How To Recover Losses in Apple Non-Traded REITS Purchased at David Lerner Associates
We are currently representing clients of David Lerner Associates on a contingency fee basis who lost money or have funds frozen in the Apple non-traded REITs. David Lerner Associates (DLA), headquartered in Syosset, New York, sold Apple non-traded REITs and artificially inflated the value of the investments. Apple REITs 6 through 9 have never changed the value of their shares from the $11 price despite: 1) market fluctuations; 2) net income declines; 3) increased leverage through borrowing; and 4) return of capital to investors through distributions. In addition, a significant percentage of the funds returned to clients is simply a return of their principal. Since 2008, Apple REITs 6 through 9 did not achieve anywhere near the “funds from operations” necessary to pay investors 7-8 percent returns promised and the payout ratio nearly always exceeded 100 percent. The Apple REITs were able to make distributions that well exceeded the funds from operations in two ways. First, the Apple REITs borrowed funds to fund the distributions. Second, to the extent that a shortfall remained after borrowing, funds, the Apple REITs made up the difference by including a return of capital to investors. In addition, DLA misleadingly marketed Apple REIT 10 on its website by presenting performance information for earlier Apple REITs. The performance results for several of the earlier Apple REITs are themselves misleading because: 1) they do not reflect the recent reduction in distribution rates; and 2) DLA does not disclose that income from those REITs was insufficient to support their 7-8 percent returns and that distributions were partially funded by debt that further leveraged the REITs.
To determine if some, or all, of the investment losses or frozen funds in the Apple non-traded REITs recommended by David Lerner Associates can be recouped via a contingency fee basis arbitration claim or lawsuit please contact us. To learn more about the results of our investigation, please see Results of Investigation.
I. Background on Apple Non-Traded REITs
Apple REITs (or Real Estate Investment Trusts) are a series of investments underwritten by David Lerner Associates (“DLA”). A REIT is a company that owns, and usually, operates income-producing real estate such as hotels, apartments and shopping centers. To qualify as a REIT, a company must annually distribute at least 90 percent of its taxable income in dividends to its shareholders. However, like other businesses, a REIT cannot pass any tax losses through to its investors. Any company designated as a REIT must invest at least 75 percent of its total assets in and derive its income primarily from real estate held for the long term and from other limited items. Shareholders of REITs earn a pro-rata share of the income produced through ownership of commercial real estate. According to DLA’s website, the goal of the Apple REITS were to provide “income and possible capital appreciation for our clients.” Since 1993, over $6.55 billion and approximately 114,800 accounts purchased at least one of the 10 Apple Real Estate Programs. David Lerner Associates has underwritten seven Apple REITs.
II. Seminars as a Means of Soliciting Clients
David Lerner, who is well known in the greater New York City area for his “Take a Tip from Poppy” radio segments, is the president of David Lerner Associates. According to its website, David Lerner Associates regularly holds financial investment seminars throughout the New York metropolitan area and in Florida to attract new investors. Recent seminars were held at the Boca Raton Marriott at Boca Center, Trumbull Marriott in Trumbull, CT, Watermill Inn in Smithtown, NY, the Sheraton Eatontown in Eatontown, NJ and the Doubletree Hotel in Tarrytown, NY. Between the radio show and seminars, DLA is able to secure hundreds of new clients a year.
III. Problems With The Apple REITs
1) Artificial Inflation of Apple REITS: Apple REITs 6 through 9 opened between April 2004 and April 2008 and all completed offerings at $11 per share. Apple REITs 6 through 9 have never changed the value of their shares from the $11 price despite: 1) market fluctuations; 2) net income declines; 3) increased leverage through borrowing; and 4) return of capital to investors through distributions. This is not the true value of these REITs. The Apple REITs based their unchanging valuations solely on the fact that they were currently selling shares at $11 to existing shareholders under the DRIP and redeeming shares at $11 under the unit redemption program. DLA accepted this justification and always has recorded the Apple REITs at $11 per share on customer account statements. The $11 per share valuation Apple REITs 6 through 9 adopted currently is inaccurate and has been inaccurate in the past.
2) A Significant Percentage of The Funds Returned To Clients Is Simply A Return Of Their Principal or Borrowed Funds: Since 2008, Apple REITs 6 through 9 did not achieve anywhere near the “funds from operations” necessary to pay investors 7-8 percent returns promised and the payout ratio nearly always exceeded 100 percent. The Apple REITs were able to make distributions that well exceeded the funds from operations in two ways. First, the Apple REITs borrowed funds to fund the distributions. Second, to the extent that a shortfall remained after borrowing, funds, the Apple REITs made up the difference by including a return of capital to investors.
