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Non-Listed REITS

Certain Non-Listed REITs Spell Trouble For Unsuspecting Investors

Critics of non-listed real estate investment trusts (REITs) say the vehicles are often a financial disaster waiting to happen. Among their potential problems: excessive broker fees of up to 15%, illiquidity, opaque disclosures, and valuation issues. Case in point: Inland American Real Estate Trust and Inland Western Retail Real Estate Trust.

Created in 2003 by Oak Brook-based Inland Group, the largest sponsor in the United States of unlisted REITs, Inland Western has faced ongoing cash-flow issues in 2009. Earlier this summer, Chicago Real Estate Daily.com reported that Inland Western had defaulted on several property loans, as well as pushed back maturity dates of others. As of May 2009, Inland Western subsidiaries defaulted on six mortgage loans - totaling $54.9 million - according to a quarterly report filed with the Securities and Exchange Commission (SEC). The company expects more defaults in the future.

In March 2009, Inland Western slashed its dividend by 70%. It also has suspended its share-repurchase program, which places many shareholders who wanted to sell their investment in a state of perpetual financial limbo.

Investors could have even more reasons to worry about Inland Western. The company needs to refinance $1.1 billion in debt that comes due this year and $1.3 billion that is due in 2010. At a time when the country is immersed in one of the worst real estate lending market in decades, refinancing 2.4 billion in debt could prove difficult.

Meanwhile, Inland Western's sister company, Inland American, is facing problems of its own. It, too, suspended its buyback program in March, leaving investors with two options. They can hold onto their shares until buybacks are re-instated or they can try to sell their shares on the secondary market. The problem with the latter has to do with price. Shareholders can expect to get as little as $4 for their Inland American shares. Prior to the suspension of the buyback program, however, the company was offering $10 a share.

Unlisted REITs are considered unique financial products unto themselves in that they are public but their shares do not trade on a stock exchange. For many investors, the lack of transparency, illiquidity and high commissions and fees associated with unlisted REITs makes them entirely unsuitable investments, especially for elderly or retired investors.

Unfortunately, some brokerages and financial advisers never disclosed all of the facts about Inland Western, Inland American and other non-traded REITs. Instead, the lure of hefty commissions and fees prompted many firms and brokers to market unlisted REITs as an investment similar to certificates of deposit - something that would denote safety and low risk.

In March 2009, the Enforcement Department of the Financial Industry Regulatory Authority (FINRA) placed non-traded REITs under the microscope, issuing a notice to an undisclosed number of broker-dealers for information about the marketing tactics they used to promote and sell these products to retail investors.

If you've sustained losses in the Inland American Real Estate Trust or the Inland Western Retail Real Estate Trust, contact us. We can advise you on your legal options.

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