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Category Archives: Behringer Harvard REIT

LPL Pays Up In Non-Traded REIT Case

Non-traded real estate investments trusts, or REITs, have come back to bite brokers/dealers and investors alike in recent years. Most recently, LPL Financial announced that it would pay a multimillion-dollar settlement connected to allegations by Massachusetts’ securities regulator that it failed to supervise representatives who sold investments in the products.

Secretary of the Commonwealth William Galvin filed a complaint against LPL in December 2012. In the complaint, Galvin alleged that LPL was in violation of both state limitations and the company’s rules. The Securities Division also charged LPL with dishonest and unethical business practices.

The Massachusetts complaint focused on seven REITs: Inland American, Cole Credit Property Trust, II, Cole Credit Property Trust, III, Cole Credit Property 1031 Exchange, Wells REIT II, W.P. Carey Corporate Property Associates 17 and Dividend Capital Total Realty.

As part of the Massachusetts settlement, LPL will pay restitution of $2 million to Massachusetts investors who bought the seven non-traded REITs in question, as well as a $500,000 administrative fine.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

Wells REIT Offerings Come to Halt

Non-traded real estate investments (REITs) have caused the undoing of several high-profile firms and broker/dealers in recent years, especially following the collapse of the commercial real estate market and the credit crisis of 2008. Now, one prominent non-traded REIT player – Wells Real Estate Funds – is at least temporarily saying goodbye to the non-traded-REIT industry.

As reported Jan. 15 by Investment News, Leo Wells announced his departure in a letter dated Jan. 11 to broker/dealer executives. In it, Wells said his firm would not register any new investment products at this time but may in the future. The firm will continue to serve existing clients in its line-up of real estate investment trusts and private real estate funds.

Wells attributes his pullback to a lack of clarity surrounding the regulation of REITs.

“As most of you are aware, [the Financial Industry Regulatory Authority] has been working toward producing new transparency guidelines for alternative investments, which they expect to become effective mid-2014,” Wells said in the letter. “As a result, I do not believe it is prudent to register a new product that may or may not meet the new regulatory requirements.”

According to Wells, the Wells Real Estate Investment Trust II is moving to become an independent company early this year and the Wells Core Office Income REIT will close to new investments in June. The Wells Timberland REIT also is looking toward “its appropriate exit strategy.”

The Investment News article says Wells Real Estate Funds does not intend to close its wholesaling broker/dealer, Wells Investment Securities Inc.

Last year, FINRA imposed a $300,000 fine against Wells Investment Securities over misleading marketing tied to Wells Timberland REIT. In reaching the settlement, Wells Investment Securities neither admitted nor denied the charges.

Wells Real Estate Funds is one of the biggest sponsors of investments in the non-traded REIT industry, with $11 billion in assets and 300,000 investors.  As the Investment News article points out, the man behind the company is known as an outspoken and colorful figure in the non-traded REIT world.  In October 2003, FINRA’s precursor, NASD, sanctioned Wells Investment Securities for improperly rewarding broker/dealer reps who sold the firm’s REITs. Among those rewards: High-end entertainment parties and lavish dinners that included one at a Civil War fort complete with costumed Civil War heroes, fireworks, fife and drum players, skydivers and a cannon re-enactment.

The regulator also censured Wells and suspended him from acting in a principal capacity for one year.


2012: A Year in Review, Part 1

Non-traded REITs. Elder fraud. LPL Financial. Medical Capital Holdings. Tim Durham. Provident Royalties. Tenant-in-Common investments. Those were just a few of the investment topics to dominate the financial headlines in 2012.

In January, elderly investors found themselves caught up in scams involving Provident Royalties and Medical Capital Holdings. Both firms had previously been the subject of fraud charges by Securities and Exchange Commission (SEC) for scamming investors, many of whom were senior citizens, out of millions of dollars through bogus private placement deals.

A number of broker/dealers that sold investments in either Provident or Medical Capital found themselves facing regulatory investigations, as well as arbitration claims by investors. In late January, the Financial Industry Regulatory Authority (FINRA) ordered CapWest Securities to pay $9.1 million in damages and legal fees stemming from sales of private investments in both Medical Capital and Provident Royalties. The $9.1 million award is thought to be one of the single largest arbitration awards based on sales of failed private placements.