3) Misleading Claims To Investors: DLA misleadingly marketed Apple REIT 10 on its website by presenting performance information for earlier Apple REITs. The performance results for several of the earlier Apple REITs are themselves misleading because: 1) they do not reflect the recent reduction in distribution rates; and 2) DLA does not disclose that income from those REITs was insufficient to support their 7-8 percent returns and that distributions were partially funded by debt that further leveraged the REITs.
4) There Are No Public Markets For Any Of These Offering Making Them By Definition Illiquid: There are no public markets for any of the Apple offering making them by definition illiquid. This is a factor that must go into a suitability analysis before the investment is recommended by David Lerner Associates or any of its financial advisors. DLA acknowledges this lack of liquidity on its website by disclosing the following: “In addition, since the REITs we offer lack public markets (i.e. are illiquid), investors should be prepared to hold the investment for an indefinite period of time, although certain REITs (i.e. Apple REIT Six, Apple REIT Seven and Apple REIT Eight) may offer the possibility of limited, interim liquidity.” Unfortunately, some clients believed they would be able to get access to their funds through the “limited, interim liquidity.” In reality, few clients were able to get access to any of their funds because of a highly complex, restrictive formula for investors.
In addition, non-traded REIT share prices do not fluctuate because, as their name implies, these shares are not traded on a national stock exchange. The price of a non-traded REIT is set during the initial offering period. Because the shares aren’t actively traded, non-traded REITs should be held only as a long-term investment. Unfortunately, many of the elderly or retired clients who were recommended the non-traded REITs simply did not have this long term time frame necessary to make the investment suitable and appropriate.
Many of the clients who purchased the Apple REITs were elderly, retired or otherwise conservative clients. Besides a conservative stream of income, the clients needed their principal to remain safe and to have access to the funds. The liquidity of an investment becomes even more important as a client ages since unknown needs might arise like health-care costs, nursing home expenses and other similar issues. The liquidity of an investment is an element FINRA requires financial advisors and brokerage firms to consider before making a recommendation to a client. For example, in 2003, FINRA (then known as the NASD) warned brokerage firms and financial advisors they must take the liquidity of the investment into consideration before making a recommendation. In Notice to Members 03-71 FINRA stated “The type of due diligence will vary from product to product. However, there are some common features that members must understand about products before registered representatives can perform the appropriate suitability analysis. These features include, but are not limited to…the liquidity of the product; the existence of a secondary market and the prospective transparency of pricing in any secondary market transactions.”
5) Concentrated In One Market Sector and Not Diversified: Diversification is the hallmark of prudent investing. The duty and obligation to recommend a diversified investment increases the older a client gets or the more conservative a client becomes with age. Some of the Apple REITs focused on and were primarily concentrated in hotels and hotel related properties. For example, Apple REIT Six consists of 68 extended-stay and select service hotels. Apple REIT Seven consists of 51 extended-stay and select service hotels. Apple REIT Eight consists of 51 extended-stay and select service hotels. Apple REIT Nine consists of 78 extended-stay and select service hotels. This sort of concentration in hotels and hotel related investments was not appropriate or suitable for many of the clients who were recommended the Apple non-traded REITs.
More egregious were the conservative pitches made to clients of David Lerner Associates. We have received reports clients were told the Apple non-traded REITs were conservative investments, had “little to no risk”, and could serve as an alternative to certificates of deposit and other conservative investments. David Lerner Associates’ website makes it clear the firm believes the Apple non-traded REITs are “moderately conservative investments” (“Next, the investor needs to consider ‘moderately conservative’ investments such as REITs (real estate investment trusts). Many investors then should look at what we consider value investments with stock market risk such as growth mutual funds.”)
