The Financial Industry Regulatory Authority (FINRA) has issued an Investor Alert regarding non-traded Real Estate Investment Trusts (REITs). Non-traded REITS carry significant risk to investors. FINRA is concerned that sales agents are not explaining those risks to investors.
The risks include:
- Front-end fees can be as high as 15%.
- Early redemption is restricted and may be expensive. Redemptions may be priced below the purchase price or current price.
- Non-traded REITS are illiquid, making them hard to value and trade. The secondary market, if any, is very limited.
- Non-traded REITS generally are not subject to the same disclosure requirements as public non-traded REITs. This makes it extremely difficult for investors to make an informed decision about the investment.
- Distributions may exceed cash flow; i.e., they may consist of investors’ principal or borrowed money that does not come from income generated by the underlying real estate.
- Distributions can be suspended or stopped altogether.
- Distribution are taxed at higher ordinary income tax rates, not the lower capital gains tax rate.
Apparently acknowledging that recommendations investors receive from their brokers are conflicted, FINRA warns that “it is a good idea to have the [non-traded REIT] investment reviewed by an investment professional who understands the product and can offer impartial advice. ‘ Be wary of pitches or sales literature offering simplistic reasons to buy a REIT investment. Sales pitches might play up high yields and stability while glossing over the product’s lack of liquidity, fees and other risks. Ask whoever is recommending that you purchase a REIT how much they (and their company) are receiving in selling commissions or other fees.”
FINRA’s alert follows the 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 consisted of a return of investors’ principal or money borrowed by Lerner. The distributions hid the fact that the REITs could not generate distributions from operations because the commercial real estate market had declined significantly. Lerner also misleadingly continued to report the value of its Apple REITs at par value (i.e., the purchase rice paid by investors) on account statements sent to customers, according to FINRA.
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.