In February, tenant-in-common (TIC) investments and DBSI were big news. A one-time leader in the TIC industry, DBSI was now the focus of a criminal probe. DBSI founder and CEO Doug Swenson also faced charges of tax evasion, money laundering, racketeering and securities fraud.

DBSI, which filed for bankruptcy protection in 2008, left many of its 10,000-plus investors minus their life savings, while others took devestating financial losses. James Zazzaili, the court-appointed examiner in DBSI’s bankruptcy, stated that DBSI executives ran “an elaborate shell game, one that included improper and fraudulent use of investor money to prop up the company, to spend on pet projects, and to enrich themselves.”

In March, investors in several non-traded real estate investment trusts (REITs) received an unwelcome wake-up call when their investments unexpectedly declined sharply in value. Pacific Cornerstone Core Properties REIT fell by than 70%; investors in the non-traded REIT learned of the news via a letter from the REIT’s chairman that shares of Cornerstone, once priced at $8, were now worth $2.25.

Other REITs that followed down similar paths Cornerstone in 2012 included the Behringer Harvard Short-Term Opportunity Fund I LP and the Behringer Harvard Opportunity REIT I.

In April, shoddy private placements deals and the lawsuits that later ensued were behind the shuttering of yet another broker/dealer. On April 13, after losing an arbitration claim in March for $1.5 million, Cambridge Legacy Securities LLC filed its withdrawal request with FINRA. Several days later, the company sought bankruptcy protection.

April also witnessed the less-than-desirable IPO of Inland Western REIT. The REIT, now called Retail Properties of America, went public at $8 a share on April 5. The $8 per share price fell well below the expected price of $10 to $12. But that $8 valuation was the result of a 10-to-1 reverse stock split and distribution plan that may have cost pre-IPO investors as much as 70% of their initial investment.

In May, non-traded REITs again reared their ugly head when a FINRA arbitration panel ruled in favor of an investor’s claim against David Lerner Associates and the company’s Apple REIT Nine. FINRA further stepped up its scrutiny of the non-traded REIT sector in May by launching inquiries into several broker/dealers and their sales of the products.

In June, the SEC put life insurers on notice by instructing them to improve their product disclosures, protect legacy variable annuity clients and ensure that swapped benefits were indeed suitable for certain clients.

Investment scams involving financial aid, health insurance and Ponzi schemes also saw significant increases across the country in June.

Check back for Part 2 of our 2012 Year in Review wrap-up!

Bad News for Investors of Behringer Harvard Strategic Opportunity Fund I

Investors in the Behringer Harvard Strategic Opportunity Fund I were given news last week news that they likely never thought they would hear. Their investment, which many investors had purchased on the recommendation of brokers who characterized the product as a low risk, safe investment, is now underwater.

The Strategic Opportunity Fund I’s “liabilities are greater than its assets,” said Michael O’Hanlon, chief executive of the funds comprising Behringer Harvard’s opportunity platform, in an Aug. 26 story in Investment News.

First offered in 2005, the Behringer Harvard Strategic Opportunity Fund I raised $65 million and invested in six properties, including an office building in Amsterdam and a hotel on Wilshire Boulevard in Los Angeles.

Non-traded real estate investment trust (REITs) like the Strategic Opportunity Fund have encountered a number of problems over the past year. Among them: Disclosure issues, high front-end fees of sometimes up to 15%, complex fee structures, lack of a secondary market, and restrictions or suspensions of distributions.

Maddox, Hargett & Caruso, P.C. currently is investigating claims by investors who suffered significant losses in the Behringer Harvard Strategic Opportunity Fund I, as well as in other non-traded REITs. If you have a story to tell regarding your experiences, please contact us.

Behringer Harvard REIT: Debt Outweighs Its Equity

Investors in non-traded real estate investment trusts (REITs) have had to face some unpleasant news recently – from inaccurate valuations to suspended dividends. Now, Behringer Harvard Holdings LLC is preparing to inform clients that its Behringer Harvard Strategic Opportunity Fund I is under water.