6) Concentration of Large Quantities of Client Assets In Apple REITs: Unfortunately, due to the massive commissions and fees associated with non traded REITs, the temptations for financial advisors to recommend large concentrations of a client’s portfolio in non-traded REITs are great. REITs are not bought by clients but rather sold by commission hungry financial advisors. Unfortunately, non-public REITs have virtually the largest commissions of any product that a financial advisor can sell. Typically between 11% to 15% of the amount invested in a non-listed REIT pays for sales commissions, fees and offering expenses. It is comparable to driving a new car off the lot and immediately having 15% depreciation. Many conservative investors had no idea right off the bat they would be down 11%-15% in the investment as soon as they bought it (despite the listed value of the non-traded REITs not moving on customer statements). In addition to the upfront commissions of 8% to 11% percent paid directly to the financial advisor and firm (with the rest going to the REIT manager), there are typically individual property/asset acquisition fees, property financing fees, management fees, disposition fees, and asset management fees, plus additional expenses. The net result is that out of a $100,000 initial investment, only about $80,000 to $85,000 would be left to actually invest. These massive fees create a commission vortex that can cause sales of non-traded REITs and purchases of the underlying property at almost any price regardless of the quality. Unfortunately, the retail investor often has no idea how expensive these investments truly cost.
7) Conflicts of Interest: There tend to be multiple conflicts of interest in non-traded REITs. For example, David Lerner Associates disclose on its website “There are conflicts or potential conflicts of interest with the issuer’s chairman/president because he has duties as an officer and director to companies with which the issuer contracts or with which the issuer may compete for properties.” These sorts of conflicts make it difficult for investors to know whether the firm is acting on its benefit or the benfit of the proprietary investments and firm itself. The problems with non traded REITs in general are so widespread in June of 2009, FINRA Enforcement sent “targeted examination requests” to brokerage firms to review their sales practices. The conflicts of interests was a topical area closely examined.
IV. Major Claims Against David Lerner Associates: We are pursuing two major causes of action against David Lerner Associates related to the Apple REITs. The firstmajor cause of action are suitability claims. Under FINRA Conduct Rules, brokerage firms and financial advisors have to make suitable and appropriate claims for clients based on their financial situation and needs. We believe in some instances, clients may have had an unsuitable concentration of their portfolio placed in Apple related REITs. This issue is particularly relevant for elderly clients or those with conservative investment objectives. The second major cause of action are claims related to misrepresentations and omissions. Under the federal and state securities laws, brokerage firms and financial advisors have a duty to disclose all material, relevant risks of an investment. These risks must be disclosed in easy to understand language where the information must be detailed in terms a lay person can understand. We believe many of the true risks of these concentrated, sector REITs were not made clear to investors.
V. How To Recover:Investors who have lost money at David Lerner Associates in Apple REITs or other related products can file FINRA arbitration claims on a contingency fee basis against the firm to recover some, or all of their investment losses or frozen funds. Please see the button Why Arbitration For Apple Losses on the left hand side of this page for more information on the FINRA arbitration process.
PLEASE CONTACT OUR LAW FIRM IN CHICAGO, ILLINOIS AT 312.332.4200 OR VISIT WWW.INVESTMENTFRAUD.PRO FOR MORE INFORMATION ABOUT RECOVERING INVESTMENT LOSSES OR FROZEN FUNDS IN APPLE REITS AT DAVID LERNER ASSOCIATES.
Many clients of brokerage firms don’t recall but at the time the account was opened with David Lerner Associates, the client contractually agreed to have any disputes heard through binding arbitration. The arbitration process is administered through an organization called FINRA (formerly called NASD). For over almost 30 years, clients of brokerage firms have had claims decided through FINRA by a panel of three arbitrators. If a client files a lawsuit in count against David Lerner Associates, the judge will almost certainly compel the case to arbitration instead because of the binding arbitration clause in the new account agreement. FINRA arbitration is usually faster and cheaper than traditional court house litigation.
We work on a contingency fee basis. This means our fee is based on, and completely contingent upon, the amount we recover for the client. If we do not recover, the client is not responsible for any of our attorney fees whatsoever. FINRA, the group who administers the binding arbitration procedure, does require clients to pay an upfront filing fee at the time the FINRA arbitration claim is filed. The client is obligated to pay this fee. The amount of the filing fee depends on the size of the client’s investment losses. The fees with FINRA run anywhere from $475 for a claim between $10,000 and $25,000 up to $1,800 for claims over $1 million.
We would like to see three sets of documents from the investor to determine if we can help with the Apple non traded REITs. First, we need information related to when the investment was purchased and how much income was received. These could be monthly, quarterly or yearly account statements or even a spreadsheet or other document put together by the client. Second, if the documents were retained, we would like to see all marketing material sent to the client regarding the Apple non traded REIT. Third, we need to review a completed Investor Questionnaire from Stoltmann Law Offices that will provide needed background information on the client and his or her experiences with the Apple non-traded REIT (please contact Stoltmann Law Offices at 312.332.4200 or Andrew@Stoltlaw.com for the Investor Questionnaire).