Non-Traded REITs: Pass Go, Proceed With Caution
The myth that non-traded REITs are safe investment vehicles is just that – a myth.
In reality, non-traded REITs are high-risk, illiquid products that typically come with “hidden addendums” the average investor may not understand until it’s too late.
Non-traded REITs don’t trade on a national stock exchange. That’s means they are illiquid. They also lack transparency and contain limited and lengthy redemption clauses. In other words, investors may find themselves waiting a good and long time before they can cash out their investment. In addition, most non-traded REITs have higher-than-normal commissions and other upfront fees and charges. In some cases, commissions for non-traded REITs can be as high as 15%.
One of the biggest misconceptions about non-traded REITs concerns dividends. These dividends, or distributions, are not guaranteed and, as the past year has been witness to, are oftentimes suspended or stopped entirely.
As reported by REIT Wrecks, a Website devoted to the REIT sector, a number of non-traded REIT programs have eliminated or severely limited their share repurchase programs. Among them: Behringer Harvard Multi-family REIT I, Apple REIT 10, Grubb & Ellis Apartment REIT, Cole Credit Property Trust, Hines REIT, and Wells Timberland REIT.
Another concern with non-traded REITs is the accuracy of their valuation. More than two years ago, the Financial Industry Regulatory Authority (FINRA) issued a notice to broker/dealers of non-traded REITs prohibiting them from using data that was more than 18 months old to estimate the value of non-traded REIT shares. Unfortunately, some broker/dealers failed to abide by FINRA’s notice and, instead, continued to provide artificial and/or misleading per share values on their clients’ account statements.
In some instances, broker/dealers showed the value of non-traded REIT at par – typically $10 a share. The price was woefully inaccurate, however, because upfront fees, commissions and other expenses had never been taken into account.
What follows is a comment from an investor in the Behringer Harvard REIT. His response echoes that of countless investors who’ve suffered unexpected financial losses in their non-traded REIT investments.
“No one ever told me that this thing wasn’t liquid or that I couldn’t get my money out when I wanted. No one ever told me that the valuation of this investment was completely fiction. Instead, they just raised another few hundred million and then closed the doors on everyone!”