There is no real estate investment I would work more diligently to avoid than a non-traded REIT. They routinely pay dividends using money from new investors peter or paul? and one of them, Wells Timberland REIT, doesn’t even qualify as a REIT. So what gives? It’s pretty simple: your friendly neighborhood broker is paid handsomely to sell them, regardless of whether it’s in your best interest to buy them.
Almost $9 billion in non-traded REIT equity was raised in 2008, a record that was easily eclipsed in 2009 after 11 non-traded REITs registered to raise a combined $19 billion. Officially, these non-traded REITs are gearing up to capitalize on opportunities arising from the recession and the distressed property market. Unofficially, it’s a commission and fee bonanza for everyone involved, and hapless retail investors are paying the freight.
Indeed, it would be easier and cheaper to hire Johnny Cochran to bail you out of a murder charge than to somehow come out ahead on a non-traded REIT investment. You would also be leaving much less to chance. In addition to the upfront commissions of 7 percent paid to your broker and a dealer/manager fee of up to 3 percent paid to the sponsor, there are individual property/asset acquisition fees of up to 2.75 percent, property financing fees of up to 1 percent, disposition fees of up to 1 percent, and asset management fees of up to 1 per annum, plus expense reimbursements. The net result is that out of a $10,000 initial investment, only about $8,000 would remain to buy property.
Obviously, these fees encourage only two things: sales of non-traded REIT shares and purchases of property – any property – at almost any price. David Swensen, Yale Endowment’s chief investment officer, singles out the Wells REITs in his book, “Unconventional Success” (pages 70-75). Swensen obviously knows his way around alternative investments, and his opinion of Wells is unambiguous:
“No rational buyer can compete with the Wells acquisition machine’s willingness to overpay for product. As a consequence, investors suffer the double indignity of high fees and poor investment prospects.”
How then, are investors convinced to suspend common sense and buy these commission-laden pigs? In theory, non-traded REITs offer price stability and a reliable source of income, and those are the major selling points. But a quick glance glance at almost any prospectus reveals these key “features and benefits” to be nothing more than highly profitable gimmicks.
Officially, the share price is almost always set at something remarkably close to $10 by the REIT sponsor, and almost as remarkably, it never ever changes no matter what. This is true of almost all non-traded REITs, regardless of the quality of their assets, their location, leverage, current market conditions or how long the REIT has been in operation. This lack of transparency is somehow supposed to provide investors with comfort.
Realistically though, how could a brand new REIT with no assets and unproven management be worth the same $10 a share as a 5 year old REIT with $3 billion in diverse assets spread across the country, and the same as a 10 year old REIT with just $200 million in assets concentrated in one small market? It’s a $10 coincidence that is just as impossible as it is unbelievable.
In fact, the latter example is Whitestone REIT, a non-traded REIT that was the product of one real estate entrepreneur’s efforts to consolidate his real estate holdings in Houston. The result was a bitter dispute with Whitestone management that lasted almost a decade. Could this REIT still be worth $10 a share to the investors whose dividends were cut and whose shares can no be longer redeemed? It’s improbable, and recent Whitestone insider transactions value it at $5.15 a share, about half the “official” price paid by outside investors.
If egregious fees and lack of transparency weren’t enough to perfect this foul smelling stew, why not add conflicts of interest and fraud? For an example of the former, look no further than Inland American REIT, and Inland Western REIT, two non-traded REITs managed by the Inland Group in Chicago. Inland Western needs to repay $1 billion in debt this year, which may be an impossible feat. In fact, as we type, Inland Western is rather desperately trying to raise cash to avoid bankruptcy (see What Are Inland Western Shares Really Worth?).
But that’s no matter, especially since Inland Western can easily raise cash by selling its kryptonite to affiliates. Inland Western did just that earlier this year, pocketing $99 million in cash by selling two properties to Inland American. This was done at a time when commercial real estate sales volumes reached all time lows. Whether any of this was truly arms length and representative of fair market value is difficult to tell, but it seems unlikely.
Fraud and misrepresentation complete this cancerous portrait. This particular example is brought to you courtesy of the SEC which recently settled a non-traded REIT kickback scheme with W.P. Carey. According to the settlement, W.P. Carey paid nearly $10 million in undisclosed compensation – using the assets of the REIT – to a broker-dealer that sold shares of W.P. Carey’s non-traded REITs to the public. Carey executives then used fake invoices and misrepresented the payments in securities filings to keep it all secret. The arrangement benefited not only the broker-dealer, but also W.P. Carey, because the broker-dealer’s sales of REIT shares increased the management fees paid to W.P. Carey. In the settlement, W.P. Carey and 2 senior executives agreed to pay $30.3 million in disgorgement, interest and penalties.
In terms of the other key selling point, reliable income, non-traded REITs are not so reliable. Many, like Cornerstone Core Properties REIT, are busy funding their dividends from borrowings and returns of capital. Grubb & Ellis Healthcare REIT is a great (but not isolated) example of the lengths to which non-traded REITs will go to maintain their dividends. For the three months ended March 31, 2009, Grubb & Ellis paid distributions of $14,247,000, as compared to cash flow from operations of $5,895,000. In many cases, distributions paid in excess of cash flow ponzi scheme are paid using proceeds from new investors. Slowly but surely, these fictitious dividends are starting to be cut.
OK, so you made a mistake, and now you want out. Good luck brother – you’re stuck. As of the end of May, the six largest non-traded REITs have shut down their share repurchase programs. These include Behringer Harvard REIT I, Cole Credit Property Trust II, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust, Piedmont Office REIT and Wells Real Estate Investment Trust II.
Other nonlisted REITs that have either stopped repurchasing shares or that have been unable to repurchase all the shares submitted include Behringer Harvard Opportunity REIT I, Desert Capital REIT, Dividend Capital Total Realty Trust, Grubb & Ellis Apartment REIT, KBS Real Estate Investment Trust and Whitestone REIT. It may be years, if ever, before investors experience a so-called “liquidity event” with these REITs (see Piedmont Office REIT Finally Goes Public…Sort Of ).
There seems to be no boundary around the financial sleight of hand deceit employed by some non-traded REIT sponsors. For example, Lightstone Value Plus REIT claims to be on investors’ sides by allegedly allocating 100 percent of investor proceeds toward real estate investments and co-investing alongside shareholders. This is quite far from the real economic truth, and even a cursory read of the Lightstone “Value Plus” prospectus shows otherwise (read more on Lightstone’s investment prowess midway through this post, or click here for an update on Lightstone Value Plus I REIT’s financial condition, which is not so great). There’s really nothing not to like about these non-traded REIT scams, except everything.
