The SEC just recently announced that it has commenced an investigation into Inland America Real Estate Trust Inc. (“Inland American”). Inland American is one of five (5) real estate investment trusts (“REITS”) affiliated with The Inland American Real Estate Grouo of Companies Inc. According to reports, Inland American has $11.2 billion in real estate holdings as of the end of the 1st quarter of 2012, consisting of more than 950 properties consisting of more than 49 Million square feed of retain, industrial and office space. According to its website, Inland American also owns more than 9,500 apartment units and more than 15,000 hotel rooms.
The investigation into Inland American is consistent with much of the criticisms by regulators of most REITs in today’s market. REITs have been the subject of much scrutiny recently because although they can be very profitable investment products, they fall within the definition of a Regulation-D offering and should only be made available to accredited investors. However, some REITs were offered to non-accredited investors or, the amount of money invested into REITs was in excess of the amount that would be deemed suitable under NASD guidelines. Finally, a lot of investors put their money into various REITs with the misunderstanding that after a short period of time, their investment would become liquid, when the reality is that the liquidity of REIT investments was dependent upon the REIT’s issuer authorizing an event of liquidity.
As a result, many people invested into REITs with the hope that for a short period of time (4-5 years), they would receive dividends for the interest accrued, followed by a return of their investment, similar to investment model found in other reg-d offerings such as private placements. Now, when those investors need their money back to offset declines in their 401k’s or other investment tools, they are discovering that their REIT investments are not liquid as they believed.
The SEC is allegedly investigating all aspects of Inland American’s business practices, with the most significant being the detail of its fees. Specifically, Investment News reported that the SEC is investigating potential violations “regarding the business manager fees, property management fees, transactions with affiliates, timing and amount of distributions paid to investors, determination of property impairments, and any decision regarding whether the company might become a self-administered REIT.”
Depending on the results of this investigation, FINRA could see an increased wave of claims made by investors alleging wrongdoing similar to the SEC’s findings. Furthermore, FINRA and the SEC could see an increased number of complaints about similar REITs such as Retail Properties of America Inc., formerly known as Inland Western Retail Real Estate Trust Inc., which has experienced value declines similar to those experienced by Inland American.