The Financial Industry Regulatory Authority (“FINRA”) has issued Investor Alert: Public Non-Traded REITs – Perform a Careful Review Before Investing.
A real estate investment trust (“REIT”) pools capital from numerous investors to purchase a portfolio of real property that may include apartment buildings, office buildings, medical facilities, shopping centers or other income generating properties. There are two types of REITs: ones that are listed and traded on a stock exchange (“traded”) and those that are not (“non-traded” or “non-listed”).
Non-traded or non-listed REITs are a $10 billion-a-year industry. These investments differ from traded REITs in several important ways. Because non-traded REITs are not traded on a stock market, they are generally illiquid. In many instances, investors are not able to redeem their shares early and may be required to hold the investment for periods of 8 years or more. In addition, non-traded REITs often charge higher fees than traded REITs: front-end fees can be as high as 15%.
FINRA cites some additional factors to consider prior to investing in a non-traded REIT:
• Distributions are not guaranteed. A REIT’s Board of Directors has discretion on whether to pay distributions and the amount of any distributions. It is possible that distributions could be suspended or stopped entirely.
• REIT distributions have tax consequences. Distributions may be taxed as ordinary income rather than as qualified dividends.
• It is possible to lose the entire investment. Because they are not traded on a stock exchange, it is difficult to determine the value of a non-traded REIT. Most non-traded REITs are required to become listed on a stock exchange or liquidate after a stated amount of time. There is no guarantee that the value of the REIT will have risen between the time of purchase and the date the REIT is listed or liquidated. It is possible for a REIT to decline or lose all of its value.
• Early redemption is not always possible. Most non-traded REITs limit the number of shares that can be redeemed early. In addition, the redemption price is typically lower than the purchase price: it may be as much as 10% lower. It is also possible for a REIT to terminate its redemption program completely.
• REITs are subject to real estate risk. Fluctuations in the real estate market can affect the value and performance of the properties held by the REIT.
Non-traded REITS can be a financial disaster for investors who are not adequately informed about the risks and consequences, including possible suspension of distributions and illiquidity, prior to investing. When considering purchasing a non-traded REIT, investors should consult an investment professional and tax adviser for a thorough and beneath-the-surface explanation of the non-traded REIT’s risks, benefits and potential tax consequences before adding it to their portfolio.
The Florida securities lawyers at McCabe Rabin, P.A. represent investors nationwide in FINRA arbitration matters. Investors nationwide who have incurred recoverable investment losses due to specific failures by stockbrokers and brokerage firms, and who may have a FINRA arbitration claim, may contact the Florida securities lawyers at McCabe Rabin, P.A. for a free and confidential consultation by calling toll free at 877.915.4040 or by e-mail to firstname.lastname@example.org.