Update: This post received almost 30 comments before I had to migrate the entire site to a new platform. Not all of the comments ported over during the move, so I republished all 30 or so under my name in one “bulk” comment below. Still more comments have followed. If you have additional questions or comments,you can post them here or on the Non-Traded REIT Forum. The forum is searchable, you can upload documents and images (charts, graphs) and publish links. Cheers RW
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Here is the full unedited comment set, in chronological order, from the original post:
Kevin Kleen rpakkleen@gmail.com said…
Interesting. The Inland REITs have the same sponsorsip as some private partnerships which I foreclosed on in the early 1990s. The properties were in the Chicago area but they filed BK in Tucson (forum shopping, the judge there was notorious for quick approval of cramdown plans). After much litigation we got the buildings back. According to my counterpart at Inland, they avoided substantial tax consequences to their limited partners by exchanging into new buildings controlled by Inland affiliates prior to the foreclosure sale. So, the juggling of assets between affiliates is nothing new to them.
May 27, 2009 5:56 AM
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Blogger Steven said…
Investment rule of thumb: avoid investments/products produced/sponsored/sold by companies with an Ivy League or other prestigious university name (Harvard, Stanford) in their name.
Great blog, btw.
May 28, 2009 5:44 AM
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Anonymous Rob said…
What a completely biased view. The fees and commission sighted are a gross exaggeration. And some of the information stated is flat out false (i.e., the Cornerstone Core Properties REIT has not even been in existence for 8 years.) Obviously the author doesn’t understand that a non-traded REIT subsidizes the dividend while it’s in the capitalization stage (purchasing property). As more properties are accumulated, the income generated begins to cover the dividend. And, with regard to the Grubb & Ellis REIT (and all other REITs) did he add back depreciation and amortization into his dividend coverage calculation – probably not. Are there fees involved with non-traded REITs? Yes. But that’s because you’re buying real estate. You have expenses at purchase, you have costs to manage the property and you pay to sell it. Despite that, investors still receive consistent income with growth potential as well. Why not mention all the successful non-traded REITs that have made investors a lot of money with great returns. The author obviously has a hidden agenda here and should do some fact checking before posting such slanderous remarks. And let’s be fair, exchange-traded REITs are in a world of trouble themselves. Where’s the discussion about that?
May 28, 2009 8:35 AM
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REIT Wrecks said…
Rob, thanks, I corrected the misinformation on Cornerstone. Apologies for that. As for the rest, I’d be happy to debate you on the facts, one by one.
May 28, 2009 10:16 AM
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Anonymous said…
From Rich
More times than not I appreciate comments that question investment firms but only when the author has the facts straight. I find it odd that the author does not list his name, is it because he’s affraid he would be sued by about 10 investment firms for slander and completely inaccurate information? Or is it because he actaully works for a traded REIT and is trying to deter people from investing in the non-traded sector? It is certainly one of the two… I have to agree with Rob’s comments above, his calculations are completely inaccurate and the author is leaving out incredibly important information. The author mentioned that 9-12% is paid to our brokers, that can’t be true because the SEC has a 10% cap in order to classify as a REIT. Everyone knows that…
May 28, 2009 10:19 AM
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Steve R. said…
Interesting, but somewhat slanderous, article in my opinion. I have personal experience with these things working in the industry and having close family members who have invested. The fact is that non-traded REITs often do have high sales loads (albeit, typically 7% or less) up front, but that doesn’t mean there’s not a good cash-on-cash story behind them. Consider CNL’s Retirement Properties REIT that went full cycle and was taken public (sold to HCP) for a huge share premium for upwards of 30% in a few years. Add that to the steady dividends (subsidized UP FRONT or not), and you had a pretty attractive investment vehicle! While the fees may be, quite frankly, different, sometimes it’s the end result that I really care about.
July 10, 2009 7:31 AM
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REIT Wrecks said…
Steve, there are good cash on cash stories behind lots of things.
All else being equal, I obviously prefer cash on cash stories without all the fees. Also, the conflicts of interest are just enormous, as most NTR sponsors have virtually no skin in the game, and therefore almost no stake in the outcome. And Lightstone is a classic example!
I think most people would also prefer to know that they are subsidizing the dividends of others, and that they are paying, on a cumulative basis, a 15-17% all-in load (including acquisition fees, asset management fees debt placement fees, disposition fees, etc, etc., – plus expenses on top of that!!) for the privilege. If it’s real estate and income you want, why not just buy O? They pay something like 7% monthly, and you get to get to keep your 15%. Yeah, yeah, I know correlation blah, blah, blah…but try correlating a $29.95 commission for $50,000 of O with $7500 all-in for a non-traded REIT.
July 10, 2009 10:34 AM
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Steve R. said…
REIT Wrecks,
I think we agree that fees and expenses on NTRs are, at the very least, different than most traded equity investments. When you’re examining the acquisition and disposition fees in NTRs, think of them more like trading costs in a mutual fund than a cumulative load.
While less fees on the same investment are always preferrable, my point is that NTRs still have extremely successful cash-on-cash stories. Top-performing hedge fund managers frequently gouge their investors with fees and will continue to attract new monies so long as their track record is deserving enough.
Conflicts of interest: an average 7% cut to the broker is a large incentive to move these products. This is oftentimes the scenario of “new” financial products to the market (consider mutual funds of the 80′s). I see this “NTR” marketplace as a growth opportunity that will continue to improve in efficiency throughout the years and therefore move toward a cheaper fee structure. Lightstone puts up a large amount (10%) of their own capital up front into the fund’s equity, so I’m not sure that’s the best example of huge conflicts of interest. Most NTRs have preferred hurdle rates on the back end. This means the less the portfolio grows, the more the sponsors lose. Sounds like alignment to me!
