All's not well as Wells halts REIT offerings

Founder says lack of regulatory clarity forced his hand

Jan 15, 2013 @ 4:10 pm

By Bruce Kelly

Legendary real estate investor Leo Wells is throwing in the towel, at least for now, on the nontraded-REIT industry.

His retreat, however, may be temporary. In a letter Jan. 11 to broker-dealer executives, Mr. Wells said his firm, Wells Real Estate Funds, 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.

Mr. Wells pointed to a lack of clarity around REIT regulation as the reason for his pullback. “As most of you are aware, [the Financial Industry Regulatory Authority Inc.] has been working toward producing new transparency guidelines for alternative investments, which they expect to become effective mid-2014,” Mr. Wells wrote. “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.”

“Until we have regulatory and marketplace clarity, in addition to more uniform guidelines throughout the industry, I believe it wise to 'pause' in our offering of real estate investment products,” Mr. Wells wrote. “Once we have the clarity we require to make prudent investment product decisions, we intend to come to market with strong and innovative products.”

Wells' REITs are extremely popular with independent broker-dealers, and it has as many as 200 selling agreements with such firms.

Wells Real Estate Funds is a “viable and well-capitalized company,” Mr. Wells wrote. The property investment firm was founded in 1984 and has funneled $11 billion into real estate projects since its inception. Most of the money raised has been through nontraded REITs, which have come under scrutiny from regulators who have questioned the products' fees, valuation methods and how their value appears on client account statements.

The standardization of valuations is one issue that nontraded REITs are attempting to harmonize. The Investment Program Association, an industry trade group, is working to create such guidelines with the intent of publishing them in the first quarter.

Wells Real Estate Funds does not intend to close its wholesaling broker-dealer, Wells Investment Securities Inc., said spokeswoman Margot Olcay. Mr. Wells wrote that the cessation of registering new products my lead to staff cuts, particularly in the capital markets area, which is managed by the broker-dealer.

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, Mr. Wells wrote. The Wells Timberland REIT is also looking toward “its appropriate exit strategy,” he added.

Mr. Wells is one of the most noted real estate sponsors in the independent-broker-dealer industry. Many B-Ds have long sold his REITs, but the nontraded-REIT business is changing in the aftermath of the collapse of the commercial real estate market and credit crisis in 2008.

Mr. Wells is also one of the most outspoken and colorful figures in an industry that has generated plenty of headlines in the past decade. In October 2003, Finra's precursor, NASD, sanctioned Wells Investment Securities for improperly rewarding broker-dealer reps who sold the company's REITs. Those rewards included lavish entertainment and travel perquisites. At the time, the regulator also censured Mr. Wells and suspended him from acting in a principal capacity for one year.

The entertainment included parties and dinner at a Civil War fort with costumed Civil War heroes, fireworks, fife and drum players, skydivers and a cannon re-enactment.

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