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Non-Traded REITs: A Darker Side Can Loom Large

An April 1 article by Investment News offers insight into the potential downside of non-traded real estate investment trusts (REITs).  Shortly after investor Susan Fox, 63, bought a non-traded REIT – Inland American Real Estate Trust – for her IRA from her broker, it began to decline in value. Her broker, however, dismissed the losses and went on to sell her a second non-traded REIT.

The second REIT, Cornerstone Core Properties REIT, also is tanking in value. In March 2012, the Cornerstone REIT had fallen more than 70% in value – to $2.25 per share, from $8.

Adding to Fox’s financial woes is the fact that the REITs are part of her IRA, which in 2008 had $105,000 in it. The REITs accounted for $56,616 of her account, or almost 54%, according to the Investment News article.

In July 2010, she instructed her broker to sell her non-traded REITs but learned she was unable to do so. That’s because non-traded REITs have specific redemption policies; in most cases, money in non-traded REITs is tied up for seven or more years.

Fox’s dilemma strikes a familiar and painful chord with many non-traded REIT investors.  Non-traded REITs can be highly risky. Because they do not trade on a national stock exchange, non-traded REITs are considered illiquid investments – a fact that many investors, including Fox, are often unaware of until it’s too late.

Non-traded REITs also lack transparency, have limited and lengthy redemption periods, and come with exceptionally high commissions and other upfront fees and charges.

Another potential downside of non-traded REITs concerns dividends, which are not guaranteed to investors and can be halted at any time. In the past year, a growing number of non-traded REITs have either suspended their dividends or stopped them altogether. Among them: Behringer Harvard REIT I, Cole Credit Property Trust, Hines REIT and Apple REITs.

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