Lastly, a word on correlation: this is absolutely the most understated aspect of why anyone should even consider this asset. Run the numbers and you’ll find zero or even slightly negative correlation between non-traded RE values (all n/t R/E, not just REITs) and general equity markets. Traded equivalents? Forget about it. I’ve seen charts and tables on these numbers several different ways from several sponsors and the story is flawless. If I want true R/E exposure to hard assets in order to protect from inflation, etc., traded REITs won’t do it. In my opinion, if an investor is looking for a way to participate in the growth/protection/income of commercial R/E, there’s 2 ways to go: direct ownership and off-market funds such as REITs. If they can’t afford to buy direct, there’s only one option left and I certainly don’t think it’s a bad one…
sorry for the length
July 10, 2009 3:35 PM
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REIT Wrecks said…
Hey Steve, thanks for those thoughtful comments and don’t worry about the length. In most cases here, the comments are the most informative parts of the post. Equipped with the facts, investors can easily make the choice that’s best for them, so your additional thoughts are helpful and welcome.
I agree that publicly traded REITs are no way to go if you’re looking to diversify away from stocks – they have shown that they are highly correlated, and I have also written here that public REITs are not great as inflation hedges either.
Putting aside my own broad opinion on NTRs for the moment, you also make a good point about NTRs being a good alternative for those who cannot afford to invest directly in CRE on their own.
Which brings me to Lightsone! They did make a big splash with their $30MM commitment to fund broker payments, but all you need to do is take a quick peak at the prospectus, which is here (until they remove the link) to see what a sneaky game this is.
Sure, they grease the skids with their $30 million, but investors are paying for it via Lightstone’s ridiculously high 2.8% property acquisition fee. In fee summary on page 5, Lightstone discloses the dollar amount of this fee, but they note that the calculation “assumes no leverage”. However, just 4 pages later, under the heading Financing Strategy, they say that they that they “intend to use leverage”. So which is it?
The significance of this is that fully levered at 75%, which is their strategy for pete’s sake, so why not assume it in the fee summary, their acquisition fees alone are actually $33,600,000! So they are actually pulling $3.6MM out of the deal, rather than investing in it, and adding insult to injury, they take THIRTY PERCENT of the back-end profits!
The bottom line is that Lightstone bears zero downside risk (this is sold off to the shareholders) but they take 30% of the juice! They should call it the upside down REIT, which is exactly what it may turn out to be.
Certainly, not all Non-Traded REITs operate this way, and CNL is one that actually seems to have a conscience, but at this stage in the game it’s definitely a buyer beware market…
July 14, 2009 4:31 PM
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Anonymous said…
Ray Lucia is selling non-traded REITS as one of his “bucket” strategies. He (actually his company advisors) claims he is invested in them as well.
He is hawking Wells, Stanford and CB Ellis these days.
Any word on how much of his company’s recent income is actually from commissions from the non traded REIT, and how he is really doing in these REIT investment vehicles aside from skimming off these commissions?
July 26, 2009 10:14 AM
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Anonymous said…
It would be great if Rob could provide a representative list of non-traded REITS which have delivered as promised. This would give readers an opportunity to attempt to distinguish common characteristics of sound products.
July 27, 2009 7:17 AM
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Anonymous said…
I have worked as a wholesaler selling these products to the independent broker/dealer channel. Big mistake on my part. I am sorry to say that NTR are the biggest bs investment out there. Brokers say” they don’t go up and down with the market”. Of course they do stupid! eventhough they are not priced every day. Some of the NTR has worked out well such as a couple of Inlands offerings. They had the perfect market supporting them with falling interest rates. It will not happen any time soon again. Big NTR’s going belly up are coming soon. Billions and billions of dollars invested in these scams. Good luck with refi in this market. It will get ugly. Hopefully NTR’s is dying off. I know some of the bigger broker dealers in the independent cahnnel are giving the the boot. Of all the NTR’s Wells are the worst one I think. Their wholesalers are even using faith, God and so on to fool the clients. Disgusting. When will WSJ or any other major source write about these scams??
August 6, 2009 9:40 AM
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Anonymous said…
I used to work for Wells Real Estate Funds. Everything in this article is true regarding their REIT products. Not to mention that the entire space Hines, Inland, CNL, WP Carey, Behringer are all equally sleazy. There is a certain ilk of company that delves in this space–they’re all pretty much the same. I felt guilty that investors were being sold these toxic products at the hand of greedy and clueless financial advisors. I got out and I’m staying out of this investment cesspool.
November 5, 2009 7:15 AM
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Blogger Tubed Online said…
If anyone could offer their thoughts/knowledge as to what Wells and Piedmont are like to work for as a manager of their real estate assets I would really appreciate it. I am considering working for them as a real estate manager. Don’t want to be associated with an unethical company…but I am a real estate manager; not a securities trader/seller. Also, what are your thoughts about them potentially selling assets to raise cash??? Thanks!!! tubedonline@gmail.com
November 6, 2009 8:44 PM
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Anonymous said…
there have been 13 publicly registered, non-traded reits to go full cycle since the REIT act passed in 1960. ZERO, i repeat, ZERO investors have lost principal in these programs.
(this does not include “publicly traded” or “private reits” which are very different in design)
not sure why the author has so much anger with non-traded reits, but there are plenty of very sound products out there, that will outperform the stock market on growth, outperform the bond market on income, all while providing diversification, tax advantages and an inflationary hedge.
to the people who claim they used to sell these, how many of your commission checks did your return? exactly, take your lack of credibility elsewhere. just because Leo fired you doesn’t warrant your biased criticisms.
December 8, 2009 7:13 PM
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Anonymous said…
Any ‘investment’ that requires my $$ be tied up for an indefinite period, the promised distributions may be made or not, I cannot see the market value of my sequestered investment, I have no or little ability to redeem and little or none of the ‘dividends’ paid represent earnings…..all of this simply reaffirms P.T. Barnum’s dictum that suckers are alive and well
December 10, 2009 12:20 AM
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Anonymous said…
There are a lot of factual flaws to this article, and I agree with one of the other posters. The author seems either like he’s gotten burned by a bad investment in the past or he hasn’t done his homework properly.
Most non-traded REIT’s do NOT pay dividends out of new investor subscriptions and financings. I believe the Apple REIT does though. Wells does not. Also, the broker commissions of 7% (which is the average) are paid for distributions. Do you have any idea how much it costs if a company has to hire an investment bank to do an IPO? Same concept.
Lastly, just because redemptions have been limited, it’s not necessarily a sign that the sky is falling. An unusually high rate of redemptions means the company either has to have excessive cash reserves on hand to meet them (which is not efficient), or they have to sell prpoperties from the portfolio at a time that might not be optimal.
