SEC Investigating Inland American Real Estate Trust and Other Non-Traded REITs

Today, in a Wall Street Journal article, Craig Karmin writes that the Securities and Exchange Commission (SEC), is currently investigating an $11 billion real-estate company for potential violations of federal securities laws, looking at the business of real estate investment trusts that aren't traded on exchanges.

They are looking at the activity of Inland American Real Estate Trust to determine if the REIT committed violations related to management fees, the timing and amount of distributions paid to investors, and transactions with affiliates, according to a company filing with the SEC on Monday.

The WSJ article reported that Thomas McGuinness, an Inland American executive, said the company has been "fully cooperating" with the SEC and that "Inland American does not believe it has done anything improper and it continues to execute its business plan and strategy."

Inland American, with $11.2 billion in property, is the largest in the non-traded REIT industry of about 90 nontraded REITs that have raised more than $73 billion, mostly from small investors. The investigation comes at a time when other nontraded
REITs are drawing attention from regulators or reporting weaker valuations and dividend cuts.

Karmin writes that the Financial Industry Regulatory Authority (FINRA), which oversees the financial advisers that market these REITs, has proposed new guidelines on adviser disclosure of REITs. Last year, Finra also sued New York brokerage David Lerner Associates Inc., which sold a series of funds known as Apple REITs. Finra reported that Lerner targeted unsophisticated investors with products ill-suited for them. Lerner has described the Finra action, which is still pending, as "rife with falsehoods."

The WSJ article goes on to say that the SEC has previously said that it has been pressing some nontraded REITs to provide better disclosure on their share valuations. Unlike public stocks, whose values are set in the marketplace, valuations for nontraded REITs have varied. Some have relied on outside appraisers, others on their own management. Lately, some of the nontraded REITs have started to provide more up-to-date valuations, but this has occasionally resulted in sharp declines in share prices.

Karmin writes that Inland American, which closed the fund in 2009, owns 964 properties, including retail, hotels, office, industrial and apartment buildings. The REIT's parent company, Inland Real Estate Group of Companies, is a 40-year-old real-estate company in Oak Brook, Ill., with $25 billion in assets. They were also the sponsor of a publicly traded REIT now known as Retail Properties of America, RPAI -0.22% an owner of strip malls and shopping centers. Last month, the REIT sold shares publicly at a price that struck many as lower than expected. The shares valued last June at $6.95 were valued during the IPO at $3.20, before a reverse stock split.

Many other nontraded REITs have disappointed their investors by cutting or eliminating dividends. KBS Real Estate Investment Trust I informed shareholders in March that it was suspending the monthly payments of 5.25% and it marked its share price down 30% to $5.16.