Selling Bad Apples; Securities Regulator Alleges That Apple REIT 10 is Rotten

Posted on June 2nd, 2011 at 9:22 AM

Securities regulator FINRA (the Financial Industry Regulatory Authority) recently accused David Lerner Associates, Inc. of misleading investors, and not conducting due diligence, in connection with its sales of non-traded REITs, particularly its current offering, Apple REIT 10.

Represented to be secure, safer than the stock market, and generating a high annual return, David Lerner Associates, Inc. has sold its non-traded REITs to “unsophisticated and elderly customers”, according to the FINRA complaint, and now may suffer the consequences.  The firm has had great success in its sales.  Since 1992, the firm has sold $6.8 billion of non-traded REITs to approximately 122,600 customers by way of direct marketing through dinner and luncheon seminars.  Apple 10 currently seeks to raise $2 billion, mostly invested in extended stay hotels of two national chains, for which David Lerner Associates, Inc. stands to reap about $200 million in commissions and fees.

FINRA has identified several particular problems that apply not just to Apple REIT 10 but also to Apple REIT 6 through 9.  For example, David Lerner Associates, Inc. has represented to investors that they would receive a 7-8% annualized return, distributed each month.  However, under harsh market conditions, the REITs have not met the performance expectations outlined in the sales pitches. While Apple REITs were profitable until 2004, they since have failed to remain profitable.

With no profits, how could the firm pay monthly distributions?  According to the FINRA complaint, the firm decided to continue to pay the unsustainably high monthly distributions instead of taking the prudent and conservative course of reducing distributions.  To do so, however, the firm was forced to take out loans, which needed to be repaid by the Apple REITs, as well as return the investors’ own capital.  Unfortunately for investors, this allowed the Apple REITs to maintain their appearance of success.  To further the deception, David Lerner Associates, Inc. even misleadingly cited the distributions as a “yield” on monthly statements.  This created an illusion of profitability, and helped sell future issues of Apple REITs.  To date, the firm continues to saddle the Apple REIT partnerships with debt.  As recently as April 19, Apple REIT 8 secured a $20 million dollar loan to help cover distribution costs.  

To put the problem in perspective, profitable, income-producing healthy REITs have distribution payout ratios between 90-100%.  By comparison, Apple REIT 8’s “on the respirator” payout ratio swelled from 210% in 2008 to 387% in 2011!

A second problem that the FINRA complaint has identified relates to the valuation of Apple REIT shares.  Since the 2004 inception of Apple REIT 6, David Lerner Associates, Inc. has represented the value of Apple REIT 6-9 shares to be a constant, $11 per share.  This is a fairy tale.  FINRA notes, “The $11 per share valuation Apple REITs Six through Nine adopted is currently inaccurate and has been inaccurate in the past.”  Translation: investors have lost money!  Moreover, David Lerner Associates, Inc. has continued to embrace this share overvaluation despite what the FINRA complaint lists as “years of market fluctuations, performance declines, increased leverage and excessive return of capital to investors.”  The valuation was false and misleading, and FINRA contends that it should have been a “red flag” for David Lerner Associates, Inc.  FINRA argues that the firm should have investigated previous Apple REITs before selling Apple REIT 10 due to this artificial valuation.  FINRA has rejected the firm’s argument that since current Apple shareholders were still buying at $11 a share, the price was valid.  

Of course, David Lerner Associates, Inc. had every reason to prop up the incredibly lucrative non-traded REIT sales machine.  FINRA’s complaint notes that Apple REIT sales had accounted for 60-70% of David Lerner Associates, Inc. business since 1996. In order to attract more investors and capital, the firm published the distribution data for Apple REITs 6-9 on its website.  This data misled investors into believing that Apple REIT 10 would be profitable.  The data also failed to acknowledge the recent reduction in distribution rates and that income from the prior Apple REITs was insufficient to support the 7-8% returns.   

While Apple REIT 10 remains open for investment today, its future remains in doubt in light of FINRA’s complaint.  The firm is alleged to have violated NASD Rules 2310 and 2210(d)(1) and FINRA Rules 2310(b) and 2010 by failing to conduct adequate due diligence, thereby leaving it without a reasonable basis for recommending that its customers purchase Apple REIT 10, in addition to using misleading statements regarding the performance of earlier Apple REITs.  Remedies may include rescission for all investors or some other relief.  Ultimately, the resolution will depend on what FINRA can prove at an enforcement hearing, or what, if anything, the parties agree to in settlement.  

Rather than await the outcome of FINRA’s enforcement action and any such relief, investors immediately should seek counsel from competent securities law attorneys in order to explore all of their options and remedies currently available.  For the reasons stated above, the problems are not confined to Apple REIT 10 – which FINRA alleges to be a rotten apple – but also relate to Apple REITs 6 through 9!


Return to Archive



I learned two important things working with Eccleston Law. First, I made a friend and ally with Jim and Steph for life. Secondly, and this is a crucial life lesson - if you need counsel, then seek out the very best. Jim was referred to me by a most trusted source. I've never had to hire an attorney for anything. Now, I know the value of hiring an important partner. Meticulous, thorough and detailed in preparation is the best way to describe Jim. Brilliant too, I might add. Bottom line, I would highly highly recommend Jim and Stephany for your legal needs. One of the best life decisions I've ever made.

Howard S.


June 9, 2023
Retrospective Review Deadline Approaching

The deadline for completing the initial retrospective review required by the Department of Labor (DOL) is quickly approaching.

June 8, 2023
Former David Lerner Branch Manager Receives FINRA Sanctions for Supervisory Lapses

The Financial Industry Regulatory Authority (FINRA) imposed a one-month suspension and a $5,000 fine on former David Lerner Associates branch manager Rande Aaronson.

June 7, 2023
SEC Files Fraud Charges Against Financial Advisor for Exploiting Elderly Clients

The Securities and Exchange Commission (SEC) has charged Douglas McKelvey, a former Morgan Stanley financial advisor, with fraud for misappropriating more than $1.7 million from two elderly customers who were his close relatives.