The Problem With Non-Traded REITs

Risk, risk, risk…that’s the reason why a growing number of broker/dealers say they are cutting back on sales of non-traded real estate investment trusts (REITs) to retail investors.

Problems with non-traded (REITs) include lack of transparency, illiquidity, limited redemptions and, sometimes, inaccurate valuations. Among the non-traded REITs that have turned sour for investors in the past year: Behringer Harvard REIT, Inland American, Cornerstone Growth & Income, Cole Credit Property, among others.

As reported Sept. 18 by Investment News, more independent broker/dealers are bailing or reducing their non-traded REIT offerings, citing concerns with REITs’ expenses and how the REITs pay for their dividend, or “distribution,” to investors.

In the past year, more investors – many of whom are retirees or elderly – bought into non-traded REITs only to see their dividends fall by the wayside, their share values evaporate and their ability to sell their REIT shares curtailed.

According to a June 2 article by Kiplinger, unlisted REITs’ promises of stability and steady income have helped the products take in billions of dollars of cash from investors. Non-traded REITs attracted $8.3 billion in 2010, up 28% from 2009, and total assets reached roughly $72 billion, according to Blue Vault Partners, a research firm that tracks non-traded REITs. A record 15 new unlisted REITs launched last year, bringing the total to 61 at the end of 2010.

The growth and popularity of non-traded REITs have come amid heightened scrutiny from regulators, however. In 2009, the Financial Industry Regulatory Authority (FINRA) requested information from some dozen broker/dealers of non-traded REITs about their commissions, disclosure of risks to investors and other details. Since then, several formal investigations into sales practices have begun.

Because non-traded REITs don’t trade on national stock exchanges, investors who plan to sell their shares can find the process difficult at best. Non-traded REITs have limited share repurchase programs, and they tend to disappear if the market becomes volatile. In most cases, investors are required to hold onto an unlisted REIT share for seven to 10 years.

Declining share values and distributions are other concerns associated with non-traded REITs. Just ask Ted Horita, an 81-year-old retiree. Horita filed a FINRA arbitration claim against Ameriprise Financial Services this year in which he says he’s invested more than $350,000 in Inland American REIT in 2007 on the advice of his Ameriprise broker.

In March 2009, Inland American suspended its share repurchase program. That same year, Inland paid distributions of about 50 cents per share, down from 62 cents in 2008. In 2010, the estimated share value of Inland American fell by 20%, according to the Kiplinger article.

Horita claims that his broker failed to adequately disclose the risks of the REIT; instead, he says the product was presented as a solid, risk-free investment.

If you’ve experienced financial losses in a non-traded REIT such as Behringer Harvard REIT I, Inland American, Inland Western, Cole Credit Property Trust I or Desert Capital, please contact us to tell your story.