Lodging Fund REIT III Lawsuit Investigation Update September 2026
Have you suffered losses investing in Lodging Fund REIT III Inc.? The White Law Group continues to investigate potential securities claims involving broker-dealers who may have improperly recommended Lodging Fund REIT III to retail investors. FINRA arbitration attorneys at our firm are tracking several new developments, including a formal SEC ruling on how the fund’s Fair Fund will be distributed.
September 2026 Update: SEC Approves Fair Fund Distribution to Investors
On July 6, 2026, the SEC formally approved the Plan of Distribution for the Lodging Fund REIT III Fair Fund, moving the roughly $4.77 million fund from a proposal to a final, approved plan. Lodging Fund REIT III and a related fund had reportedly objected to the plan, arguing the money should go to the REIT itself rather than to harmed investors. The SEC rejected that objection, finding that paying the REIT instead of investors could shortchange harmed investors and create a windfall for the very entity the Commission found had misallocated the funds in the first place. With the plan now approved, investors who qualify should begin seeing the claims process move toward an actual payout rather than a proposal.
REIT Explores a Sale as Distributions Remain Suspended
Lodging Fund REIT III has not paid a distribution to common stockholders since August 2024 and declared none at all during 2025, according to its own SEC filings. In April 2026, a special committee of independent directors retained investment bank Piper Sandler & Co. to evaluate strategic alternatives, which the company says could include a sale, merger, stock exchange listing, or continuing its current business plan. The REIT has also continued selling off hotels to raise cash, with its portfolio shrinking from the original 19 properties to roughly a dozen as of mid-2026. Investors should understand that a sale or merger could set the price at which their shares are ultimately valued, separate from any Fair Fund recovery or FINRA arbitration claim.
Hotel Sales and a Shrinking Portfolio
Legendary Capital announced the sale of two hotel assets held by Lodging Fund REIT III in late 2025: the Hampton Inn Fargo in North Dakota sold December 17, 2025 for $10.5 million, and the Home2 Suites by Hilton in Prattville, Alabama sold December 30, 2025 for $16.7 million. The Hampton Inn Fargo was originally acquired in 2022 for approximately $11.4 million, and the Home2 Suites Prattville was purchased in 2019 for approximately $14.75 million, both figures excluding transaction costs. The company has continued selling properties since then as part of its broader liquidity strategy.
SEC Fair Fund for Lodging Fund REIT III Investors
The SEC’s underlying order, issued August 28, 2023, found that from 2014 to 2020, Legacy Hospitality II, LLC, Legendary Capital REIT III, LLC, and principal improperly directed two REITs, including Lodging Fund REIT III, to reimburse approximately $5 million in overhead expenses in a manner inconsistent with disclosures made to investors. Without admitting or denying the findings, the respondents agreed to a cease-and-desist order and to pay a combined $4,766,344.17 in disgorgement, prejudgment interest, and civil penalties, which the SEC placed into a Fair Fund under the Sarbanes-Oxley Act. With the Plan of Distribution now approved, the Fair Fund will compensate eligible investors for losses tied to the improperly allocated expenses. Even if you qualify for Fair Fund compensation, you may still have the right to pursue additional recovery through FINRA arbitration.
Financial Reporting Delays Continue
Lodging Fund REIT III has a pattern of late SEC filings. Its 2023 annual report was filed roughly nine months late, and multiple 2023 and 2024 reports were delayed. That pattern has continued into 2026: the company’s 2025 annual report was filed roughly six weeks past its deadline, and both its first and second quarter 2026 reports remained outstanding as of this writing. In December 2024, the REIT amended its revolving line of credit, increasing borrowing capacity from $5 million to $20 million and extending the maturity date to December 31, 2027. Persistent filing delays in a non-traded REIT can be a red flag for investors evaluating its transparency and financial health.
Non-Traded REIT Risks: What Investors Should Know
Lodging Fund REIT III is a publicly registered, non-traded REIT. Unlike exchange-traded REITs, non-traded REITs are illiquid, can carry upfront commissions as high as 15%, are difficult to independently value, and are subject to distribution suspensions like the one Lodging Fund REIT III has been under since 2024. Hospitality-focused REITs are also particularly sensitive to rising interest rates, economic slowdowns, travel demand volatility, and capital expenditure requirements. Many retail investors were not fully informed about these risks when they invested.
Broker Due Diligence and Suitability Obligations
Under FINRA rules, brokerage firms must conduct reasonable due diligence on REIT offerings like this one, confirm recommendations are suitable based on an investor’s age, net worth, liquidity needs, and risk tolerance, and fully disclose material risks and conflicts of interest. If your broker recommended Lodging Fund REIT III without adequately explaining its liquidity constraints, fee structure, or the regulatory issues tied to the fund, you may be able to recover your losses through FINRA arbitration.
Class Action Lawsuit vs. FINRA Arbitration
Investors frequently ask whether to join a class action or file an individual FINRA arbitration claim. A class action can make sense for smaller losses, since recovery is shared among many investors, while FINRA arbitration is often the better path for losses exceeding $100,000, since it’s tailored to your individual circumstances and can allow for a larger recovery. The right path depends on the size of your loss and how the investment was recommended to you.
Recovery of Investment Losses – Lodging Fund REIT III
If you invested in Lodging Fund REIT III and experienced losses, you may be able to recover damages from your brokerage firm, not just through the Fair Fund. The securities fraud attorneys at The White Law Group, with offices in Chicago and Seattle, have handled more than 800 FINRA arbitration cases nationwide. We investigate claims involving unsuitable recommendations, failure to conduct due diligence, misrepresentation of non-traded REIT risks, and overconcentration in illiquid alternative investments. For a free consultation, call (888) 637-5510 or contact us online.
Frequently Asked Questions (FAQs)
1. What is the Lodging Fund REIT III lawsuit about?
It centers on SEC findings that the fund’s advisor and its principal improperly directed the REIT to reimburse roughly $5 million in overhead expenses that offering documents said the advisor, not the REIT, was supposed to cover. Investors who bought shares based on those disclosures may have grounds to recover losses tied to the misallocated expenses.
2. What is the status of the Lodging Fund REIT III Fair Fund?
The SEC approved the final Plan of Distribution on July 6, 2026, after rejecting the REIT’s own objection to redirect the Fair Fund to itself instead of investors. The roughly $4.77 million fund will now be distributed to eligible harmed investors under that approved plan.
3. Does the REIT’s search for a sale affect my ability to bring a claim?
No. Whatever price Lodging Fund REIT III ultimately fetches in a sale, merger, or listing is separate from any claim you may have against the broker who recommended the investment to you. Asset sales and a strategic review don’t eliminate potential broker liability if the REIT was unsuitable for your investment objectives in the first place.
4. Can I still file a claim if there is a Fair Fund?
Yes. The Fair Fund compensates investors for the specific harm tied to the misallocated expenses, but it doesn’t prevent you from filing a separate FINRA arbitration claim against your broker or brokerage firm for unsuitable recommendations or misrepresentations.
