No. of Recommendations: 13
One of the largest series of non-traded REITs is the Apple 1 through 10. They were offered exclusively by David Lerner Associates.[1] Lerner and the REITs have run into a bit of trouble recently. This week a FINRA arbitration panel awarded an investor, 100% of their original Apple Nine REIT investment. From the FINRA news release [2]

CASE SUMMARY: Claimants asserted the following causes of action: misrepresentation and omissions, breach of fiduciary duty, violation of FINRA Conduct Rules, negligence, failure to supervise, breach of contract, and fraudulent misrepresentation.

The panel ordered Lerner to refund the $24,450 that the couple invested plus pay for the FINRA arbitration fee. What is NOT clear is who paid for the law firm that represented the couple. Clearly they could not afford many hours of legal help for a claim of this size. (Legal fees would probably by ~$350/hour for this type case.) Possibly, the law firm worked pro bono.

Above and beyond this case, FINRA is not very happy with Lerner/Apple. From FINRA’s “recent case trends” dated 5/23/12: [3]

On May 31, 2011, FINRA announced that it had filed a complaint against David Lerner & Associates, Inc. (DLA), of Syosset, NY, charging the firm with soliciting investors to purchase shares in Apple REIT Ten, a non-traded $2 billion Real Estate Investment Trust (REIT), 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. DLA has sold and continues to sell Apple REIT Ten targeting unsophisticated and elderly customers with unsuitable sales of the illiquid security.

Since January 2011, as sole underwriter for Apple REIT Ten, DLA has sold over $300 million of an open $2 billion offering of the REIT's shares. Apple REIT Ten invests in the same extended stay hotel properties as a series of other Apple REITs closed to investors. Apple REIT Ten and the closed Apple REITs were founded by the same individual, and are all under common management. DLA has been the sole underwriter for Apple REITs since 1992, selling nearly $6.8 billion of the securities into approximately 122,600 DLA customer accounts. DLA earns 10 percent of all offerings of Apple REIT securities as well as other fees. Apple REIT sales have generated $600 million for DLA, accounting for 60 to 70 percent of DLA's business annually since 1996.

The complaint against DLA 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.

Personally I will stick with traded REIT commons/preferreds for the widows and orphans portfolios I manage.



[1] David Lerner Associates, Apple non-traded REITs

[2] FINRA award against Lerner/Apple REIT nine

[3] FINRA recent trends:
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