SEC probes giant private REIT

By Bruce Kelly

May 13, 2012 @ 12:01 am (Updated 9:31 am) EST

The Securities and Exchange Commission's probe into Inland American Real Estate Trust Inc., the largest nontraded real estate investment trust in the industry, is another cause for concern for the $84 billion private REIT business, which has recently seen some REITs struggle with valuations.

Inland American, which has $11.2 billion in real estate assets, made the SEC investigation known last Monday in its quarterly report. The probe, for potential violations of federal securities laws regarding fees and administration, is consistent with common criticisms surrounding the nontraded-REIT industry, namely the details of its fees.

“I think it was a bit of a surprise and unprecedented,” said Kevin Hogan, president of the Investment Program Association, an industry association for the broker-dealers that market and sell nontraded REITs.

Mr. Hogan said that it is too early in the SEC's investigation to draw conclusions, but Inland's decision to reveal the probe is positive.

“It was a nonpublic investigation, and [Inland] didn't have to but chose to be open about it with their clients,” he said, adding that the IPA has had a long and positive relationship with the SEC and other regulators.

Inland American's announcement is alarming for the representatives who sold the popular product, one industry observer said.

“These headlines are going to scare advisers,” said Michael Stubben, president of MTS Research Advisors, an industry consultant.

“And there will be more to come,” he said, adding that the concerns over valuations of REITs are likely to spur further actions by regulators.

In its quarterly report, released last Monday, Inland American said that it “has learned that the SEC is conducting a nonpublic, formal fact-finding investigation to determine whether there have been violations of certain provisions of the federal securities laws.”

Those potential violations are “regarding the business manager fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments and any decision regarding whether the company might become a self-administered REIT.”

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“Inland American has not been accused of any wrongdoing and we are fully cooperating with the SEC,” said company spokeswoman Nicole Spreck. “Inland American does not believe it has done anything wrong, and we continue to execute against our business plan and strategy.”

She declined to comment further.

A number of nontraded REITs have been forced to cut their value recently, an issue that has drawn the attention of securities regulators.

The Financial Industry Regulatory Authority Inc., for example, has proposed new rules on disclosures and valuations for nontraded REITs.

Last year, Finra sued David Lerner Associates Inc., which has sold a series of nontraded REITs known as Apple REITs.

Finra's complaint against Lerner Associates alleged: “Since at least 2004, the closed Apple REITs have unreasonably valued their shares at a constant price of $11, notwithstanding market fluctuations, performance declines and increased leverage.”

Lerner Associates, in turn, has described the Finra complaint as “rife with falsehoods.”

The matter is pending.

Inland American is one of five REITs that have been sponsored by The Inland American Real Estate Group of Companies Inc., according to that company's website.

At the end of last year, Inland American directly or indirectly owned 964 properties, representing 49 million square feet of retail industrial and office space. The REIT also owned 9,500 apartment units and 15,600 hotel rooms.

At that time, the company estimated its value at $7.22 a share, down from a previous estimate of $8.03.

Most investors initially paid $10 for the REIT.

A related REIT, Retail Properties of America Inc., also has seen difficulties recently. Formerly known as Inland Western Retail Real Estate Trust Inc., Retail Properties of America had an initial public offering last month in which its shares were listed at an equivalent of $3.20 a share.

Last June, its management said its estimated value was $6.95 a share.

bkelly@investmentnews.com