Nontraded REIT gets cease-and-desist order from Ohio

State regulators last week smacked a nontraded real estate investment trust for monkeying around with its offering price, a thorny issue for the $10 billion-per-year nontraded-REIT industry. The Ohio Division of Securities on Friday issued a cease-and-desist order against Steadfast Income REIT Inc. for announcing price changes to the REIT two months before they took effect. On July 12, 2012, Steadfast Income REIT disclosed its estimated value of $10.24 per share but continued to sell the shares at a lower value of $10 per share until Sept. 10. Specifically, “Steadfast's decision to publicly announce an offering price increase 59 days prior to implementation of the price increase created a sale period that may have artificially increased investor demand for its securities,” according to the order, which does not prohibit sale of the REIT in Ohio but calls a halt to the valuation practice. The Steadfast Income REIT, which focuses on multifamily real estate, or apartment houses, has $691.4 million in total assets and launched in 2009. Its chief executive, Rodney Emery, did not return calls to comment. The practice of announcing a future change in the valuation of a REIT hurts the shareholders because it undercuts the REIT's current value, industry observers have long noted. “It creates a window for a discounted sales price,” said Mark Heuerman, registration chief counsel for the Ohio Division of Securities. “It's in the best interest of prior shareholders that the REIT sells shares for what it's worth.” Ohio does not have the authority to issue fines in such cases, Mr. Heuever No restitution to investors was ordered. Steadfast has not been alone in the nontraded-REIT industry in issuing a new share valuation and waiting a period of time to change it. At the beginning of the year, noted real estate investor Tony Thompson attempted to drum up sales for his struggling REIT, the TNP Strategic Retail Trust Inc., by drawing attention to its rising valuation and its lower per-share price. A note to broker-dealers in January stated that the Thompson REIT's current net asset value was 6% higher than its share price. “As of Nov. 9, 2012, estimated NAV increased to $10.60. Shares continue to be offered at $10,” the note read. In March, the REIT stopped paying its dividend to investors, and Mr. Thompson is under investigation by the Financial Industry Regulatory Authority Inc. for allegedly failing to turn over documents to the regulator.