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The Hidden Dangers of Non-Traded REITs

An analysis of the “distributions” of non-traded REITs sold by broker/dealer David Lerner Associates reveals that the property investments of the REITs in question largely underperformed at the level required to pay promised dividends to investors, according to an Oct. 16 story by Investment News.

The analysis went on to show that the products, known as Apple REITs, consistently “borrowed from a line of credit and used distributions that investors were recycling back into the REITs to meet the targeted dividend payout.”

A class-action lawsuit has since been filed against Lerner over the Apple REITs. According to the Financial Industry Regulatory Authority (FINRA), Lerner allegedly provided misleading performance figures for Apple REITs and implied that future investments could be expected to achieve similar results.

The Apple REIT lawsuit also sheds light on some of the potential problems concerning non-traded REITs in general. As in the case of the Apple REITs, a number of investors who have purchased non-traded REITs thought they were getting into safe, conservative investments that would protect their savings from the volatility of the stock market.

In reality, non-traded REITs can be highly risky. The products do not trade on a national stock exchange and are therefore illiquid. They also lack transparency, include limited and lengthy redemption periods, and come with exceptionally high commissions and other upfront fees and charges.

Another potential risk of non-traded REITs concerns their dividends, which are not guaranteed to investors. In the past year, a growing number of non-traded REITs have either suspended their dividends or halted them altogether.

Among those that did just that: Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Wells Real Estate Investment Trust II.

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