Is There a Future for NonTraded REITs?


The four top selling nontraded real estate investment trusts have either closed or say they intend to close soon. This has left industry participants wondering whether new players will be able to fill the void. “As top nontraded REITs close, doubt over new ones,” InvestmentNews). Industry participants apparently believe the $9 billion nontraded REITs market is still popular with investors. But that may not be the case for long as negative press reports, well-publicized disciplinary actions and investor arbitration claims have increased investors’ awareness of the risks of these alternative investments. In fact, Registered Rep Magazine, a publication geared to brokers, recently published an article reporting that the securities industry is beginning to take notice of these storm warnings in the nontraded REITs arena. (“NonTraded REITs Raising Red Flags in the Industry,” Registered Rep).

In recent months, the following developments, among others, have disrupted the nontraded REIT market:

? Adverse press coverage – MarketWatch’s Chuck Jaffe listed nontraded REITs as his “Stupid Investment of the Week,” noting that investors who are interested in adding real estate to their portfolios should buy publicly listed (i.e., traded) REITs. Likewise, Philip J. Martin of Morningstar said: “Presently, Morningstar does not believe a significant investment in nonlisted REITs makes sense for most investors as there are still too many drawbacks and unresolved issues. We believe listed REITs to be the most appropriate option, from the standpoint of both the alignment of shareholder interests and long-term risk/return potential.”

? Adverse regulatory actions – The Financial Industry Regulatory Authority (FINRA) recently fined Atlanta-based Wells Investment Securities $300,000 for misleading investors about its Timberland non-traded REIT. Similarly, FINRA filed a disciplinary proceeding against David Lerner Associates for misleading investors by pricing its Apple REITs at cost ($11 per share) on account statements when the underlying assets were worth much less and making distributions to investors that consisted of borrowed money and investors’ principal because the REITs’ performance did not support the payments. FINRA also charged Lerner with “targeting unsophisticated and elderly customers with unsuitable sales of this illiquid security” and misled them regarding the record of earlier Apple funds.

? Adverse regulatory announcements – FINRA has issued an “Investor Alert” on the subject of non-traded REITS, warning of high upfront fees, illiquidity, lack of transparency, poor due diligence by selling brokers, and other problems.

As nontraded REITs close, it will be interesting to see how many fulfill the representations and promises made to investors when they were sold.

Page Perry is an Atlanta-based law firm with over 170 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 other alternative investments. For further information, please contact us.