Lerner Associates Paid Promised Returns with Borrowed Money

A new slant on the non-traded REITs, sold exclusively by David Lerner Associates Incorporated, has surfaced. The analysis was made public in an amended petition filed by victimized investors in a class action in Newark, New Jersey, according to Investment News. The report revealed that the Apple REITs did not generate enough income to pay the 7% to 8% annualized returns promised to investors.

The class action originally was filed shortly after a Financial Industry Regulatory Authority (FINRA) investigation revealed that David Lerner Associates had allegedly provided misleading performance results for its Apple REITs. Furthermore, Lerner touted the investments as being safe conservative investments that would help to reduce investors’ risk during times of stock market volatility, in addition to guaranteeing 7% to 8% steady, annualized returns.

Unfortunately, the stream of income generated by the Apple REITs was insufficient to pay the promised dividends to investors. According to the complaint, Lerner would borrow from a line of credit and use recycled capital distributions to make the promised dividend payments to investors. For example, Apple REIT Eight paid out $238 million in dividends between the years 2007 to 2010. This was far more than the $82 million, or 34% of the total payout to investors, in cash generated from the Apple Eight REIT. Also, the Apple REIT Nine paid out $188 million in dividends to investors between the years of 2008 and 2010, while generating $42 million in income, or 22% of the distributions. Accordingly, the complaint alleges that Lerner made dividend payments to investors “without regard to profitability, even as they acquired properties at prices they knew could not conceivably justify the level of distributions they were paying.”

David Lerner Associates was the only brokerage firm that sold Apple REITs. The firm made $341.5 million in commissions and expenses from peddling Apple REITs Eight, Nine and Ten, as alleged in the class action complaint. The Apple REITs were very lucrative for the firm, with a 7.5% commission going to the firm and broker for every share sold, plus a 2.5% marketing expense.

According to the article, Lerner Associates peddled some $5.7 billion worth of the five various Apple REIT offerings between 2004 and 2010. The REITs were offered at $11 per share and had been shown on client brokerage account statements at a constant value of $11 per share, notwithstanding the volatility of the markets since 2008. Following the FINRA investigation, Lerner no longer lists the value of the Apple REIT shares on account statements as being worth $11 per share. The shares are now “not priced.”

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