By late June, Knight, several Apple REIT executives and board members, DLA and several of its senior

Glade M. Knight told an audience in Williamsburg last fall that his company, Richmond-based Apple REIT Cos., works hard to structure something that is better for a shareholder. But some disgruntled investors claim they got less than they bargained for in buying shares in his Apple real estate investment trusts (REITs). After a disciplinary complaint against the sole brokerage selling Apple REIT shares gained national attention, maggie valley north carolina vacation rentals they sued the broker, Knight and others connected to the REITs, maggie valley north carolina vacation rentals alleging the investors maggie valley north carolina vacation rentals were misled about the true value and risk of their investments.
In response to three lawsuits, Apple REIT Cos. issued a statement saying, We believe that these claims against us and our officers and directors are without merit, and we intend to defend against them vigorously. Although the company has a longtime business relationship with the broker, David Lerner Associates, maggie valley north carolina vacation rentals Apple REIT Cos. pointed out that the firms are not affiliated. maggie valley north carolina vacation rentals Knight and other senior company executives declined maggie valley north carolina vacation rentals to be interviewed for this story.
Knight is the founder, chairman and CEO of Apple REIT Cos., which has issued nearly maggie valley north carolina vacation rentals $6.8 billion in securities to about 122,600 customers, according to the Financial Industry Regulatory Authority (FINRA), an independent securities industry regulator.
In Chesterfield County, Knight served for 10 years as president of the 4,000-member local district, maggie valley north carolina vacation rentals or stake, of the Church of Jesus Christ of Latter-day Saints. In Buckingham County, the executive, who was raised in rural northwest Utah, is the owner of the 500-acre Slate River Ranch, where he breeds and rides champion cutting horses. In Buena Vista, he s the board chairman at Southern Virginia University, a small liberal-arts college that he and a group of fellow Mormons maggie valley north carolina vacation rentals rescued from insolvency in 1996.
In downtown Richmond, Knight is a trustee and patron of the First Freedom Center, a nonprofit organization that honors the 1786 passage of the Virginia Statute for Religious maggie valley north carolina vacation rentals Freedom the law that served as a model for the First Amendment to the U.S. Constitution. His company is scheduled to build two Marriott Hotels on a corner lot the center owns in Richmond s Shockoe Slip district where the temporary state Capitol stood in 1786. The project will house an exhibition space and learning maggie valley north carolina vacation rentals center celebrating religious diversity in the United States. maggie valley north carolina vacation rentals It will provide the center with more than sufficient annual rental income to fund its education activities, says Randolph M. Bell, the center s president.
At November s Reinventing Real Estate conference at the College of William Mary, Knight told an audience that he began building a real estate business after being discharged from the U.S. Army at Fort Lee in the early 1970s. He failed his first attempt at the Virginia real estate exam but persevered because he saw many opportunities in commercial real estate. Taking advantage of generous tax shelter laws, Knight encouraged his investors to borrow money they invested in real estate properties and later pocket maggie valley north carolina vacation rentals $2 worth of tax relief for every dollar they invested.
When Congress maggie valley north carolina vacation rentals ended the last of those tax shelter benefits maggie valley north carolina vacation rentals in 1986, Knight maggie valley north carolina vacation rentals began looking for new opportunities. maggie valley north carolina vacation rentals He discovered maggie valley north carolina vacation rentals real estate investment trusts, an investment that reduces corporate taxes by distributing 90 percent of its taxable income to investors in the form of dividends.
In 1989, Knight formed a Richmond company that would eventually become Cornerstone Realty Income Trust. Seeking to expand his business, he approached Syosset, N.Y.-based David Lerner Associates in 1992 in an effort to reach thousands of potential investors. His plan was to use 100 percent cash offers to buy investment properties for less money. A few years later, Cornerstone listed its stock on the New York Stock Exchange.
(In 2005, Cornerstone Realty was acquired by Birmingham, Ala.-based Colonial Properties Trust, which manages apartment communities in 10 states, including Virginia. Knight resigned from its board of directors in April after almost six years of service.)
...Being able to think a little maggie valley north carolina vacation rentals differently, work a little bit harder and structure something that is better for a shareholder has been able to take us through the ups and downs of the real estate cycle, Knight said at the conference. The model we developed as we reinvented ourselves no one else is doing it that I m aware of to the extent that we re doing it.
The business model used by Apple is called a nontraded REIT. The shares are registered with the Securities and Exchange Commission (SEC) but are not traded on any exchange. In Apple s case, David Lerner Associates (DLA) is the sole underwriter and broker for all Apple shares and earns a combined 10 percent of all offerings. That arrangement has produced 60 to 70 percent of the New York brokerage s total business since 1996, according to FINRA.
