Private REITs (such as the Apple, Behringer Harvard, Cole, Hines, Inland, and Wells REITs) were once touted by investment advisors to be safe, dividend-paying investments. Similar to traditional REITs but not traded on any exchange, these could provide regular income to investors without having their value rise and fall with the pressures of the open market. Often involving risky real estate properties, they could provide strong returns to investors, sometimes as high as 10%. These high returns, combined with the unusually high fees and commissions brokers could take for themselves when selling these funds, made them a popular investment – according to research firm Blue Vault Partners LLC, non-traded REITs raised $8.1 billion in fresh capital in 2010 alone.
Unfortunately, it is precisely the fact that these trusts are not traded that provides the potential for disaster. If, say, the US real estate market suddenly suffers a steep deREIT wreckscline not seen since the Great Depression, a private REIT’s administrators can choose to suspend dividend payments in order to stay liquid. Because these are not traded on any open market, the only way an investor can offload them is by selling them back to the REIT through its buyback provision. When things are not going well, the trust can choose to suspend buybacks as well, leaving investors with non-dividend paying, illiquid investments of indeterminable value. Nontraded REITs are not as regulated as their traded counterparts and can operate with little transparency, further increasing the potential for misconduct. Investors are often surprised to find they are bound by long and complicated exit clauses when they try to liquidate their holdings.
There are several documented examples of brokerage firms selling these investments to elderly and unsophisticated investors without alerting them about these risks or using downright misleading promotional materials – click HERE to read our blog post about FINRA’s action against David Lerner and Associates related to its sale of the Apple Ten REIT. The illiquid nature of non-traded REITs makes them completely unsuitable for elderly and retired clients. Other private REITs that have suspended or cut dividends include Behringer Harvard REIT, Cole REITs, Hines REITs, Inland REITs, Wells REITs, and many more.
Individuals who suffered losses from investments in untraded or private REITs can contact attorney Robert H. Rex or Nan Thompson at the law offices of Dickenson, Murphy Rex and Sloan PA. Mr. Rex is dedicated to pursuing claims on behalf of investors and practices exclusively in the field of securities arbitration.