All's not well as Wells throws in towel on REIT offerings

Founder says lack of clarity about regs forced his hand

Jan 20, 2013 @ 12:01 am

By Bruce Kelly

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

In a letter Jan. 11 to broker-dealer executives, Mr. Wells wrote that his firm, Wells Real Estate Funds, wouldn't register any new investment products at this time but may in the future.

The firm will continue to serve existing clients in its lineup of real estate investment trusts and private real estate funds.

Mr. Wells pointed to a lack of clarity regarding REIT regulation.

“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,” he 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.”

Mr. Wells wrote: “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. 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 popular with independent broker-dealers, and it has as many as 200 selling agreements with such firms.

UNDER SCRUTINY

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 doesn't intend to close its wholesaling broker-dealer, Wells Investment Securities Inc., spokeswoman Margot Olcay said.

Mr. Wells wrote that the cessation of registering new products may 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 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.

CHANGING BUSINESS

Mr. Wells is one of the most noted real estate sponsors in the independent-broker-dealer industry. Many broker-dealers have long sold his REITs, but the nontraded-REIT business is changing following 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 over the past decade.

In October 2003, Finra's precursor, NASD, sanctioned Wells Investment Securities for improperly rewarding broker-dealer representatives 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 re-enactors, fireworks, fife and drum players, skydivers and a cannon salute.

bkelly@investmentnews.com Twitter: @bdnewsguy

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