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

REITs
+ Zoom

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.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

State Street's Brie Williams: The story behind the 'Fearless Girl' statue

The idea started with the creation of a statue to coincide with International Women's Day, and the results surpassed expectations, according to Brie Williams, head of practice management at State Street Global Advisors.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.

CFPs, including brokers, may have to adhere to a stricter fiduciary duty

CFP Board revises its standards and aims to beef up fiduciary requirements of certificants.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print