A real estate investment trust (“REIT”) is a corporation, trust, or association that owns, and may also manage, income-producing real estate. Pursuant to federal law, a REIT is required to distribute at least 90% of its taxable income to investors in the form of dividends. Unsurprisingly, because REITs typically pay out healthy dividends (as measured by their yield), many retail investors seeking to augment their income stream choose to invest in REITs.
REITs pool the capital of numerous investors in order to purchase a portfolio of properties; these properties can vary widely and may include office buildings, shopping centers and malls, hotels, apartments, industrial real estate, and even timberland or farmland. Many REITs are traded on national securities exchanges, and therefore can be sold and resold in liquid, public markets at publicly quoted prices.
In contrast to exchange traded REITs, non-traded REITs do not trade on a securities exchange. As a result, non-traded REITs may only be sold pursuant to optional redemption programs sometimes offered by the REIT itself, or in some circumstances, on a thinly traded secondary market. In addition to the illiquid nature of non-traded REITs, these securities carry additional risks, as described more fully below.
In a Nutshell - How Non-Traded Reits Differ from Exchange-Traded ReitsIn August 2012, the Financial Industry Regulatory Authority (“FINRA”) issued an Investor Alert concerning non-traded REITs. As part of this Investor Alert, FINRA offered the following table to help distinguish REITs from non-traded REITs as part of its ongoing effort to keep investors informed:
| Non-Traded REITs | Exchange-Traded REITs | |
|---|---|---|
| Listing Status | Shares do not list on a national securities exchange. | Shares trade on a national securities exchange. |
| Secondary Market | Very limited. While a portion of total shares outstanding may be redeemable each year, subject to limitations, redemption offers may be priced below the purchase price or current price. | Exchange traded. Generally easy for investors to buy and sell. |
| Front-End Fees | Front-end fees that can be as much as 15% of the per share price. Those fees include selling compensation and expenses, which cannot exceed 10%, and additional offering and organizational costs. | Front-end underwriting fees in the form of a discount may be 7% or more of the offering proceeds. Investors who buy shares in the open market pay a brokerage commission. |
| Anticipated Source of Return | Investors typically seek income from distributions over a period of years. Upon liquidation, return of capital may be more or less than the original investment depending on the value of assets. | Investors typically seek capital appreciation based on prices at which REIT’s shares trade on an exchange. REIT’s also may pay distributions to shareholders. |
As outlined above, investing in non-traded REITs carries it with significant risks. In addition to lack of liquidity and excessive front-end fees, investors should remain mindful of the following additional risks associated with investing in non-traded REITs:
Distributions are not guaranteed: investors should understand that deciding whether to pay distributions, as well as the amount of any distribution, falls squarely within the discretion of the non-traded REIT’s Board of Directors in the exercise of its fiduciary duty. It is not unheard of for a non-traded REIT to suspend its distribution for a period of time or altogether halt distributions to investors, many of whom purchased the non-traded product precisely for its income component;
Lack of a public trading market creates both illiquidity and valuation complexities: as its name implies, a non-traded REIT has no public market. Moreover, investors should understand that many non-traded REITs are structured as a ‘finite life investment’ meaning that at the conclusion of a given time frame, the REIT is required to either list on a national securities exchange or liquidate. And even if a liquidity event occurs, investors are not guaranteed that the value of their investment will have appreciated, and in some instances, the investment may lose some or all of its value. Any attempt to assign a valuation to a non-traded REIT is a difficult task, as many factors will impact price, including the underlying real estate portfolio, the non-traded REITs balance sheet, overhead expenses, cost of capital, etc.;
Properties may not be specified: most non-traded REITs are structured as blind pools, meaning they have not yet specified the properties which will be purchased (in other instances, a non-traded REIT may specify only a portion of the properties the REIT plans to acquire, or that certain properties are in various stages of acquisition). As a general rule, investors should know that the more properties that have been specified by a non-traded REIT for purchase, or that have actually been acquired, then the less risk an investor will incur, because the investor has the opportunity to assess the nature and quality of the assets from the outset;
Early redemption is often restrictive and may be expensive: investors should be cautioned that most public non-traded REIT offerings place limits on the amount of shares that can be redeemed prior to liquidation. In fact, redemption provisions can be as restrictive as 5 (or in some cases, 3) percent of the weighted average number of shares outstanding during the prior year. Additionally, shares may have to be held for a specified holding period, often 1 year, before they can be redeemed. Further, redemption programs usually may be terminated or adjusted, so investors should not count on them as a viable option, even as an emergency exit strategy. Finally, while a redemption program may allow an investor to sell shares prior to any liquidity event, the redemption price is typically lower than the purchase price, by as much as 10 percent.
The attorneys at Law Office of Christopher J. Gray, P.C. possess considerable experience in successfully representing aggrieved investors in a variety of forums who have lost money due to financial fraud and related misconduct. In particular, the firm has provided representation to numerous investors in connection with various non-traded REITs.
Do You Wish to Further Discuss Your Potential Claim?If you have invested in what may be an unsuitable non-traded REIT or other product, and such an investment has incurred considerable losses due to poor performance and/or excessive fees, you may be able to recover your losses in FINRA arbitration or through litigation. Investors who wish to discuss a possible claim may contact a securities arbitration attorney at Law Office of Christopher J. Gray, P.C. via the contact form on this website, by telephone at (866) 966-9598, or by e-mail at newcases@investorlawyers.net for a no-cost, confidential consultation.