Written by The White Law Group• April 6, 2021• 5:58 pm• Blog, Current Investigations

Lodging Fund REIT III Update on Investigation

Did your broker recommend an investment in Lodging Fund REIT III?

The White Law Group continues to investigate potential securities claims involving broker dealers who may have improperly recommended Lodging Fund REIT III to investors.

Lodging Fund REIT III Inc., a publicly registered non-traded REIT that invests in hotel properties, has disclosed in a filing with the Securities and Exchange Commission that the regulator is conducting an inquiry into the reimbursement of certain expenses to its advisor, Legendary Capital REIT III LLC, as well as its disclosure of reimbursement policies and procedures, according to an article in the DI Wire today. The REIT notes that the inquiry was received in December 2020.

According to the filing, the REIT is cooperating with its regulators but is not “able to comment on specific details related to regulatory inquiries.” Further, the company says that it is unable to estimate the cost of complying with the inquiry or its outcome at this time.

The REIT warns that the inquiry could cause harm to their business, possibly resulting in “considerable legal expenses,” and diverting management’s attention from other business concerns. Further the company notes that “if the SEC were to determine that legal violations occurred, we could be required to pay significant civil and/or criminal penalties or other amounts and remedies or conditions could be imposed as part of any resolution.” The REIT reportedly says it can’t provide assurances to the outcome of the inquiry, according to the filings.

According to the DI Wire, the REIT raised $75.3 million in investor equity, as of the fourth quarter of 2020, and owned a portfolio of seven hotel properties purchased for approximately $100 million.

Lodging Fund REIT III, formed on April 9, 2018, focuses on “acquiring a diversified portfolio of limited service, select service and extended stay hotel properties located primarily in “America’s Heartland,” which we define as the geographic area from North Dakota to Texas and the Appalachian Mountains to the Rocky Mountains,” according to a 10-K filing.

Potential Lawsuits to Recover Investment Losses

Brokerage firms are required by the Financial Industry Regulatory Authority (FINRA) to disclose all the risks of an investment, prior to making recommendations to an individual investor. Recommendations should only be made if the investment is suitable for an individual investor given their age, investment objections, investment experience and risk tolerance.

Brokerage firms that do not perform adequate due diligence on an investment and/or make unsuitable recommendations can be held accountable for investment losses through FINRA arbitration.

High commissions could be a motivating factor for unscrupulous financial advisors to sell non-traded REITs regardless of whether the investment is in line with the client’s investment objectives and profile. Often, the total commissions and expenses make it difficult for the REIT to perform in line with the market.