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FINRA Cautions Investors on Non-Traded REITs

Their names include Behringer Harvard REIT I. Inland Western. Cole Credit Property Trust I.  Wells Real Estate Investment Trust II. Desert Capital. These and other non-traded REITs have become a bone of financial contention for countless investors.

The Financial Industry Regulatory Authority (FINRA) issued an investor alert on non-traded REITs in September in which it outlined potential risks of the products. Among the downsides cited: illiquidity, lack of transparency, and high commissions and other upfront fees.

Another risk associated with non-traded REITs concerns dividends, which are a key component to attracting investors. Known as “distributions” in the industry, these dividends “are not guaranteed and may exceed operating cash flow,” according to FINRA.

As a result, distributions can be suspended for a period of time or halted altogether.

That’s exactly what happened to some of the biggest non-traded REITs, including Apple REIT 10, Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Wells Real Estate Investment Trust II.

A posting on REIT Wrecks, a Web site that follows the non-traded REIT industry, describes what many investors are feeling these days about their non-traded REIT investments.

“I’ve been burned by Behringer Harvard. I sent my request for distribution in on February 10th of 2009. They denied me (and others) without any notice at their next board meeting (after making me resend the damn thing because I needed a special medallion signature stamp from my bank!). I wasn’t getting my money for any reason other than I’d been unemployed since June of 2008 and needed money to live! To find out I could only get my money out if I died was so morose and in bad taste that I wrote appeal after appeal to the board…only to be told to die or become disabled…and then ‘get in line with everyone else’.!

No one ever told me that this thing wasn’t liquid or would ever have these kinds of issues. No one ever told me that the valuation was completely a fiction. They just raised another few hundred million and then closed the doors on everyone!”

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