Even the state of Massachusetts is seeing the dangers in non-traded REITs (also known as unlisted REITs) as they have now lodged a complaint against LPL Financial relating to these products. The situation is familiar to investor’s rights lawyers, as the state is going after LPL for its failure to properly supervise financial advisors of the firm in their sales of these oversold and defective financial instruments.
Unfortunately, it is now common for brokerage firms to be accused of not properly supervising their brokers and advisors. In fact, Vernon Litigation Group has filed similar actions against numerous broker-dealers for inadequate supervision of their representatives in the sale of non-traded REITs.
So high are the commissions paid by most non-traded REITs (and the temptation that comes with it), that just a few months ago, on September 14, 2012, Investment News reported that non-traded REITs represented more than 75 percent of LPL’s commission revenue for the entire year. And while LPL is being targeted by state regulators in Massachusetts, investors all over the country continue to see devastating losses for non-traded REIT related investments.
Just last week Wells Timberland REIT, Inc, a non-traded REIT focused on the acquisition of timberland located in the southeastern United States announced a decline of share value from $10 per share to $6.56 per share. This represents a crushing 34 percent decrease in value in a non-traded REIT that just closed to new investors less than a year ago (December 31, 2011), according to SEC filings.
The table below, filed by Wells Timberland with the SEC, describes how the new adjusted price-per-share was calculated:
| Timber assets | $ | 11.70 | (1) |
| Debt | (4.18) | (2) | |
| Preferred Equity | (1.24) | (3) | |
| Other non-timber assets and liabilities, net | 0.28 | (4) | |
| Estimated net asset value per-share of common stock | $ | 6.56 | |
| Estimated enterprise value premium | None assumed | ||
| Total estimated value per-share of common stock | $ | 6.56 |
While Wells Timberland blames the decline in share value to the recovering housing industry, the chart above outlines that the REIT value is heavily impacted by its leverage and preferred equity.
The above is concerning for Wells Timberland investors, especially because the REIT continues to enter into a number of loans. For example, on September 28, 2012 (just three months ago), Wells entered into a loan “the CoBank Loan” authorizing the REIT to borrow up to $148 million in principal. But perhaps the most concerning factors about the substantial debt Wells Timberland continues to acquire, are the terms of the loans. In its last quarterly report filed with the SEC, Wells Timberland reported that the “CoBank Loan” does not allow for investors’ distributions if the loan to value ratio is greater than 40 percent. Specifically, Wells Timberland disclosed:
The CoBank Loan prohibits us from declaring, setting aside funds for, or paying any dividend, distribution, or other payment to our stockholders other than as required to maintain our REIT qualification if our LTV Ratio is greater than or equal to 40%.
The pending suit by the state of Massachusetts against LPL as well as the recent devastating news for Wells Timberland investors are just but a few of the on-going concerns we see regarding non-traded REITs.
The Vernon Litigation Group’s investment fraud team of attorneys continues to represent investors nationwide who have suffered significant damages from REITs. In 2012 alone, Vernon Litigation Group represented investors that have collectively lost millions of dollars for investing in REITs like Wells, Cole, KBS, Behringer Harvard, Inland America, CNL, and Lightstone, among others.