeeming shares at $11 were either overcompensated to the detriment of the REITs’ remaining investors or undercompensated.
Below are links to FINRA’s announcement of the action and its complaint.
http://www.finra.org/Newsroom/NewsReleases/2011/P123738
http://www.finra.org/web/groups/industry/@ip/@enf/@ad/documents/industry/p123739.pdf