Seriously, if you’re going to author such a biased piece, at least discuss some of the good points too.
December 12, 2009 8:27 AM
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Anonymous said…
” . . there have been 13 publicly registered, non-traded reits to go full cycle since the REIT act passed in 1960.”
trying to understand this. Does this mean of the hundreds(?) of NTRs sold – only 13 have had liquidity events in these 49 years ? Or does this mean something other since most promise and event with in 7-10 years of offering. Thanks for the explanation
December 25, 2009 7:50 PM
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Anonymous said…
The following is from the Apple REIT VIII form 10-Q for the quarter ended 9/30/09. If I am an investor, is there cause for concern?
Statement of Cash Flows Analysis (000s)
CASH IN
Net cash from operating activities 36023
Net cash from selling stock 20334 Net cash from credit line 39055
TOTAL 95412
CASH OUT Capital Improvements -26700
Redemption of Common Stock -10193Cash Distributions to Investors
-56955
Payment of Notes Payable -1564
TOTAL -95412
Line of Credit: LIBOR +175bps 49300due Nov. 2010
January 3, 2010 12:14 PM
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REIT Wrecks said…
Anonymouses 12/12/09 through 1/3/10:
1. I have never been burned by a non-traded REIT investment, nor has my 78 year old Mother, thank goodness. If anything, please criticize me for ignorance, as I have never invested in one. Surprise, surprise.
2. Shouldn’t ALL non-traded REITs pay dividends out of earnings? (the retort in the comment was that MOST do, so I guess the commenter thinks that makes the rest OK.) What is the true yield of an investment that’s paying you dividends with your own money?
3. Limiting redemptions means the REIT has no cash, cannot or will not sell assets, and you are therefore stuck for years, possibly many, many years. Did/does the sales literature fully explain this risk? What is the true value of an investment that you are unable to sell?
4. I have heard the “13 REITs have gone full cycle” quote before; it came from a Stanger and Co. article on NTR returns, which amounted to a pathetic low single digit blended IRR, if I remember correctly. What Stanger and crew has not published is the number of REITs that have NOT gone full cycle. I would love to know that number, and yes, it is much larger than 13.
5. Apple REIT VIII 10Q. This is perfect! They generated $36MM in cash from operating activities, yet they paid $56.95MM in distributions (and redeemed $10MM in stock). Where do you think they are they getting the money to cover the shortfall?? FYI, L+175 has 2006 written all over it.
Cheers, REIT Wrecks
January 10, 2010 7:51 PM
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reisaorg said…
Harsh comments. You may be enlightened by the virtues discussed on this Webinar coming up.
“Deconstructing REITs” (Webinar)
Learn the differences and virtues of publicly-traded REITs and public non-traded REITs in the market today. Registered reps and advisors will gain a better understanding of the pros and cons of each type and how to best utilize them in building or adding to an alternative portfolio for their clients.
Thursday, January 21, 2010 1:30 EST, 12:30 CST, 11:30 am MST, 10:30 am PST
Register for Webinar at http://www.reisa.org
January 13, 2010 2:54 PM
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Blogger Bren B said…
Any registered representative and their firm has an obligation to satisfy the suitability requirements for selling a NTR to any investor. If the investor requires liquidity, a NTR isn’t suitable, nor is any real estate investment. It’s not a bank account, it’s a long-term investment that is designed to provide income from lease income and the potential of capital return and capital gains upon liquidation or liquidity at public offering. I have sold Wells REITs for many years to clients who are suitable and have zero problems with their investments or service. I have found their principals, field personnel, and home staff to be prudent, experienced, risk/leverage averse, reliable, customer service-oriented, and highly trained. I have met the principals and my firm has done its due diligence. Through the financial crisis, their investments continued to privide a steady income to my clients and Piedmont is now in preliminary proceedings to go public, now that market conditions have improved. I don’t know why the “former employee” left, but I suspect the problem was with him, not the firm. The commissions described by this blogger are inflated. 6-7% is more like it, which is only 1-2% more than an A-share mutual fund. The blogger is obviously not a registered representative with any real experience. The risks of these investments are fully disclosed to investors at my firm and investors are not allowed to invest more than 20% of their investable net worth, or if their liquidity needs contraindicate their participation. NTRs are a tool. Properly used, they function very well. But, any real estate investment’s success depends on the skill of the buyer to make good deals at the front end to maximize their long-term capital potential at the back-end, and the skill of the management team to fully lease and maintain the value of the properties and the stability of the cashflow. In my experience, Wells has done that in good markets and bad. Before you make blanket accusations, you should have specific facts to back them up. Wells may take some interest in your comments, now that they have been alerted to your publication.
I have also worked temporarily in Ray Lucia’s office, so I have seen them from the inside. Ray and his team are knowledgable and ethical. Ray is also a marketing genius. He has key people working with clients behind the scenes who are ethical and whose expertise has been tapped numerous times to appear in court as expert witnesses. If I had only one criticism of Ray’s group, they have so many clients, they may not provide as much face time with clients as they or their clients might like or perhaps need. However, his strategy is overall sound for longterm investing. But, I wouldn’t dream of talking to him or his staff about individual stock or bond trading, sector rotation, technical analysis, or options work.
January 19, 2010 12:24 PM
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REIT Wrecks said…
Great. Here we have a retail broker hiding behind FINRA’s smoke and mirrors on “suitability”.
Bren, in terms of what’s most suitable for your clients, when you talk to your clients about the investment advice you and your firm provide, do you explain the difference between the suitability standard and the fiduciary standard?
Do all of your clients know that the suitability standard is much lower? Do you make your clients aware that under the suitability standard, you are not required to act in their best interests at all times – as you would if you were a fiduciary?
In addition to fully disclosing all the risks and doing your due diligence (very good Bren, A+ for effort), do you fully explain all the conflicts of interest you have with your clients?
Do you fully explain, for example, that you may choose to sell them a certain product simply because you and/or your firm earn a higher commission (in one form or another) – even though lower priced “tools” exist and they could be just as effective?
As for the commission amounts specifically, I would love to know of an A class share in any mutual fund that scrapes 15% of investors’ cash straight off the top, regardless of who gets it and what it’s called. Good grief, even the endangered B shares don’t attempt this miraculous feat.
