New York newspaper bruises Apple REIT

Richmond-based Apple REIT and one of its funds is in the national spotlight after a broker that bought shares of Apple REIT Eight was sued by regulators for misleading investors.

The New York Times reported that David Lerner Associates has been accused of misleading investors that the brokerage put into Apple REITs funds. David Lerner is a major funds source for Apple REIT and sold almost $7 billion in Apple REIT shares since 1992.

The Financial Industry Regulatory Authority said Lerner misled investors by failing to show that the dividend payments to investors were greater than the income the fund’s hotels were producing and were funded by borrowing. Lerner, FINRA said, was selling the investment as safe.

Now New York Times business columnist Floyd Norris has weighed in on non-traded REITs, writing that the funds’ true market value is likely not what the brokerage, or Apple REIT, has stated:

“In reality, investing in hotels is anything but a safe, volatility-free way to invest money. That will be apparent to any investor who pores through Apple Eight’s most recent quarterly report. Nearly all of its distributions to shareholders in the quarter were paid for with borrowed money.”

His story also dug up a few facts about Apple REIT:

–    Apple REIT Eight failed to make mortgage payments on four hotels and has said it might have to surrender the properties.
–    Apple REIT Eight is borrowing money to make dividend payments to investors. Glade M. Knight, the CEO of Apple REIT, personally guaranteed the loan.
–    Knight gets a 2 percent commission on every hotel purchased by the REIT, plus advisory fees. He gets another 2 percent when the hotels are sold.

Richmond-based Apple REIT and one of its funds is in the national spotlight after a broker that bought shares of Apple REIT Eight was sued by regulators for misleading investors.

The New York Times reported that David Lerner Associates has been accused of misleading investors that the brokerage put into Apple REITs funds. David Lerner is a major funds source for Apple REIT and sold almost $7 billion in Apple REIT shares since 1992.

The Financial Industry Regulatory Authority said Lerner misled investors by failing to show that the dividend payments to investors were greater than the income the fund’s hotels were producing and were funded by borrowing. Lerner, FINRA said, was selling the investment as safe.

Now New York Times business columnist Floyd Norris has weighed in on non-traded REITs, writing that the funds’ true market value is likely not what the brokerage, or Apple REIT, has stated:

“In reality, investing in hotels is anything but a safe, volatility-free way to invest money. That will be apparent to any investor who pores through Apple Eight’s most recent quarterly report. Nearly all of its distributions to shareholders in the quarter were paid for with borrowed money.”

His story also dug up a few facts about Apple REIT:

–    Apple REIT Eight failed to make mortgage payments on four hotels and has said it might have to surrender the properties.
–    Apple REIT Eight is borrowing money to make dividend payments to investors. Glade M. Knight, the CEO of Apple REIT, personally guaranteed the loan.
–    Knight gets a 2 percent commission on every hotel purchased by the REIT, plus advisory fees. He gets another 2 percent when the hotels are sold.

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David Meyer
David Meyer
11 years ago

As an investment fraud attorney, i feel it is my duty to educate the public on investments that guarantee results. David Lerner Associates guaranteeing gains and misleading the public into purchasing Apple REIT ten share is reprehensible. I blog about all the past transgressions of David Lerner Associates here http://www.investorclaims.com/blog/recovering-your-losses-from-apple-reit.cfm

Mike Saddleview
Mike Saddleview
11 years ago

Let’s call it what it is:
If these allegations are true; than it’s a pyramid scheme. The large dollars amounts lead me to believe that all parties would be aware of the investments in detail.

When dividend payments to investors are greater than the income the fund produces that means that it being funding by, ultimately, future investors. I think that’s the definition of a pyramid scheme.

Marvin Bendavid
Marvin Bendavid
11 years ago

David Lerner Associates continues to maintain that the value of shares in Apple REIT 9 & 10 remain a constant $11, despite capital returned in the guise of dividends. These investments differ from a pyramid scheme in that any dividends not derived from operating income are (puportedly)paid out of borrowed funds, rather than from new investors’ funds. Furthermore, there is actual real estate on the company’s balance sheet, although there is no way for the investor to verify the stated value of that real estate, or, for that matter, the operating income cited in the quarterly statements. Theoretically, if the… Read more »

nicholas J Tarzia
nicholas J Tarzia
11 years ago

I have been in the Apple Reits for years and consider myself a very sophisticated investor. I think the way the dividends are maintained at artifical levels is genious when one considers the rturn of capital just dilutes the appreciation at the end of the 7 year(or more) cycle.

If the dividends paid flucuate based on the economy, then a larger payout occurs at the end of the cycle, what is the difference.

Real property, real income, real gains over time.