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Non-Traded REITs: Look Before You Leap

Non-traded REITs can be tricky, sometimes confusing investments. While they certainly can generate profits, they also come with unique and hard-to-discern risks. Following a major downturn of the market in 2008, the non-traded REIT industry took a nose dive. Investing largely in commercial real estate, many of the biggest non-traded REITs - including Behringer Harvard REIT I, Inland American Real Estate Trust and Inland Western Retail Real Estate Trust - slashed dividends or drastically limited their redemption programs.

In recent months, many investors have filed formal complaints against various broker/dealers who sold them shares in non-traded REITs. Most of the allegations stem to charges of misinformation and undisclosed risks regarding the investments.

Unlike their publicly traded counterparts, non-traded, or unlisted, REITs are illiquid, high-commission investments. Non-traded REITs dictate when investors can actually redeem their shares. In most instances, this “waiting period” is seven years or more.

The products themselves raise money for purchases by selling shares to investors via broker/dealers. In turn, the broker/dealers collect hefty commissions. When all is said and done, fees and commissions can claim up to 15% of an investor's outlay.

Non-Traded REITs blog

Another important factor to be aware of when considering a non-traded REIT as an investment is the leverage ratio involved.

This spring, the Financial Industry Regulatory Authority (FINRA) stepped up its scrutiny of non-traded REITs by formally examining the marketing practices of broker/dealers selling non-traded REITs. FINRA first launched probes into non-traded REITs in March 2009, issuing letters for information from 10 to 20 of the most active broker/dealers in the market, according to a June 1 story by Bloomberg.

As reported in the Bloomberg story, non-traded REITs tend to attract unsophisticated investors who may not thoroughly understand the extent of the risks that the products present. Those risks include lack of share trading; fees that can dramatically reduce returns; share devaluations; dividend cuts; and the suspension of buyback programs.

According to Bloomberg, Behringer Harvard REIT I, which raised $2.9 billion from its 2003 launch through the end of its final offering period in December 2008, reduced its share value in May 2010 to $4.25 and cut its annualized dividend rate to 1 percent. For investors like 49-year-old Larry Lipman, the revaluation was devastating financially.

Lipman contends that he would never have bought the shares if his financial adviser had properly explained that the companies weren't listed. “Shareholder value of a private fund is based on fantasy,” Lipman said in the article.

Maddox Hargett & Caruso currently is investigating sales of non-traded REITs on behalf of investors. If you believe your broker/dealer or financial adviser misrepresented the facts concerning investments in a non-traded REIT, please contact us.