Local REIT’s funds under SEC scrutiny

The sign at Apple REIT's downtown building.

The sign at Apple REIT’s downtown building.

A local REIT revealed last week that it is under investigation by the Securities and Exchange Commission.

Four of downtown-based Apple REIT’s funds are being looked at by the SEC for issues related to the “adequacy of certain disclosures” in their regulatory filings beginning in 2008, according to disclosures in each of the companies’ year-end 10-K filings.

The “non-public” SEC investigation is also interested in the Apple funds’ internal review of certain transactions they’ve made, the filings state.

The investigation is focused on Apple REITs Six, Seven, Eight and Nine. It does not involve Apple REIT Ten, the newest of the company’s funds and the only one that remains open to new investors and is still selling shares.

Dealing with the investigation hasn’t come cheap. The four funds combined spent a total of $7.3 million in legal costs in 2012 associated with the investigation, according to its filings. Significant related legal costs will continue at least for the first half of 2013, they said.

Apple REIT spokesperson Kelly Clarke did not return calls or an email seeking comment.

Each of the funds each stated in their respective 10-Ks: “The company intends to continue to cooperate with the SEC staff, and it is engaging in a dialogue with the SEC staff concerning these issues and the roles of certain officers.”

“The company does not believe the issues raised by the SEC staff affect the material accuracy of the company’s consolidated financial statements. At this time, the Company cannot predict the outcome of this investigation as to the Company or any of its officers, nor can it predict the timing associated with any such conclusion or resolution.”

The SEC declined to comment, saying it does not confirm or deny the existence of any investigation.

Last year, the New York firm that exclusively sells Apple REIT shares to investors was ordered by regulators to pay $12 million in restitution to certain shareholders. David Lerner, the head of David Lerner Associates, was also fined $250,000 by the Financial Industry Regulatory Authority and was suspended for one year from the securities industry.

Apple REIT Companies, among its five funds, owns a total of 207 hotels nationwide. They brought in a combined $1.2 billion in revenue in 2012 and a combined profit of $164 million.

Disclosure of the investigation comes as Apple REIT Six is in the process of being acquired by an affiliate of private equity and financial firm Blackstone for $1.2 billion.

Shareholders are expected to vote on the deal this year.

Apple REIT Nine meanwhile has a major project underway in Shockoe Slip.

It broke ground in November on a 134,000-square-foot Marriott hotel project on a former parking lot at 14th and Cary streets. The First Freedom Center, as it will be known, will consist of a six-story, 210- hotel split between two Marriott brands.

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Vince shields
Vince shields
6 years ago

I purchased shares of the apple reit 10, they are only sold by a two bit securities company in new York called David Lerner associates. I believe these apple reit programs are making a select few people from the owners of apple and David Lerner associate very rich. Only David Lerner associates can sell the apple shares, I find this very odd, they are making huge commissions on us and they will tell you no information except what is in their sec filings. I would never again buy an illiquid reit again. For anyone reading this be very careful before… Read more »