In terms of defending the merits of these things, it’s just not easy. One comment that has made the most sense so far is that most small investors don’t have $250,000 or more to pony up for a down payment on an office building or a shopping mall (assuming, for the moment, that you are an asset allocator and you agree that public REITs are correlated to stocks, then it’s true that direct real estate exposure would be desirable).
For those investors, these products might make a little bit of sense. However, do these small investors really need CRE exposure, given the considerable risks and the high costs of these vehicles in particular? Most of them already own a home, isn’t that enough exposure to real estate?
In the final analysis, once again, I really can’t think of any reason why you would willingly buy one of these things, or not be suspicious of the person who tried to sell you one (unless, of course, that person and his or her broker/dealer, in their collective zeal to achieve client asset allocation of the highest order, had agreed to waive all commissions).
By the way, Bren, when you turned me in to Leo’s peeps, did you invite them to visit my sponsors at the top of the page? It would be nice if they could do that. Hosting this thing is expensive, lots of bandwidth required and all that, and every little bit helps. TIA!
January 19, 2010 5:52 PM
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Anonymous said…
Greatly enjoy reading this. Especially the remarks. Slanderous?! Biased? Must have gotten burned by a bad investment? Are you adding depreciation? (exactly what your 78 y/o mother would want to hear, right?) Just because Leo fired you? You must work for a competitor?
Indeed REIT Wrecks, these products are difficult to defend, hence the attacks of 7% commission only being about 2% higher than the highest load mutual fund.
Seems that those defending Wells REIT are salesmen, adding credence to the contention that these products are sold, not bought. I can nowhere in the blogosphere find an investor who speaks favoribly of Wells REIT. I have not followed any other of what they now call NTR’s. But regarding Wells…
I attended a sales seminar at Wells in about 2003 and have never seen anything quite like it. They had raised tons of cash and seemed giddy. I happened across an old piece of literature stating Wells wanted to abide by “Biblical investment principles.” I inquired what was meant by that and was informed that Wells does not use debt to purchase property. Apparently, they gave up this strategy. Looking at their Timber REIT filing, an investor is doing nothing more than paying off mezzanine debt. So much for the Biblical approach.
All the God talk stirred up the cynic in me, so I decided to follow Wells at that time to see if they were for real or a scam. I got the “too good to be true” feeling. Since visiting in 2003 I have regularly viewed Wells statements on the SEC site, do google searches, and used to have a “mole” within the organization. I am still not convinced that “scam” applies, but it sure is hard to get one’s money back.
I particularly enjoyed your paragraph about the difference between fiducuary and suitability. If the writer does not know what fiduciary means now, they probably will very soon. Wells is defending itself against Washtenau county for breach of fiduciary responsibility. The class was recently certified and hopefully those who need their money will get it back. So Indeed, suitability is nothing but smoke and mirrors. Determining suitability is done by the honor system.
Perhaps most disappointing is Wells inability to meet deadlines within a reasonable timeframe. Those who invested in the first offering of REIT I (now Piedmont) were informed the holding period would be 5-7 years. Original investors are now in year 12. Wells has a LOOOONG history of failing to meet deadlines. Based on track record, the listing or liquidity event will take years to come to fruition. Actually, it already has. In their attempt to finally list, Piedmont has again proxied its investors, this time to approve a 3:1 reverse split. If, as Wells has always stated, the shares are immune from market volatility, the shares should be worth $30 each if the split is approved.
The wholesalers at Wells are very good at what they do. It could be because those people are religious fanatics. We’re talking prayer-chains for favorable acquisitions, crucifixes throughout the office, chants of “amen” when St. Leo says something dogmatic, which to some of his minions is every other sentence. I have never in my life seen a more egregious use of religion to market products, and that includes televangelists.
In closing, if Wells delivers a favorable long-term return on their REITs, then the commissions and management fees may have been well spent. But so far, there is nothing that should give anybody optimism. Look into Wells LP1 – LP14 for a company track record. You will find ZERO, I repeat ZERO that met the objectives in the prospectus.
Looks like investors are lawyering up too. I expect this to get interesting.
I too apologize for the length and have visited your sponsors.
January 23, 2010 10:03 AM
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REIT Wrecks said…
Funny. Perhaps they could add the Church of England to their prayer list. Those Anglican heathens just lost $250 million on their 2006 Stuyvesant Town investment. (lenders foreclosed on it last week.)
Anon, thanks for your support, I appreciate it very much, and don’t apologize for the length of your remarks – I enjoyed reading them. Well penned! All of these comments have been great.
As a matter of fact, they have **inspired** me!
I just created an entire forum dedicated to sharing information on Non-Traded REITs. You can check it out HERE.
The inaugural topic has already been created. It’s about Apple REITs, and it’s absolutely perfect. It was started by an Apple REIT investor, and he is wondering whether his shares are still worth $10. Of course, his broker at David Lerner assured him they were, which is just flat out fiction.
Anon, you mentioned that you have some track record data on some of the Wells programs – if you would be willing to share some or all of that, I would appreciate it if you would visit the Non-Traded REIT Forum and post it there. You can upload attachments and you are also welcome to post links – the forum’s BBcode for urls is easy to use.
As I said earlier, equipped with the right information, investors can easily make the choice that’s right for them.
January 29, 2010 3:07 PM
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Blogger kc said…
I’ve worked in the retail sector for many years now and have sold (and personally bought) a number of various REIT offerings to a number of my clients over the years.
Prior to “The Meltdown,” people loved these things… the CNL Retirement was especially nice… paid well and regularly and went liquid to the tune of a nice fat capital gain…
However, I also sold some Inland Western and American that, well… simply suck.
However, every client that ever purchased a REIT knew that liquidity, while it was never a problem before, could end up being one. And they knew that, like any investment, the return they see could be end up being negative.
Obviously, while they are not exactly thrilled with how things have gone down, they don’t hold me personally responsible. I personally own a piece of every REIT I’ve ever sold.
The Point? A suitable REIT investor is not one that barely meets the listed suitability standards. Nor should a REIT be anything more than a minor addition to a well diversified portfolio. Caveat emptor? Always!
But there are plenty of investments that have gone south over the last couple of years… how’s your residence doing these days? Are you pissed off at the real estate agent?
February 4, 2010 2:27 PM
I have 2 things to say on this blog.
1) The author is definately biased and is grouping ALL REITS as “Bad Stuff”.
