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The Valuation Problem of Non-Traded REITs

When the non-traded Inland Western REIT went public recently, investors who owned previously purchased shares got their first look at the investment’s true value. What they discovered wasn’t pretty. Shares that were valued in June 2011 at $6.95 were valued at the IPO for $3.20 – a price that required a complex reverse stock split. For investors who bought Inland Western at its original share price of $10 a decade ago, the new price meant they lost some $65% of their original investment.

Other investors in non-traded REIT are in the same boat. Robert Block, a 74-year-old retiree in Florida, invested more than $400,000 in several non-traded REITs from 2006 to 2008 on the advice of investment adviser who told him the investment’s dividends were attractive and the REITs were “about as safe as anything you could get.”

As reported in a story by the Wall Street Journal, Block’s $400,000 investment was valued at about $300,000 based on REIT share valuations earlier this year.

“I needed income that I could count on and wasn’t risky,” said Block, who is seeking damages from his investment adviser in an arbitration case with the Financial Industry Regulatory Authority (FINRA), in the WSJ story.

Dividend cuts also have been an issue for non-traded REIT investors. In April, KBS Real Estate Investment Trust I told shareholders it was suspending its monthly dividend of 5.25%. It also marked down its share price by 30%, to $5.16.

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