ESTERO — After selling his motorcycle dealership near Chicago for more than $1 million, Bill McCabe searched for a safe place to invest his money.
He sought a steady income – and said he thought he'd get it after following the recommendations of a financial adviser he found on the Internet in 2005.
The adviser pitched a financial product McCabe hadn't heard of – non-traded real estate investments trusts, or REITs, which buy real estate with a pool of investor money.
McCabe bought into the trusts based on promises of higher returns and lower taxes on his capital gains, he said.
"It sounded like it was the only thing there was," said McCabe, 60, of Estero.
It didn't work out that way — he's lost most of his retirement savings.
Through Naples attorney Chris Vernon, McCabe filed a claim with the Financial Industry Regulatory Authority, a self-regulating agency that tries to resolve disputes between investors and brokers outside of court.
During the past few years, unlisted REITs have come under increased scrutiny from regulators for the way they're sold and valued:
** In 2011, the Financial Industry Regulatory Authority received 54 percent more complaints about the investment trusts than it did in 2009.
** In November of last year, the authority fined Wells Investment Securities Inc. $300,000 for misleading investors in the sale of its non-traded REITs.
** For more than a year, David Lerner & Associates Inc. in New York has been in the hot seat for selling billions of dollars worth of REITs to unsophisticated and elderly investors, which triggered class-action lawsuits. In May, an arbitrator ordered Lerner to give customers back their money in exchange for their shares in unlisted REITs.
** In April, Vernon Healy and another law firm in Atlanta filed $2.3 million in claims with the authority for three retirees who were sold non-traded REITS and other risky investments by brokers with VSR Financial. Two of the retirees live in Southwest Florida; one sought safe investments because of his long battle with cancer, Vernon said.
** One of Vernon's other clients, a 58-year-old retired manufacturing executive in Naples, told a VSR broker he wanted safer investments because he'd already lost a chunk of his savings in a Ponzi scheme in 2002 – yet the broker steered $1.3 million of the man's money into risky alternative investments, according to the man's claim.
The broker was fired by VSR in September 2010 and later barred from working for any Financial Industry Regulatory Authority financial firm after he failed to answer questions about possible undisclosed outside business activities and private securities transactions.
Jon Stanfield, a co-president for VSR Financial Services, said the company doesn't comment on pending litigation.
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Like many other seniors who have invested in the high-risk non-traded real estate trusts during the past decade, McCabe, who has lived in Southwest Florida year-round since 2008, regrets he didn't know better. His investments have lost more than half their value, the distributions he counted on have stopped and he's been forced to borrow money from his parents to get by, he said.
"My father just passed away. He was 100 years old. My parents as much as possible have helped," McCabe said.
He believes high commissions motivated his adviser to sell him REITs. The adviser put more than $830,000 of the retiree's nest egg into speculative investments in two years.
McCabe wants his money back, plus damages and lost interest. His claim is against SII Investments in Wisconsin and its adviser who sold him the REITs and put another $85,000 of the retiree's money in Ridgewood Energy, another bad investment, said Vernon, the Naples investor rights attorney.
McCabe's money is tied up in Behringer Harvard REITs that have suspended distributions and restricted their share buy-back programs. After struggling to recapitalize mature debt related to Frisco Square, a mixed-use property in Texas, a subsidiary of Behringer Harvard Opportunity REIT I Inc. and its special purpose entities voluntarily filed for Chapter 11 bankruptcy protection in June.
Jason Mattox, chief operating officer for Behringer Harvard, said the company doesn't comment publicly about specific clients and their situations.
"In general, a historically severe recession has reduced the value of all commercial real estate in the U.S., and the assets held by Behringer Harvard's investment programs have not been immune to this trend," he said.
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Unhappy investors are calling Vernon almost daily.
"Not only are they stuck in the REITs, but they are not getting any income from the REITs and they're fearful the value will continue to decline until all the money is gone," Vernon said.
He's talked to investors who have as little as $10,000 and as much as $9 million tied up in the trusts, which are frequently sold by smaller broker-dealers, he said.
In the past few years, numerous non-traded REITs have seen their values plummet. Falling commercial real estate values have taken a toll, but Vernon said the problems with the trusts run much deeper, including the high costs of operating them.
"I don't think it's a cost-efficient way to invest in real estate," he said. "There is just so much money flowing to the issuers and the sales people."
High commissions can be a powerful motivator for brokers to sell the risky investments even when they're unsuitable for clients, Vernon said.
"The tragedy is you are going to end up with an entire generation, frankly the baby boomers out there, upper middle class people, that are going to have a wad of this stuff in their portfolios, whether it's suitable or not," Vernon said. "It may be suitable for some people. But it's not going to be suitable for many people."Kevin Hogan, CEO of the Investment Program Association, an advocacy group for non-traded REITs, said they're not a bad product, they're just misunderstood.
"If a senior or any other investor needs to have access to their money, they should not be in a non-listed (non-traded) REIT," he said. "It's just like buying a home or other real estate. They are typically long-term holds. And those periods range from 7 to 10 years. What's unfortunate is people forget this, they don't realize that, or it's sold the wrong way."
He points out many financial products took a hit with the economic downturn, including mutual funds.
"A lot of people would argue that this is a fantastic time to be investing in non-listed REIT products because they are buying real estate holdings at a time when they are at historical lows," Hogan said. "It's just about timing. It's just like buying your home."
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The industry continues to work on standardizing how dividends are paid and how shares are valued to promote a better understanding of the product, Hogan said.
While the high commissions for brokers have been criticized, he said if you spread the cost over the life of the investment, it's less than 1 percent a year.
For McCabe, there are no good arguments for why his broker steered so much of his hard-earned money into the unlisted REITs. That's why he believes the broker was motivated by lucrative commissions.
The only way McCabe can get money out of his REITs now is to sell at a deep discount in a limited secondary market — worth about 25 cents on the dollar, he said.
He said the broker led him to believe he could sell his shares back to the REITs at any time, but then the issuers suspended their buy-back programs.
"I pay my bills," McCabe said. "But I'm not able to enjoy the lifestyle that I feel I should be living with what I acquired."
After owning a motorcycle dealership for 25 years, he expected a comfortable lifestyle in Southwest Florida retirement. He got something far different.
__ Connect with Laura Layden at www.naplesnews.com/staff/laura_layden