Apple REIT Eight’s Distributions and Redemptions May Be Unsustainable

IRS rules mandate that REITs, such as Apple REIT Eight, must pay out at least 90% of their taxable income to investors in order to maintain REIT status for tax purposes.  Most REITs are structured so that their distributions and redemptions meet, or just barely exceed this minimum threshold. 

In contrast, Apple REITs, including Apple REIT Eight, are generally sold as “safe” investments that carry a consistent 7% return on principal whether or not the economy is good or the underlying properties are generating income. As a result of this consistent rate of return, the Apple REITs (including Apple REIT Eight) must pay investors dividends whether or not there is a positive cash flow.

Some recent 10-K filings from Apple REIT Eight support this conclusion:

• 2007: 30% ordinary income and 70% return of capital;
• 2008: 53% ordinary income and 47% return of capital;
• 2009: 33% ordinary income and 67% return of capital; and
• 2010: 42% ordinary income and 58% return of capital.

Based on the illustration above, in every year except in 2008 the return of capital to investors exceeded the ordinary income generated by Apple REIT Eight. What this may mean for investors is that the distributions and redemptions largely are coming from offering proceeds and debt.

In light of the recent 8-K SEC filing that announced another $20 million loan that was personally guaranteed by Glade M. Knight, Apple REIT Eight’s Chairman and Chief Executive Officer, it seems likely that Apple REIT Eight is being forced to borrow to meet continue to meet investor distribution and redemption requests.   Moreover, the fact that lenders required that this loan be personally guaranteed by the assets of Glade Knight himself suggests that lenders are not be confident in Apple REIT Eight’s ability to continue to borrow money to pay investor distributions and redemptions.

If you have invested in Apple REIT Eight upon the recommendation of David Lerner Associates and if you are concerned about the ability of Apple REIT Eight to continue to pay distributions or meet redemption requests, please contact one of our attorneys at 312-332-0000.  Our attorneys are representing investors who have suffered losses investing in Apple REIT Eight along with those who are seeking to rescind (get out of) their investment in this product.