FINRA Comes Down on Non-Traded REITs, Private Placements
Non-traded real estate investment trusts (REITs) and private placements have been under the microscope of the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission since 2009, and it appears the scrutiny is growing. Last week, FINRA’s board of governors authorized staff to issue a regulatory notice that would change how broker/dealers show the estimated value of a non-traded REIT on clients’ account statements.
The growth of the non-traded REIT sector has intensified in the past decade. According to Blue Vault Partners, a research firm in Cumming, Georgia, the non-traded REIT industry has more than doubled and now has 63-plus sponsors. Last year, these sponsors raised $8.5 billion, a 30% increase from 2009. As much as $10 billion may be raised this year, according to Blue Vault.
Critics of non-traded REITs are not impressed, citing a number of issues with the investments. Among them: High upfront fees that lower the investment’s value by as much as 17 cents on the dollar. Sales commissions and fees also are high – typically 10%. Then there’s the lack of transparency regarding how companies value their real estate holdings, not to mention conflicts of interest because the sponsor generally invests little in the REIT but owns the entity that collects the fees.
In May, non-traded REITs were again in the news when FINRA filed a complaint against New York broker/dealer David Lerner Associates. In the complaint, FINRA accused Learner of aggressively marketing $300 million worth of shares of the non-traded Apple hotel REIT to unsophisticated and elderly customers without telling them that the income from the stock was insufficient to support the dividends.
Similarly, other non-traded REITs have lowered their market value to an amount well below the initial $10 offering price. As reported July 19 by the New York Times, American Realty Capital Trust recently reported that its shares, which had been sold at $10, are now worth $6.62.