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Apple REITs Face Growing Scrutiny, Lawsuits

An Apple REIT a day is keeping investors at bay. With apologies to the childhood saying, investors who own shares in Apple Real Estate Investment Trusts are finding out their investments may be worth far less than they ever imagined.

A disciplinary complaint was filed last month by the Financial Industry Regulatory Authority (FINRA) against David Lerner Associates, the sole brokerage that sells Apple REIT shares. In its complaint, FINRA says that Lerner failed to comply with the industry’s stringent due-diligence standards when it sold shares in the $2 billion Apple REIT 10, which launched in January.

FINRA goes on to say that Lerner targeted unsophisticated and elderly customers to buy Apple 10 shares. Moreover, FINRA says Lerner cited the distributions of previous Apple REIT companies on its Web site but failed to reveal that many of the distribution rates had dropped and distributions had exceeded funds from operations at Apple REITs 6 through 9.

As reported July 20 by the Virginia Business Journal, those distributions totaled $118.1 million in 2010 at Apple REIT Nine, while its funds from operations totaled only $60.2 million.

FINRA also stated in its complaint against Lerner that shares in Apple REITs 6 through 9 had been valued at $11 a share since their initial offerings. However, after a California firm made a tender offer of $3 a share for shares of Apple REITs 7 and 8 in June, the Apple REITs revised the $11 figure – stating in a filing that the shares had a book value of $7.57 each.

Glade M. Knight is the founder, chairman, and CEO of Apple REIT Cos. His company has issued nearly $6.8 billion in securities to about 122,600 customers, according FINRA. Both Knight and Apple REIT Cos. have been named in at least two class action lawsuits filed in June 2011 against David Lerner Associates.

If you are an investor in the Apple REITs through David Lerner Associates, please contact us to tell your story.

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