REIT SALES PLUMMET AFTER BAD PRESS

This story first appeared on WSJ.com.
A popular family of real-estate funds that has raised billions of dollars from small investors over the years saw sales plunge in its latest fund in June, after a securities regulator filed a complaint against the broker that markets the funds.
The unlisted Apple REIT 10, which, like other Apple real-estate investment trusts, is sold through broker David Lerner Associates Inc., raised $26.6 million in June, according to investment-banking firm Robert A. Stanger & Co., which tracks REITs through SEC filings. That compares with $51.2 million in May and $66.1 million in April.
By contrast, Robert A. Stanger noted, nontraded REITs overall raised more money in June than in the previous month.
At the end of May, the financial industry's regulating body filed a complaint against the Lerner firm, charging that the broker was misleading investors in the way it marketed the funds. Lerner has called the complaint by the Financial Industry Regulatory Authority, or Finra, baseless.
David Lerner Associates General Counsel Joseph Pickard put the blame for the sales decline on the Finra complaint, negative press and two class-action lawsuits against Lerner. One suit filed in New Jersey charged that the firm duped investors into buying Apple REITs by misstating the business model and failing to disclose risks.
Mr. Pickard said in a statement that though these products remain a viable investment option for suitable investors, the allegations involving the Apple REITs, the negative media attention, and the actions of self-interested lawyers have undoubtedly affected sales. He also said the company will defend against the class-action suits, which he called without merit.
Since 2000, the Apple family of nontraded REITs has raised about $6.2 billion, according to Robert A. Stanger.
Finra's complaint takes particular issue with the valuations of four of the Apple REITs, which have long maintained a constant share price of $11. The securities regulator questioned why Apple's valuations of its extended-stay hotels remained the same during the financial crisis, when the extended-stay hotel industry suffered a significant, material downturn.
For the June statement, the Apple funds were listed as "not priced" instead of the previous $11 valuation. Mr. Pickard said the recent stir and hoopla in other people's minds about the Apple REIT pricing contributed to DLA's decision to change the statement format.
Earlier this month, Finra indicated it had concerns with nontraded REITs that extend beyond Lerner and Apple. Typically, these unlisted funds charge higher fees than publicly traded real-estate investment trusts and pay higher dividends.
Finra is weighing new reporting rules for all nontraded REITs. Under the proposal, heavy upfront fees of about 10% would have to be reflected in valuations. And if the broker-dealer selling the nontraded REIT had reason to believe the value estimated by the REIT sponsor is inaccurate, the broker would have to remove it from its account statements.