As reported Aug. 22 by Investment News, Behringer reportedly will inform investors about the demise of the REIT tomorrow, Aug. 24.

Launched in 2005, the Behringer Harvard Strategic Opportunity Fund I raised $65 million and invested in six properties. Among them: a hotel on Wilshire Boulevard and an Amsterdam office building.

Another Behringer fund, the Strategic Opportunity Fund II, raised $62 million during that same time period. The Strategic Opportunity Fund I’s “liabilities are greater than its assets,” stated Michael O’Hanlon, chief executive of the funds comprising Behringer Harvard’s opportunity platform. The fund is negotiating with banks over one property, the hotel in Los Angeles, that is a “swing issue,” he said in the Investment News story.

The Strategic Opportunity Fund I isn’t the only Behringer Harvard REIT to face problems. At the end of 2011, the Behringer Harvard Opportunity REIT I saw its estimated value decline 46% to $4.12 a share from $7.66 a year earlier. In June, one property in that REIT entered into bankruptcy protection.

Another Behringer REIT has had similar problems. The Behringer Harvard Short-Term Opportunity Fund I LLP had approximately $130 million in assets when it saw its valuation drop to 40 cents a share from $6.48 a share as of Dec. 31, 2010.

Inland Western Goes Public & Investors Face New Reality

Earlier this month, Inland Western Retail REIT, now known as Retail Properties of America, went public, giving investors a first-time look at the value of their investment at a publicly set price. And the news wasn’t what they expected. The Oak Brook, Illinois-based real estate investment trust priced its offering of 31.8 million Class A shares at $8. It had been hoping to sell the shares at between $10 and $12.

Investors in Inland Western have now lost significant amounts of money, about 65% by some reports. Unfortunately, it’s a reality that many non-traded REIT investors know only too well. Several high-profile non-traded REITs also have seen their valuations plummet over the past 12 months, including Cornerstone Core Properties and Behringer Harvard REIT.

Issues surrounding non-traded REITs have met with increased scrutiny in recent years, raising red flags and questions among regulators. In March 2009, the Financial Industry Regulatory Authority (FINRA) officially opened an inquiry into non-traded REITs and the broker/dealers responsible for marketing and selling the products to investors. Among other things, FINRA wanted to determine the suitability of non-traded REIT sales to retail investors and the disclosures made regarding fees, dividends and liquidity.

That same year, FINRA issued a regulatory notice requiring REITs to publish their valuations no later than 18 months following the conclusion of an offering. Then, in October 2011, FINRA issued an investor warning on non-traded REITs, citing the products’ lack of transparency, illiquidity, potential conflicts of interest, risks to an investor’s principal, and high fees.

Non-Traded REITs: A Darker Side Can Loom Large

An April 1 article by Investment News offers insight into the potential downside of non-traded real estate investment trusts (REITs).  Shortly after investor Susan Fox, 63, bought a non-traded REIT – Inland American Real Estate Trust – for her IRA from her broker, it began to decline in value. Her broker, however, dismissed the losses and went on to sell her a second non-traded REIT.

The second REIT, Cornerstone Core Properties REIT, also is tanking in value. In March 2012, the Cornerstone REIT had fallen more than 70% in value – to $2.25 per share, from $8.

Adding to Fox’s financial woes is the fact that the REITs are part of her IRA, which in 2008 had $105,000 in it. The REITs accounted for $56,616 of her account, or almost 54%, according to the Investment News article.

In July 2010, she instructed her broker to sell her non-traded REITs but learned she was unable to do so. That’s because non-traded REITs have specific redemption policies; in most cases, money in non-traded REITs is tied up for seven or more years.

Fox’s dilemma strikes a familiar and painful chord with many non-traded REIT investors.  Non-traded REITs can be highly risky. Because they do not trade on a national stock exchange, non-traded REITs are considered illiquid investments – a fact that many investors, including Fox, are often unaware of until it’s too late.

Non-traded REITs also lack transparency, have limited and lengthy redemption periods, and come with exceptionally high commissions and other upfront fees and charges.

