Behringer Harvard REIT

Behringer Harvard REIT I has gone the route of several non traded REITs in recent months: reducing its share value. The REIT, which raised $2.9 billion from its 2003 launch through its final offering in December 2008, reduced its share value to $4.25 earlier this summer, as well as cut its annualized dividend rate to 1%.

Non-traded REITs such as Behringer Harvard REIT I, Inland Western Retail Real Estate Trust and Inland American have created a financial tsunami for a countless number of investors in the past year. For many of these investors, the losses have opened their eyes to the fact that the products themselves were a far cry from the safe, conservative investments that their broker/dealer initially promised.

Behringer Harvard began operations in 2003. At the time, Behringer Harvard management apparently began paying dividends out of offering proceeds, according to REIT Wrecks, a Web site that provide news analysis on the REIT industry. Interestingly, Behringer Harvard REIT I has never covered its dividends with real operating cash flow following its launch, according to a May 31 post on REIT Wrecks. The post goes on to say that “in all but one year, more than 75% of the dividend came simply from returning shareholders' own money.”

Moreover, as of Dec. 31, 2009, Behringer Harvard had paid dividends that totaled more than three times its reported “Funds from Operations” from 2003 through 2009, REIT Wrecks says.

For shareholders, this practice is bad news in that it's highly likely to erode future shareholder equity. And that's exactly what occurred on May 18, 2010, when Behringer revalued its shares from $10 to $4.25. That's nearly a 60% loss.

Back in 2005, Forbes Magazine did a story titled “Unreal Returns” in which it says that the practice of “paying dividends filled with sawdust and promises” is prevalent among private REITs. The article, in fact, cites Behringer Harvard REIT I as one of these offenders.

Non-traded REITs like Behringer Harvard are considered illiquid investments, because they do not trade on a public stock exchange. Generally, non-traded REITs have a specific waiting period in which investors can redeem their REIT shares. In many cases, this time frame is seven years.

For broker/dealers, however, sales of shares in non-traded REITs offer an immediate payoff. Fees and commissions associated with non-traded REITs can run as high as 15%.

Maddox Hargett & Caruso is investigating a number of non-traded REITs, including Behringer Harvard REIT I, Inland American Real Estate Trust, Inland Western Retail Real Estate Trust and others. If you've suffered investment losses in these or other REITs, please contact us.


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