Recent developments suggest that most non-traded (private) real estate investment trusts (REITs) are under water even though they may be valuing their securities at cost in reports to their investors.
Exchange-traded REITs are getting “slaughtered,” according to the Wall Street Journal. In fact, the Dow Jones All Equity REIT Index experienced a negative 15% return in the third quarter of 2011. Despite the buoyancy of the broader market, REITs are selling off across the board. Investors fear that the growing debt crisis in Europe will impact U.S. banks, thereby adversely affecting the cost and availability of real estate loans.
Just as publicly traded REITs have declined in value, it appears a virtual certainty that non-exchange traded, private REITs would have experienced similar results. However, brokerage firms that sell non-traded REITS have been cited by regulators for reporting the value at cost on their account statements, despite the terrible real estate market. The Financial Industry Regulatory Authority (FINRA) recently issued an investor alert warning that sales pitches for non-exchange traded REITs gloss over the product’s lack of liquidity, high fees, and other risks and problems, such as incorrect valuations.
FINRA sued (and investors have filed numerous arbitration claims against) David Lerner Associates, Inc. for misleading investors over its Apple REIT offerings. FINRA found that Lerner misleadingly continued to report the value of its Apple REITs at cost on account statements sent to customers. In addition, distributions of 7% to 8% that Lerner paid to investors were really a return of investors’ principal or borrowed funds, because, FINRA said, the REITs could not generate distributions from operations due to the significant decline in the commercial real estate market.
Investors should scrutinize their statements to see if the value of a private REIT was reported at cost on the brokerage firm’s account statements but has recently been lowered.
Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving non-traded REITs and private placements. For further information, please contact us.