California Regulators Probe Inland American Real Estate Trust REIT

The California Department of Business Oversight is looking into the Inland American Real Estate Trust Inc. This is the largest nontraded real estate investment trust with $9.7 billion in assets. Earlier their year, Inland American announced to shareholders that it would become a self-managed REIT.

Inland American is one of the big REITs that experienced a swift drop in valuation when the real estate market crashed in ’07-’08. While the nontraded REIT is currently not under investigation, state regulators want clarification about the offering price in the recent repurchase of shares of the REIT.

In a letter written last month, the department’s corporation counsel Danielle Stoumbos asked why Inland is selling shares at up to $8.03/share in its distribution reinvestment plan when the share price pursuant to the latest tender offer is just $6.10 to $6.50. The state also wants to know how Inland compensates its manager/internal adviser and whether there might be conflicts of interest.

Now, Inland American’s investor relations VP Dan Lombardo claims that the state’s inquiry stems from a misunderstanding. In an email to InvestmentNews, he said shares out of the DRP were not sold for $8.03 and the price was in fact $6.94/share, which is what the nontraded REIT had estimated.

The U.S. Securities and Exchange Commission has been investigating Inland American over fees for the last two years. The SEC is trying to find out whether certain federal securities laws related to different fees, including those for property management, business management, affiliate transactions, timing, property impairment determinations, and other activities were violated.

In other nontraded REITS news, RCS Capital Corp. executive chairman Nicholas Schorsch says the industry is not slowing down despite the current decline of sales during this year’s first quarter compared to last. InvestmentNews says that total equity from nontraded REITs and other programs of investment was $1.6 billion, compared to $2.4 billion from last year over the same time period. Schorsch, who founded American Realty Capital says he is not worried.

In the last few years, regulators have been taking a closer look at the way non-traded REITs are marketed and recommended to customers. It seems that not all investors were properly and fully advised about illiquidity risks or that there would be substantial fees attached. Instead, many REITS were touted as low risk, safe investments. Unfortunately, not all of the customers who were advised to get involved in non-traded REITs and REITs could handle the fluctuations in the market that have happened and many sustained huge losses.

Our Non-traded REIT fraud lawyers are here to help our clients recoup their losses. Contact our securities lawyers today.

Giant Inland American REIT is focus of California inquiry, Stockbroker Fraud Blog, May 15, 2014

Inland American under SEC probe, Chicago Real Daily Estate, May 11, 2012

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Non-traded REITS Exhibit Unbelievable Resistance to FINRA Disclosure Rules, Institutional Investor Securities Blog, March 19, 2014

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