Recent Problems with Non-Traded REITs

Many non-traded real estate investment trusts (REITs) have become a mass of financial losses for investors recently – and critics of the products are placing blame squarely on various broker/dealers who misrepresented the investment’s risk factors to their clients.

Non-traded REITs enable retail investors to purchase shares in certain real estate projects, including shopping centers and large hotels.  There are several risks inherent with non-traded REITs, from lack of liquidity to inaccurate valuations of shares.

In addition, non-traded REITs typically come with hefty fees. Brokers who market and sell non-traded REITs earn up to 15% in commissions. In some cases, the lure of these high commissions have caused several brokers and financial advisors to recommend non-traded REITs to their clients when in fact the investments were entirely unsuitable for their particular risk profile.

Recent market changes have caused a number of problems in the non-traded REIT industry, including suspension of buyback programs, lower share valuations, and the elimination of dividends for investors.

Investors in Inland Western Real Estate Investment Trust know these problems first hand. Earlier this month, Inland Western was transitioned from a non-traded REIT to a publicly traded company, Retail Properties of America. Following the IPO in April 2012, Retail Properties was offered at $8, far below the expected share price of $10 to $12. Moreover, the $8 share price was actually the result of a reverse stock split. That means the true value of the investment is approximately $3.20.

For investors who originally purchased the REIT at $10, the new reality is a bitter pill to swallow.