Suitability of Non-Traded REITs

There are different kinds of real estate investment trusts (REITS) in Chicago. Generally, a non-traded real estate investment trust (REIT) is a type of real estate investment that is designed to lower or eliminate taxes for the owner of the underlying real estate, while providing competitive, higher-yield income payments to investors. Non-traded REITS aren’t traded on securities exchanges. Some investors perceive non-traded REITs as less volatile than listed REITs. However, the extent to which real estate exposure is suitable for a particular investor depends on multiple factors including the investor’s tolerance for risk, high costs, and the illiquidity of the non-traded REIT.

According to investment bank Robert A. Stanger & Co. Inc., non-traded REITS sales were at all time high of $869 million in May. The year-to-date fundraising of $3.6 billion is more than double the same period 2018. It is projected that non-traded REITs will raise more than $7 billion this year, an increase over $4.6 billion last year.

In one survey, around $7.6 billion in alternative investments was raised through retail, and these alternative investments include publicly registered non-traded REITS, along with non-traded preferred stock of traded REITS, private placement offerings, non-traded business development companies, and others.

It’s believed the trend of non-traded REITS sales will continue to increase over the foreseeable future. REITS may eventually have income generated through the real estate in which it invested, often through rental or hotel fees. However, these products melted down during the financial crisis, and we believe history may repeat itself in the investment space. FINRA and the SEC have scrutinized non-traded REITS for misleading investors about the value of these investments.

Often high fees are charged for non-traded REITs. These fees may be a maximum of 15% of the offering price, which reduces the value of the investment and leaves less money to be invested by the REIT. There may be more substantial transaction costs, as well. Some non-traded REITs have utilized the lack of transparency around the non-traded REIT to deceive unsophisticated investors.

Non-traded REITs stay illiquid for a maximum of eight years after inception, or sometimes longer. Borrowed funds may serve to pay any periodic distributions. These are not guaranteed payments and can be more than the cash flow. Sometimes the initial distributions are from the investors’ capital. The non-traded REIT has a board of directors, and it determines whether a distribution of a particular amount should or should not be paid.

Unlike traded REITS, there is a limited secondary market for non-traded REITS, and the initial fees can be significant. Usually you can only sell your shares in a non-traded REIT after a holding period of at least a year and through a limited repurchase program. Some non-traded REITS hide their illiquidity by providing grossly imbalanced repurchase programs through which investors can sell shares to others or brokers at a much lower price. Even so, there is usually an initial holding period and when lots of shareholders wish to sell, the management of the non-traded REIT may reserve the right to restrict how many shares can be sold or terminate the repurchase program.

Many investors place their trust in brokers and brokerage firms expecting that their funds are going to be professionally managed to create more wealth. However, non-traded REITs are not suitable for every investor, and brokers and registered investment advisors should disclose all material risks and must not misrepresent material risks to clients. Furthermore, brokers, brokerage firms and registered investment advisors should make suitable investment recommendations. It may be unsuitable to recommend a non-traded REIT to an investor with limited finances, an insufficiently diverse portfolio, or who has a portfolio that has not been examined for the proper asset allocation given the individual’s investment goals and risk tolerance.

If you lost money in Chicago on a non-traded REIT and you believe it was not suitable or you were defrauded, call the Stoltmann Law Offices call us at 312-332-4200 for a free evaluation. We are a contingency fee law firm, meaning we don’t get paid until you do.