Biggest nontraded REIT being dogged by its own shareholders

Investors' complaints to SEC allege false valuations and excess fees

Mar 13, 2013 @ 4:01 pm

By Bruce Kelly

The largest nontraded real estate investment trust, the $10.8 billion Inland American Real Estate Trust Inc., said Wednesday that some investors are alleging the REIT's management failed in its fiduciary responsibility, resulting in false valuations and excess fees being paid to the REIT's business manager.

In its annual report, the REIT stated that two separate groups of shareholders are piggybacking on a Securities and Exchange Commission investigation. Last year, the REIT said the SEC had launched a fact-finding investigation to determine whether there had been violations regarding the REIT's management fees, transactions with affiliates and distributions to investors.

The groups have asked the REIT's board to conduct investigations regarding their concerns.

Specifically, the first group of shareholders alleges that Inland American's management “falsely reported the value of our common stock until 2010, caused us to purchase shares of our common stock from stockholders in excess of their value, and disguised returns of capital paid to stockholders as REIT income, resulting in the payment of fees to the business manager to which it was not entitled.”

The investors looking to investigate the REIT represent a small number of shareholders, an Inland spokeswoman wrote in an e-mail.

“After our filing announcing the SEC investigation, we received two demand letters from a total of four investors out of 187,000 stockholders,” wrote Nicole Spreck. “In both demands, the board of directors has been asked to perform an investigation into issues similar to what Inland American disclosed the SEC is investigating.”

Ms. Spreck added: “The Inland American board has formed a special litigation committee to investigate the demands of these four stockholders and management is fully cooperating with this special committee.”

Inland American is one of several large nontraded REITs that were sold to investors during the real estate bubble at $10 per share but have suffered dramatic drops in valuations since then. At the end of last year, the REIT said its estimated per share value was $6.93 per share, down from $7.22 per share at the end of 2011.

The allegations of false valuations and jacking up fees are at the heart of a litany of complaints dogging the $10 billion-per-year nontraded REIT industry, one attorney said.

“We are aware of those allegations surrounding Inland and other REITs the past few years,” said Steven Caruso, a partner at Maddox Hargett & Caruso PC. “It's been the crux of most investor complaints — that valuations are not accurate and the misrepresentation of the liquidity of the shares they purchased.”

Mr. Caruso said his firm is handling about a dozen investor complaints regarding Inland American, with most of the investors being retirees. “That compounds the problems,” he said.

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