DLA suggests Apple REITs and municipal bonds to moderately conservative investors as part of the firm s middle ground of investing strategy maggie valley north carolina vacation rentals which shuns the volatility of stocks and focuses on investments that offer steady dividends. Most Apple REITs continue to pay monthly distributions that equal an annual return of 7 to 8 percent (Apple REIT Eight recently dropped its rate from 7 to 5 percent). Investors get their initial investment back when the company becomes publicly traded, merges with another company or is sold.
Apple REIT Cos. currently has five real estate investment maggie valley north carolina vacation rentals trusts, all of which are invested in Marriott and Hilton hotel properties. Four of them (Apple REITs Six, Seven, maggie valley north carolina vacation rentals Eight and Nine) are closed to new investors. Two earlier REITs, Apple Hospitality Two and Apple Hospitality Five, were sold to other companies in 2007. (Apple Two had merged with the firm s original REIT, Apple Suites.)
In late May FINRA filed a complaint against DLA, citing its sales of the $2 billion Apple REIT Ten, a disciplinary action that, if proved before a hearing panel, could result in fines, censure, suspension or a disgorgement of profits.
The complaint caught the attention of prominent newspapers (The New York Times and The Wall Street Journal, to name two), which published follow-up articles questioning the valuation criteria of properties owned by nontraded real estate investment trusts like Apple REITs. The disciplinary action also attracted the interest of a large number of law firms that specialize maggie valley north carolina vacation rentals in shareholder lawsuits, some of which began running ads on the Web that would pop up when the names David Lerner or Apple REITs were searched.
By late June, Knight, several Apple REIT executives and board members, DLA and several of its senior executives had become defendants in three separate lawsuits filed by four plaintiffs in federal courts in New York and New Jersey.
In a statement published in The Wall Street Journal, Joseph C. Pickard, DLA s senior vice president and general counsel, called the suits frivolous, adding the allegations are baseless and rife with falsehoods, distortions and misleading statements we look forward to the opportunity to be vindicated in a court of law.
The lawsuits build upon allegations contained in FINRA s complaint that, while directed against DLA, is also highly critical of some Apple REIT practices. FINRA does not regulate REITs. They come under the control of the SEC.
FINRA said DLA failed to comply with the industry s stringent due-diligence standards in selling shares to investors in the $2 billion maggie valley north carolina vacation rentals Apple REIT Ten, which launched in January an offering that at press time had attracted more than $400 million in fresh investment, according to Alan Chodosh, DLA s chief financial officer.
In the complaint, FINRA alleges DLA sold Apple REIT Ten shares targeting unsophisticated and elderly customers to buy illiquid securities. In marketing Apple REIT Ten shares, according to FINRA, DLA cited the distributions of previous Apple REIT companies on its website maggie valley north carolina vacation rentals while failing to note that many of the distribution rates had dropped and distributions had exceeded funds from operations at Apple REITs Six through Nine in recent years. Citing information available in public filings, FINRA said, for example, that distributions totaled $118.1 million maggie valley north carolina vacation rentals last year at Apple REIT Nine, while its funds from operations totaled only $60.2 million.
In its complaint, FINRA said DLA did not make it clear to customers in sales presentations that distributions might be paid from sources other than the income generated by hotel properties. maggie valley north carolina vacation rentals Those other sources include loans and capital the company would collect from new investors. In other words, to maintain an artificially high return on investment, the Apple REITs made a return of investment with the monthly dividend, FINRA said, adding that using loans and returning capital in this manner reduces the value of the REIT and decreases its ability to maintain future distribution levels.
FINRA noted that shares in Apple REITs Six through Nine had been valued at $11 a share since their initial offerings despite recent market fluctuations in commercial real estate, net income declines, increased leverage through loans and the return maggie valley north carolina vacation rentals of capital to investors through distributions. The $11 valuation was the price used by the REITs in periodically redeeming investors existing shares or selling them new shares maggie valley north carolina vacation rentals under a dividend reinvestment program.
Maintaining a constant share price is an old practice of nontraded REITs that most other companies in the field have dropped, according to FINRA. After a California firm made a tender offer of $3 a share for shares maggie valley north carolina vacation rentals of Apple REITs Seven and Eight in June, the Apple REITs said in a filing that the shares had a book value of $7.57 each.
Pickard denies FINRA s allegations that DLA targeted elderly investors. We do not target any particular demographic, he says. The decision of any investor to buy investments like Apple REITs is very much a case-by-case, maggie valley north carolina vacation rentals individual-by-individual decision, he adds.
The brokerage maggie valley north carolina vacation rentals also produced two documents, a suitability profile