Another Non-Traded Reit Tanks in Value

Another non-traded real estate investment trust (REIT) has confirmed that its value has tanked by more than 25%, according to Investment News and other sources. Wells REIT II, which was peddled by Wells Real Estate Funds for a share price of $10 in its public offering on June 30, 2011, are now said to be worth roughly $7.47 a share. This probably comes as quite a shock to the many investors who were promised that this was an income producing safe and secure investment in some 90 buildings, including Fortune 500 companies.

The announcement comes on the heels of a proposal in September by the Financial Industry Regulatory Authority (FINRA), which would change dramatically the way non-traded REITs are valued on customer account statements. The proposal would require that "all per share estimated values, including those that are based on the offering price, reflect a deduction of all organization and offering expenses (net value)."

Heretofore, investors were mistakenly led to believe that the value of their REIT was unchanging in value and always had a static share price on their monthly account statements. Unfortunately, the share price on the statements was nothing more than an arbitrary price. Following the David Lerner Associates Apple REITs, which were shown as having a constant value of $10 per share on customer account statements, FINRA mandated that firms show the actual value of the REIT's real estate holdings. Prior to this change it was obviously misleading to investors to see a static share price, in light of a volatile stock market and a real estate market that has been declining steadily over the last few years.

Non-traded REITs are very expensive to own, since the commissions run upward of 15% and more. This coupled with illiquidity makes them less than an ideal investment vehicle for most.

With regard to the Wells REIT II, customers should have seen the value of their investment go from $10 per share to roughly $7.97 per share immediately. This will be shown on next month's statements to customers. The initial offering raised some $5.9 billion from investors but the Wells REIT II only invested $4.7 billion of the proceeds in real estate. The remaining $1.2 billion went to commissions, fees and other related costs.

Recent SEC filings indicate the real estate assets to be worth $10.13 a share and the debt being $2.65 a share, making the difference being the new estimated value per share. The Wells REIT II Board in an unfriendly letter to its shareholders said that it "chose to base the new estimated value per share for Wells REIT II solely on the estimated net asset value, meaning the real estate, debt and other assets and liabilities on the REI II balance sheet, without modification. That's it. Period."

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