2) The author has an ax to grind with people getting paid for their services as if
he works for free and lives town of fantasy land where food and everything else is free.
It’s a joke and so is he.
I have worked in this industry for 17 years, 2nd generation. THANK GOD I made Wells REIT II and a couple of other REITS AS A 10 or 15% PORTION of the Portfolio during this financial crisis. It saved my clients ass financially.
Also, lets talk about WELLS REIT II. What the author does not understand that you are NOT buying the value of the property, you ARE buying the cash flow. With 99% of total sqaure footage leased mainly to Fortune 500 companies in 42 different industries in 24 different states and now the first new office building in Russia ( Fortune 500 companies does business around the world)……and they have NEVER misses a 65 dividend payment in years.
Buddy, I outright challenge you to find a more stable, solid investment with a healty dividend ike that
all day long. Give it your best shot and pick a subject you know something about.
Sincerely,
Raymond Filorimo Principal, Sr. Financial Consultant.
Raymond, thanks very much for taking the time to comment. With great respect, the Wells REIT II cash flows are simply not as safe as Wells says they are. The next time your friendly Wells wholesaler takes you out for coffee, ask him or her to explain how Wells managed to pay $279.3 million in dividends in 2009. I am just curious, because I looked at the 10K and it says they only generated $248.5 million in cash flow. In other words, Wells REIT II distributed $30.8 million more than they earned. And you think I live in a fantasy land?
When you talk to them, you can refer them to the numbers on page 33 of the 2009 10K, the link is here:
http://www.sec.gov/Archives/edgar/data/1252849/000119312510067128/d10k.htm#tx92508_8
From the Wells 10K:
Wells REIT II raised $517.1 in 2009, which is simply astounding given the environment. Unfortunately, only $124.2 was used to buy real estate. Most of the rest ($335.5 million) was used to meet the mother of all margin calls. Not only will this maneuver hurt returns, but lenders obviously care a lot about value, and shareholders should too.
Of course, one year will not make or break them, and who knows, maybe investors in Wells II will fare better than investors in Wells I. But they should be telling you this stuff, not sending you pretty pictures of their new building in Russia.
Fair enough. I will. However, so far they have been right on the money and their REIT II makes total sense to me.
A simple explanation off the top of my head, could be:
1) Extra dividend payout from reserve.
2) They kept the dividend up while expanding the portfolio therefore short on funds for that year.
Wells is still in expansion mode, so what you brought up does not really bother me. Wells is still in
gathering properties at a very low cap rate right now and has not closed to new investors.
I will agree with the author that the Timberland REIT sis not have any appeal to me whatsoever.
However, I do not invest my clients in anything I do not do myself and so far for 6 years, I am
a very happy camper. The key is to diversify.
I will get a correct answer.
Sincerely, Raymond Filorimo, Principal, Sr. Financial Consultant
OK Raymond, that sounds good. My main concern with these products is the lack of transparency. With most of the information and news on these products coming straight from the REITs themselves, this market is the investment equivalent of North Korea. In my opinion, unless the sponsor is absolutely unimpeachable, it pays to be very careful.
Raymond, I should also point out that Leo Wells is being sued in federal court for breach of fiduciary duty, and a federal judge refused Wells’ motion to dismiss the case. Before he was sued for secretly absconding with shareholders’ $175 million (see Piedmont REIT Finally Goes Public…Sort Of ), he had already used the Wells REIT I to pay himself $400 million in fees, some of which was reallowed to brokers.
David Swensen, head of the Yale endowment fund, said the most generous characterization of Wells’ offering fees ranged from “obscene to despicable”, that the structure demonstrated “greed run amok” and that the management structure contained a “staggering assortment of conflicts of interest”. This was all BEFORE Wells pocketed the $175 million.
If I were you, again with all due respect, I would be very careful of what his wholesalers tell you about anything, nevermind their breezy excuses for how they managed to pay your clients a distribution with money they didn’t earn.
I don’t know where you are getting your information, but anyone knows that ANYONE can SUE ANYONE for ANYTHING…. and if Leo Wells took the money, believe me, his reputation and the company’s reputation would be done as well as the SEC FINRA and State of GA knocking on his door.
I have read other blogs claiming he is a Christian zelot that fires people due to facial hair… I mean give me a break.
All due respect, I will take my “chances with Leo”. Just got my dividend check because I do not sell my clients anything I would not buy myself. Check it out.
WELLS REIT II DECLARES 2nd QUARTER 2010 DISTRIBUTION
NORCROSS, Ga. (March 2, 2010) – Wells Real Estate Investment Trust II Inc. announced today its Board of Directors has maintained a quarterly distribution totaling $0.15 per share for its second quarter of 2010.
“We’ve now marked six full years of a consistent distribution to stockholders,” said Leo Wells, president of Wells REIT II. “We remain encouraged that occupancy rates have held up very well; our office properties remain 96 percent leased.”
The distribution will be calculated on a daily basis and paid in June to shareholders of record during the period from March 16 through June 15. As 2010 progresses, Wells REIT II will continue to carefully monitor cash flows and market conditions, and their impact on its earnings and future distributions.
Wells REIT II, with more than 120,000 active investors, is a public, nontraded REIT focused primarily on Class-A office properties.
Currently, the Wells REIT II portfolio includes 85 office and industrial buildings in 23 states, Washington, D.C., and Russia, covering more than 20 million square feet. The weighted-average credit rating of those tenants rated by Standard & Poor’s is BBB+. For information on Wells REIT II, visit http://www.wellsreitii.com/.
Wells Real Estate Funds, advisor to Wells REIT II, is a national real estate investment company founded in suburban Atlanta in 1984. In its history, Wells investment offerings – current and closed – have invested more than $12 billion in real estate for more than 250,000 investors. For more information on Wells Real Estate Funds, visit http://www.wellsref.com/.
Another non biased Pro Con Article on REITS that should be read fully by all:
http://nreionline.com/finance/reit/real_estate_alls_unlisted_reits/
Remember , the meek shall inherit the earth… but not the real estate …
Bernie Madoff done legal.
Lee,
A lot of these are NOT “Bernie Madoff done legal”. Bernie Madoff was a sociopath who had a very clever scheme, where our SEC was either paid off or totally asleep. Madoff was suspected of this
over 10 years ago and because of his “status” of having a seat on the Exchange etc. was given a pass over.
