‘Mini tender’ offers exploit unwary investors, critics charge

Two non-traded real estate investment trusts have been targeted by private investment partnerships trying to take advantage of unsuspecting investors, critics charge.

Since December, shareholders of Inland American Real Estate Investment Trust, which has $11.6 billion in assets, and the Apartment Trust of America Inc., formerly the Grubb & Ellis Apartment REIT Inc., which has $380 million in assets, have been the subject of “mini tender” offers by private investment funds. They are called that because the tender offers are for less than 5% of the REIT shares.

The mini-tender offer for the Inland REIT is being conducted by a private fund called Lapis Investment Business Trust at $4 a share and is limited to no more than 1 million shares, or 0.12% of the fund’s shares. Executives at Inland recently have bought shares at $8.03, according to filings with the SEC.

In the case of the Apartment Trust of America REIT, seven separate funds last month initiated an offer to buy a total of up to 500,000 shares, or about 2.6% of the fund’s stock. The price offered was $3 a share, which chief executive Stanley J. Olander wrote in a letter to investors was “significantly below the $10 per share price at which these shares were originally offered.”

Critics of such lowball offers said that they take advantage of unwary investors.

“I think it’s unbelievably, incredibly unfortunate that there’s a class of people out there who prey on investors who are ill-equipped to understand such tender offers,” said John Rooney, a managing principal with Commonwealth Financial Network. “America is a free country, but it’s depressing when people take advantage like this.”

Such offers “have been increasingly used to catch investors off guard,” the SEC said in 2008.

“Many investors who hear about mini-tender offers surrender their securities without investigating the offer, assuming that the price offered includes the premium usually present in larger, traditional tender offers,” the SEC said. “But they later learn that they cannot withdraw from the offer and may end up selling their securities at below-market prices.”

Those who defend mini-tender offers said that they are providing a service by providing liquidity after the REITs restricted shareholders’ ability to redeem their shares. During the financial crisis, many REITs — including Inland and the Apartment Trust of America — halted or limited repurchases of stock in order to conserve cash.

“It’s no different than people buying opportunistically in the market,” said Don DeWaay, chief executive of DeWaay Financial Network LLC. “It provides liquidity, and a relatively fair liquidity, at a discount you would give any other illiquid asset in this kind of market.”

Mr. DeWaay, whose firm has raised money in at least three small, private funds targeting the Apartment Trust of America REIT shares, contends that “any illiquid asset, you get a bigger discount, especially in hard times.”

“Our people offer a fair discount,” he said. “I’m certain there are bad actors in this space, but on the other side of the coin, it provides liquidity, and I don’t believe everybody is abusive.”

Kjerstin Hatch, managing partner with Lapis, said she understands the criticism of mini tenders, but added that her firm is giving information to the SEC as well as using its guidance as part of its $4-per-share offer to Inland investors.

REIT sponsors have complained that mini tenders have not provided enough information, she said. “We’ve tried to counter that,” she said, by making full disclosure of the offer.

Ms. Hatch criticized the non-traded REIT industry, saying that some REIT sponsors make it difficult for buyers to complete transactions. That hurts investors looking for liquidity, she said.

Inland “agrees strongly with the Securities and Exchange Commission’s position that mini tenders can be confusing and damaging to investors,” Inland spokesman Joel Cunningham wrote in an e-mail. “As such, we proactively engage our investors and the brokerage community on the dangers of mini-tender offers through letters and filings.”

He added that Inland recently changed its charter and made it more difficult for investment management firms to obtain investors’ identities and make unsolicited mini-tender offers.

The bottom feeders for the non-traded REITs are private investment vehicles in the form of Regulation D private placements. A handful of independent broker-dealers have raised money to create pooled-investment funds, and those funds in turn have made mini-tender offers to investors holding the securities.

The broker-dealers raising money for the Apartment Trust of America deal include VSR Financial Services Inc., Centaurus Financial Inc., Foothill Securities Inc. and Financial West Group. Those firms are listed as the broker-dealers for MPF Income Fund 26 LLC, a pooled-investment offering that said in a filing with the SEC this month that it has raised $3.14 million.

Brokers generate much higher commissions and fees on such private deals than on more typical investments such as mutual funds. The brokers listed in the MPF Income Fund 26, for example, received a commission of 7%, with another 3% going to the fund’s investment adviser.

E-mail Bruce Kelly at [email protected].