Another potential downside of non-traded REITs concerns dividends, which are not guaranteed to investors and can be halted at any time. In the past year, a growing number of non-traded REITs have either suspended their dividends or stopped them altogether. Among them: Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Apple REITs.

Pacific Cornerstone REIT Sees Major Drop in Value

Investors of non-traded real estate investment trusts (REITs) have taken a financial beating over the past year, and now another non-traded REIT – Cornerstone Core Properties REIT – joins a growing list of REITs to face an unexpected decline in value.

As reported March 28 by Investment News, the Cornerstone REIT has fallen in value by more than 70%. Investors in the non-traded REIT were informed earlier this month via a letter from the REIT’s chairman that shares of Cornerstone, once priced at $8, are now worth $2.25.

“The estimated per-share value has been adversely affected by the recent global economic downturn, negatively impacting our small business tenant base, which has resulted in approximately $43 million of previously announced impairment charges recorded in the second and third quarters of 2011,” according to the letter.

The Cornerstone REIT isn’t the only non-traded REITs facing issues. Investors in Behringer Harvard Short-Term Opportunity Fund I LP saw their investment’s value fall to 40 cents a share in December 2011, down from $6.48 a share just one year earlier.

The Behringer Harvard Opportunity REIT I also has experienced major declines in its valuation. As of December 2011, the REIT was valued at $4.12 a share, compared to $7.66 a year ago.

The Fallout of Greg Smith’s Attack Against Goldman Sachs

The words “due diligence” and “suitability” have taken on a whole new meaning following Greg Smith’s very public condemnation of his former employer, Goldman Sachs. Smith, an executive at Goldman, lambasted his firm via an Op-ed in the New York Times last week. Among other things, Smith called the environment at Goldman “toxic” and that the interests of clients are now “sidelined in the way the firm operates and thinks about making money.”

Smith’s characterization of Goldman may hit a nerve with investors and brokers alike. For investors, the diatribe against Goldman could very well spur them to rethink the quality of investment service and advice they’re receiving. Meanwhile, brokers may be prompted to re-examine and reaffirm the due diligence duties they owe to clients.

No investment is without risk. But financial professionals and their brokerage firms are bound by certain duties to clients – and that includes making investment recommendations based on a client’s suitability, as well fully and accurately explaining an investment.

In the past year, countless examples have come to light in which these duties have fallen by the wayside. Medical Capital Holdings, Provident Royalties, MAT/ASTA, Lehman Brothers principal-protected notes, Behringer Harvard REIT. While each of these cases and the financial products they represent may be different, a common theme ultimately prevails: In one way or another, investors found themselves on the losing end of their investment because the concept of “client-first” was all but forgotten by the brokers and firms they trusted.

The Hidden Dangers of Non-Traded REITs

An analysis of the “distributions” of non-traded REITs sold by broker/dealer David Lerner Associates reveals that the property investments of the REITs in question largely underperformed at the level required to pay promised dividends to investors, according to an Oct. 16 story by Investment News.

The analysis went on to show that the products, known as Apple REITs, consistently “borrowed from a line of credit and used distributions that investors were recycling back into the REITs to meet the targeted dividend payout.”

A class-action lawsuit has since been filed against Lerner over the Apple REITs. According to the Financial Industry Regulatory Authority (FINRA), Lerner allegedly provided misleading performance figures for Apple REITs and implied that future investments could be expected to achieve similar results.

The Apple REIT lawsuit also sheds light on some of the potential problems concerning non-traded REITs in general. As in the case of the Apple REITs, a number of investors who have purchased non-traded REITs thought they were getting into safe, conservative investments that would protect their savings from the volatility of the stock market.

In reality, non-traded REITs can be highly risky. The products do not trade on a national stock exchange and are therefore illiquid. They also lack transparency, include limited and lengthy redemption periods, and come with exceptionally high commissions and other upfront fees and charges.

Another potential risk of non-traded REITs concerns their dividends, which are not guaranteed to investors. In the past year, a growing number of non-traded REITs have either suspended their dividends or halted them altogether.

Among those that did just that: Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Wells Real Estate Investment Trust II.

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