There are a few bad apples in EVERY business. There are also MANY legit , hard working entities and people dedicated to helping investors get what they want.
Quite frankly, after 17 years in the business, I know that many investors would go down the tubes without sharp and staright individuals that run firms like myself.
The public is sooooooo uneducated and thinks that Money magazine is their bible and because their neighbor “made a lot of money” in Vangaurd, they are the end all…. and usually I find that most of their assets are sitting in the money market, after all their “research” or poorly allocated.
But Lee, don’t give up and keep the faith. There are good people out there. For every “bernie” there
are thousands of good legit compnaies giving good opportunities to their clients.
I see it in reality and beyond the newspaper and CNN.
Raymond:
They are not selling untraded-REITS though.
How can this be legal?
I had a friend buy and than ask me about Inland Diversified Real Estate Trust so I spent a few hours with the offering circular. If you can read an offering circular you then know this is nothing short of outright legalized theft. And I’m not sure any of these other companies are anything different.
I, too, am a financial advisor who has sold Wells I, Inland Retail, Inland Western and Inland American with mostly little issues with clients. During the financial meltdown, clients had five months notice from Inland American that the share repurchase plan was being put on hold. All shareholders had to do was request redemption. In a couple of cases, because of volume discounts, redemption would have resulted in the client’s making money, even though it was within two years of purchase.
The jury is still out on Inland Western. Will they turn it around? Maybe, maybe not. Maybe it will be rolled up into Inland Diversified, maybe they will reorganized under the Bankruptcy code, which is a Constitutional right of every company and citizen. These programs are not meant to be liquid. They are meant to be non-correlated assets. My clients that held Inland retail to it’s sale to Developers Diversified Realty doubled their money in five years (a 14.25% aatr for reinvested dividends). Not bad.
A properly allocated portfolio should have non-correlated assets. That’s not even debatable. Why not mention the fact that you can purchase these NTR through fee-based managed accounts. Which is smarter, paying 7% up front to advisor with a 5-7 year expected holding period? Or the client who pays 1% per year for as long as the investment is held. The answer is, “it depends on the holding period.” For the investors in Wells, through a managed account, the up front fee would have been better.
Mutual funds are loaded with both conflicts of interest, trading costs that are never seen (John Bogle, founder of Vanguard, admitted they run about 2% per year on actively traded funds) and are also “sold” to investors. I agree with the poster who said, the bottom line is, did the client make money. Everything else is immaterial.
You either haven’t read the offering circular or you’re a broker selling these things. They do EXACTLY what Bernie Madoff does except they do it legally.
He’s both. Most financial advisors who sell these things are not capable of reading the offering documents or the financial reports, and those few that are capable simply choose not to.
If these “advisors” either cared to look under the hood or were capable of looking under the hood, they would not sell these vehicles. Many do buy these things for their own account, but that does not make non-traded REITs good investments. On the contrary, it just makes that financial advisor a bad investor.
Non-Traded REITs are a compensation scheme, not an investment strategy.
All my money was put into Inland American. It was sold as being very safe and liquid, with the share repurchase program. Investors were not adequately informed that this program could be suspended.
Today, I am facing bankruptcy and the loss of everything I have. I have nowhere to turn to.
REITS are a low return investment with incredibly high risk. I knew at the time of investment that the return was low, but they reduced it more after purchase, but I was led to believe, even by officers of Inland American, attending “informational” meetings held by my now retired adviser, that the risk was very low. As I stated earlier, a major selling point was the repurchase program.
Inland claims to be ethical, but they did contribute in marketing to elderly investors for whom the REIT was highly inappropriate. They deny this, but when officers are giving their presentations to a room of elderly investors, invested in a firm titled RETIREMENT SECURITIES, they knew exactly whom they were selling to. The repeatedly attended the meetings with the same firms clients. They were not looking at 40 year olds, but at investors in their 70s and 80s. They are now more than happy to pocket their investors limited assets as the investors file for bankruptcy, lose their homes, etc… So much for ethics.
My money has been stolen. There is no other way to look at it.
>My money has been stolen. There is no other way to look at it.
Barbara:
You are absolutely right. And every broker touting them here is either a criminal (in my book) or stupid. You decide.
From the prospectus of EVERY non-traded REIT (take your pick and go look it up):
“We may fund distributions from borrowings or even the net proceeds from our ongoing public offering.”
Excerpt from the December 11, 2008 SEC complaint filed against Bernard L. Madoff:
“Madoff paid certain investors out of the principal received from other, different investors, a hallmark of a Ponzi Scheme”
At this point, the only thing more illiquid than NTR shares is ownership in a TIC deal. I read a blog post where Moody National (a former TIC sponsor) sold one of its old TIC deals to a Moody National sponsored NTR. Isn’t this similar to what Inland is doing? Even still, the TIC owners sold at a 50% discount to what they paid in 2007, so their equity must have been completely wiped out. Worst of all, if the deal was the back-end of a 1031, they are now faced with a hefty tax bill to boot. It seems like all the old TIC sponsors are trying their hand with non-traded REITs.
Barbara B, you’re an idiot to put all your money in an NTR or anything other than a CD or Treasury. I remember talking to a person that had all their money in the Orlando Pealman deal. I told them it was too good to be true but they didn’t want to listen. Outcome was they lost all of it. I don’t see the problem with NTR’s as long as you diversify among them and still keep it to 5-10%.
B Coughlin
So why would you throw 5-10% of your money away?
Unless of course you’re also an idiot. Or a broker selling this shit.
I’m the blogger who Raymond Filorino (4/22/2010) says claimed Leo Wells is a Christian zealot that fires people due to facial hair. Except it wasn’t me, I just repeated it. It was Forbes Magazine, fifth paragraph:
http://www.forbes.com/forbes/2003/0901/117.html
It fits the pattern — Wells offices are like a Christian sleepaway camp run amok.
Skimble! Que paso? These are classics. May I?
How to steal $50,000 from a widow:
http://skimble.blogspot.com/2004/11/how-to-steal-50000-from-widow.html
And, last but not least, Wells responds to the anonymous blogger:
http://skimble.blogspot.com/2009/06/anonymous-blogger-responds-to-leo-wells.html
Breitbart we aren’t, and right we are
Thanks for sharing, RW. Apologies to Raymond Filorimo for misspelling his name yesterday.
