Hartman VREIT Investors Asking Questions as REIT Issues “Going Concern” Warning

Stoltmann Law Offices is investigating cases where financial advisors have recommended Hartman VREIT XXXI.

In a recent filing with the U.S. Securities and Exchange Commission (SEC), Hartman, a non-traded real estate investment trust, stated that its management is in “substantial doubt about the company’s ability to continue as a going concern,” according to thediwire.com. Hartman stated in investor documents its vREIT XXI invests in “value-oriented” commercial properties, including office, retail, industrial, and warehouse properties located primarily in Texas, that the company believes have the potential for growth in income and value from re-tenanting, repositioning, redevelopment, and operational enhancements.”

More importantly, Hartman stated management has concluded that there is substantial doubt about the company’s viability “within one year of the issuance date of their third quarter consolidated financial statements due to the fact of the uncertainty regarding the loan maturities.”

That means the company is struggling to pay investors. To date, several non-traded or “private” REITs have reported difficulties in maintaining high-yield dividends. They have been popular with brokers, however, who can reap high commissions for selling them. “The private REITs also have very high fees, partly because financial advisors are paid big commissions to sell the shares,” according to RetirementWatch.com. “Expenses can take up to 14% of initial investments. In addition, the REIT sponsor usually has one or more subsidiaries that are paid to manage the properties, sell the shares, and perform other duties. These services are not competitively bid.”

In addition, “private REITs tend to buy ‘trophy properties.’ These are famous or prominent properties, usually office buildings, that are known to impress investors. They tend to give investors a sense of security, because they are well-known and often have well-known tenants. But real estate professionals believe that the private REITs generally overpay for the properties. That is partly why prices of many office buildings climbed during the last recession though vacancy rates were climbing.”

But slick sales pitches don’t mean private REITs have been a good investment. “Private REITs have boomed over the last few years, but generally are untested. None of the sponsors has shown an ability to return principal to investors, either through a public offering or from liquidating properties. The investments seem similar to the old tax shelter partnerships, and there’s a good reason why. Many of the firms that sell them used to put together the tax shelter partnerships.”

Here’s another wrinkle brokers failed to tell investors: “When a REIT decides to begin liquidating, it could take years to sell the buildings at prices the REIT wants to accept. A public listing also might not be much of an option. For example, one private REIT recently tried to go public. After selling shares to investors for years at $20, it found that public investors would value the shares at around $12, according to The Wall Street Journal. The public offering was canceled. The REIT needs another plan to give investors liquidity.”

Brokerage firms and investment advisors are legally required by regulators to monitor what their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk and return information about the investments sold. Broker-dealers and advisors are also required to fully vet all of the investments they are selling to determine if they are suitable for your age and risk tolerance. Brokerage firms are also required to follow Regulation Best-Interest and to perform reasonable due diligence on an investment before their advisors are even allowed to sell them. It is difficult to justify recommendations to invest in securities like Hartman VREIT that pay massive commissions under Regulation Best Interest.

Investors can file FINRA arbitration complaints if these rules are broken. Alternative investments like the Hartman VREIT are speculative by definition and only suitable for a very small slice of the retail investing world. If you have more than 10% of your investment portfolio locked-up in alternative investments like Hartman VREIT, it is likely that asset allocation is unsuitable for your risk profile.

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!