Apple REIT Non-Traded Class Action Lawsuit

Gibbs Law Group and co-counsel filed a consolidated class action complaint in February 2012 on behalf of investors who purchased shares of Apple REIT Six, Apple REIT Seven, Apple REIT Eight, Apple REIT Nine, and Apple REIT Ten through David Lerner Associates.  The Apple REITs are non-traded real estate investment trusts that invest primarily in extended stay and limited service hotels. David Lerner Associates, the exclusive seller of the Apple REIT investments, collects 10% of every share sold as commissions and expense reimbursements. Apple REITs Six, Seven, Eight, and Nine are closed to new investors, and Apple REIT Ten is still open to new investors.

The class action lawsuit alleges that, to ensure continued sale of Apple REIT shares and to continue collecting significant commissions and fees, the defendants misrepresented the investment objectives of the Apple REITs, the value of the Apple REIT shares, and the Apple REITs’ dividend payment policies. The defendants told investors that the Apple REITs were safe, conservative investments that would protect their savings from the volatility of the stock market, that previous Apple REITs had a track record of paying dividends at an annualized rate of return in the range of 7% to 8%, and that they could expect a favorable result from investing in the REITs through an eventual sale of the properties or other transaction at the term of their investment. The offerings were structured as “blind pool” offerings, in which investors committed their money before knowing what properties the Apple REITs would purchase with the net offering proceeds. Investors therefore necessarily depended on the accuracy of the defendants’ disclosures about the investment objectives and policies to assess the risks associated with investment.

The lawsuit further alleges that defendants did not fairly apprise potential investors that they had a policy of maintaining a steady 7% to 8% rate of distributions without regard to the Apple REIT’s ability to fund the distributions from operating income, and they did not disclose that the Apple REITs consistently purchased properties at prices that could not justify the distribution rates they were paying. Most of the distributions were made with return of investors’ capital and borrowed funds. For example, Apple REIT Eight paid $238.2 million in distributions to investors from 2007 to 2010, but only $82.3 million—or 35%—was paid with from cash from operations. Apple REIT Nine paid $188.5 million in distributions from 2008 to 2010, but only 22% ($42.2 million) was paid with cash from operations.

Case Status

In April 2013, the trial court issued an order dismissing plaintiffs’ complaint. Gibbs Law Group and co-counsel filed a notice of appeal of the trial court’s decision on April 12, 2013 and intend to ask the Second Circuit to review and overturn the trial court’s decision to dismiss the complaint.

We will continue to update this web page as there is news to report on the case.

Allegations of the Apple REIT Class Action Lawsuit

The class action lawsuit alleges that, to ensure continued sale of Apple REIT shares and to continue collecting significant commissions and fees, the defendants misrepresented the investment objectives of the Apple REITs, the value of the Apple REIT shares, and the Apple REITs’ dividend payment policies. The defendants told investors that the Apple REITs were safe, conservative investments that would protect their savings from the volatility of the stock market, that previous Apple REITs had a track record of paying dividends at an annualized rate of return in the range of 7% to 8%, and that they could expect a favorable result from investing in the REITs through an eventual sale of the properties or other transaction at the term of their investment. The offerings were structured as “blind pool” offerings, in which investors committed their money before knowing what properties the Apple REITs would purchase with the net offering proceeds. Investors therefore necessarily depended on the accuracy of the defendants’ disclosures about the investment objectives and policies to assess the risks associated with investment.

The lawsuit further alleges that defendants did not fairly apprise potential investors that they had a policy of maintaining a steady 7% to 8% rate of distributions without regard to the Apple REIT’s ability to fund the distributions from operating income, and they did not disclose that the Apple REITs consistently purchased properties at prices that could not justify the distribution rates they were paying. Most of the distributions were made with return of investors’ capital and borrowed funds. For example, Apple REIT Eight paid $238.2 million in distributions to investors from 2007 to 2010, but only $82.3 million—or 35%—was paid with from cash from operations. Apple REIT Nine paid $188.5 million in distributions from 2008 to 2010, but only 22% ($42.2 million) was paid with cash from operations.

Did you Invest in Apple REITs through David Lerner Associates?

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