RW, one of these days I’ll tell you about the emails and phone calls I got from Google — seriously — because some anonymous plaintiff was trying to shut my site down. “Is there anyone who would be motivated to shut your site down?” they asked. Considering I’ve had over 6,500 search term hits for “leo wells” and “Wells REIT” and “Wells REIT scam,” the answer was yes.
Inland Western settles shareholder lawsuit:
http://www.chicagorealestatedaily.com/cgi-bin/news.pl?id=38980
Inland Western Retail Real Estate Trust Inc. has settled a shareholder lawsuit contesting a $375-million acquisition of four related firms in 2007, a transaction that generated a huge paper profit for company insiders.
The sellers have agreed to give back 9 million of the 37.5 million shares they received in the all-stock deal, shares that were valued at $90 million at the time but are worth much less now. The Oak Brook-based real estate investment trust will also cover as much as $10 million in legal fees incurred by the shareholders under the settlement, which received a judge’s preliminary approval Wednesday.
I have looked into the WP Carey REIT’s and “according to their literature” they have taken 14 REIT’s full term and the lowest avg. annual return was 7.17%, highest was 18.81% with the average of the 14 full term REIT’s being 11.10%(approx.). They show that 88% of their quarterly dividends paid by their programs have increased from the prior quarter. Am I missing something. That seems very good overall. The one thing that concerns me is it appears most of their REIT’s took 8-12 years to go full term.
My first comment, that others have brought up but seems to be glossed over, and the only point that seems not to be rebutted, WHO ARE YOU?!? I don’t mind if someone one wants to post a response to your or any other blog being anonymous, but you are spending a lot of time and money and won’t come out dark.
So tell us who you are, what you do for a living and what conflicts of interest you may have.
Now, I do not make a living on selling these products or selling any investments. I have owned non-traded and traded REITs in the past but hold none as of today (likely will change in the next 30-days).
But will never own a traded REIT unless it was part of the exit strategy of the non-traded REIT I owned (then would likely sell as it benefited me).
You are going to have advisers that do their job and ones that don’t. The ones that don’t are the ones that are making recommendations based on a commission (how many people are disgusted with insurance sales people selling annuities and CAN’T sell anything else. What a conflict there.).
But I have worked with and know advisers that sell non-traded REITs and have seen several presentations about the market that explain what to look for and look out for in this space.
Yes, I have seen some that I have to hold my nose they stink so much. I have seen many others that when you tick off all the reasons they are evil I can say no to most and look at the others as cost of doing business in this area.
Couple things that I look for in the current market as I am evaluating these products.
1. Does mngt have experience in the sector they are targeting?
2. Does mngt have skin in the game?
3. What do they feel about style drift? (some that have been mentioned above raised too much money and had to keep buying into the ’06 and later. They started buying out of their target and started paying HUGE premiums because they had to get the cash to work.)
4. Are they trying to raise too much, too fast for what they can put to work and/or are they over targeting what they can raise.
5. Dividends paid out of mgnt capital in growth stage.
6. Mngt is last money out (more of a concern if they don’t have a large percentage of net worth in the game) and that they can not get out before me (other than playing by the rules that I have to play by).
Some other things I look at depending on segment but those are the top.
One other point about liquidity. This is an issue that falls to the adviser. If it is not explained properly then they are not doing their job. That is part of the investment. I DO NOT WANT TO BE IN A NON-TRADED REIT THAT KEEPS CASH ON HAND. Keep my money working and don’t force them into fire sale prices.
If you take away that in any investment category there are good and bad. Then if you take the bad away from non-traded REIT category, what you have left is that you do not like the business structure. Or, as stated above, because you are hidden, you have some other motive.
I’m unable to come out of the dark, as it were, because I am not in the dark. My name is Chris Germain and I am a direct real estate investor like you. I am also president of Piping Rock Partners. The home page of our website is here and you can see my bio here. I have more than 20 years of institutional experience in banking, capital markets, structured finance, and real estate. I do not own a purple G-5.
Piping Rock Partners works with fee-only SEC Registered Investment Advisors, family offices and other fiduciaries on real estate investments. We do not compete with non-traded REITs, because no RIA or NAPFA member that we know of would ever think of selling a non-traded REIT to their clients. Furthermore, no independent broker/dealer that we know of would approve investments like the ones we sponsor, even though it would make much more sense than what they’re selling now. The independent B/D model is
brokentransaction-based, so they would much rather sell fraudulent Reg D offerings and non-traded REITs with fake dividends and 20% all-in loads, even though these egregious fees are inconsistent their own clients’ obvious desire to preserve capital. Even worse, if there is such a thing, these fees encourage the deployment of capital at the expense of making prudent investment decisions.My conflict is a desire for more transparency. How many independent broker dealers have been shut down this year? What are the alternatives to non-traded REITs? Do you really need to turn over 20% of your capital to intermediaries and accommodation parties? Why is the dividend not covered with FFO? And what’s up with that 7% commission? If you’re an investor looking for the best deal in the market, could it be that you’re the one being kept in the dark?
I am glad you gave us your information. And now understand the motivation behind all the work behind this site. In would also suspect that you are working with accredited investors.
While there are many “spins” on correct information let me give you a couple of points of view from an investor that understands how these things work a little better than the average investor.
So many to talk about and will take this to the forum but had to mention this.
My last non-traded REIT that went full cycle paid just better than 13%. That is after the 20% “Load”.
Had my advisor figure out returns and fees on my equity portfolio for the same period. I had a return of just better than 8.5% and paid 24.3% in fees. And he got all those fees compared to only 7% of the the 20%.
So why would my advisor want to recommend a NT REIT and less commissions?
Because he works for my best interest.
And the reason your “Fee-Only Advisors” would never offer these investments if because they can’t.
REIT Wrecks: The independent B/D model is
brokentransaction-based, so they would much rather sell fraudulent Reg D offerings and non-traded REITs with fake dividends and 20% all-in loads, even though these egregious fees are inconsistent their own clients’ obvious desire to preserve capital. Even worse, if there is such a thing, these fees encourage the deployment of capital at the expense of making prudent investment decisions.Bingo. A fiduciary, which a broker by definition is not, couldn’t conceivably recommend an investment as opaque and fee-crippled as an illiquid REIT.
Separately, my own additional gripe with Wells is their quasi-religiosity, implying that somehow Jesus Christ Himself endorses their obscenely pro-manager and anti-shareholder behavior.