The independent broker-dealers that sell non-traded real estate investment trusts (REITs) are reportedly trying to reduce their own risk by raising their due diligence standards. More stringent standards means fewer non-traded REITs being put on brokers’ approved lists to sell. At the same time, the number of non-traded REITs on the market is at an all-time high of 68, and sponsors are beating the bushes to keep them on the brokers’ shelves, according to Bruce Kelly’s InvestmentNews article, “Indies cut back on some REITs to lessen risk.”
This follows well-publicized lawsuits brought by FINRA and individual investors against David Lerner Associates, Inc. over its Apple REIT offerings. FINRA found that the “outsized” distributions of 7% to 8% that Lerner paid to investors was really their own principal or money borrowed by Lerner. The distributions obscured the fact that the REITs could not generate distributions from operations because the commercial real estate market was terrible. Lerner also misleadingly continued to report the value of its Apple REITs at cost on account statements sent to customers, according to FINRA.
The article identified the following broker-dealers as having cut the number of non-traded REIT offerings on their shelves: National Planning Holdings Inc. (which includes National Planning Corp., Invest Financial Corp., Investment Centers of America Inc., and SII Investments Inc.) and Next Financial Group Inc.
Non-traded REITs that are removed from brokers’ approved lists because they are deemed to be too risky may not be able to fund operations, and thus may become even more risky for investors. “As a broker-dealer, you’ve got to be really worried if your [REIT] sponsor is not raising much money,” Mr. Chitty was quoted as saying, adding: “If you’re not raising capital, you can’t fund property acquisitions or get meaningful diversification. Running a publicly registered company is expensive, and you need a good asset base to drive that.”
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