Everything investors need to know about non-traded REITs
In recent years, real estate investment trusts (REITs) have become an increasingly touted investment product. Many people want to get into REITs so that they can own a share of large-scale, reliable commercial real estate.
This is an understandable investment strategy. Commercial real estate is a tangible asset that can be used to help people diversify their investment holdings. Unfortunately, with far too many REITs, the financial product often does not live up to the hype.
A real estate investment trust is an entity that owns a portfolio of income-producing commercial real estate. An REIT could own anything from a shopping mall or an office building to college housing or medical housing. Some REITs are listed on securities exchanges. For example, there are many REITs that are currently trading on the New York Stock Exchange (NYSE).
However, there are also many REITs are not listed on any market exchange. These non-traded REITs have unique characteristics, and they are not suitable financial products for most investors. At Sonn Law Group, our investment fraud lawyers have deep experience handling investor losses claims involving real estate investment trusts. If you lost money in an unsuitable-non traded REIT, please contact our law firm today for immediate assistance.
The Key Features of a Non-Traded REIT
There are many ways in which non-traded REITs are similar to exchange-traded REITs. Both financial products invest in income-producing real estate, both must comply with certain IRS regulations, both must register with the SEC, and both must comply with the SEC’s filing, reporting and disclosure standards. However, there are also some critically important differences between exchange-traded REITs and non-traded REITs. These differences make non-traded REITs riskier and less desirable for investors.
- Not Listed on a Market Exchange: The key difference between non-traded REITs and exchange-traded REITs is that there is no market exchange available to trade the asset. While this is obvious, it bears emphasis. Non-traded REITs are highly illiquid investments. If a non-traded REIT investment goes wrong, it is extremely difficult for the investor to limit the damage.
- Very Limited Secondary Market Value: Beyond not being listed, non-traded REITs also have limited secondary market value. To get REITs redeemed, it may be done at a price that is significantly below fair value and the current sales prices.
- High Front-End Fees: Non-traded REITs have very high front-end fees. Not only are sales fees and commissions typically higher with these products, but the organizational fees may also be higher. In fact, these fees can often be as high as 15 percent to 20 percent of the share price.
Non-Traded REITs are Risky
An Illiquid Investment
With no public trading value, non-traded REITs are a highly illiquid investment. With limited exceptions, these investments have a defined holding period. Most non-traded REITs have a limited life, and the investment ends at a certain date in the future. However, in many cases, that ending date is years down the road. Once you buy a non-traded REIT, it is very difficult to get out and rebalance your portfolio. This fact alone makes non-traded REITs unsuitable for most investors.
Difficult to Value
What is the current market value of your REIT? This question can often be very challenging to answer. Non-traded REITs are notoriously difficult to value. Many different factors will affect the value of a non-traded REIT, including the value of the real estate portfolio, the balance sheet of the trust, the overhead expenses and management fees, and the current cost of capital. As an individual investor, many of these factors are entirely out of your control.
Early Redemption is Expensive
A large majority of non-traded REITs are structured to make early redemption so costly that investors will simply avoid trying to do it. If you want to get out of a non-traded REIT prior to the actual liquidation date, you will almost certainly be required to pay large penalties. Surrender penalties can sometimes be ten percent of the value of the investment, and in some cases it could be even more. When non-traded REITs go bad, redemption may not be possible at all.
Distributions are Not Guaranteed
Finally, it is important to remember that non-traded REITs are not guaranteed to make a positive return. While an REIT’s board of directors has fiduciary duties to the stakeholders, the board also has wide discretion for approving distributions. In some cases, distributions will be paid at a reduced rate, temporarily suspended, or halted altogether. Further, if there is no money left, because the investment failed or took on too much debt, the individual investors will likely be stuck with the losses.
The Bottom Line: Non-Traded REITs are Rarely Worth the Money
Sadly, with non-traded REITs, the only people who typically make money are the managers. These financial products have such high fees that it is incredibly difficult for investors to make a good return on their money. Unscrupulous managers and brokers too often push non-traded REITs on investors who want to get exposure to commercial real estate, but who do not truly understand the risks of putting their hard earned money into this type of product.
Our founder and lead investment fraud attorney Jeffrey R. Sonn has extensive experience with commercial real estate. In fact, Mr. Sonn has himself been a commercial real estate investor for the last three decades. He understands this market well. Unfortunately, non-traded REITs are simply rarely worth the money for investors. If you lost a substantial amount of money in this type of investment, our legal team can help you explore your legal options.
Did You Lose Money Investing in Non-Traded REITs?
Our legal team can help. At Sonn Law Group, we are committed to serving the rights and interests of investors. If you lost money in risky non traded REITs, please contact our law firm today for a free case evaluation. We take on all claims using contingency fee agreements — our investment fraud attorneys only get paid when we win your case.