We continue to see lots of activity involving unsuitable sales of non-traded Real Estate Investment Trusts (“non-traded REITs”). If you’re a retail customer who was sold one of these things with promises of higher yields, guaranteed returns, principal protection, or other bogus enticements, you’ve probably already lost money and may now find yourself stuck. Call us. We’ve helped many buyers of non-traded REITs recover money from their brokers.
Non-traded REITs can be either public or private. A public non-traded REIT is registered with the SEC, while a private non-traded REIT is unregistered and purchasers must be accredited investors. But since neither type of REIT sells on an open market, they have no transparency to investors. When securities are traded on the open market, streams of relevant information are weighed by investors and the resulting expectations of those investors cause prices to fluctuate. For instance, in the case of market traded REITs, prices fluctuate based on investors’ expectations about future dividends and growth in the value of underlying holdings, as well as assumptions about how well the issuer will sustain its business model over time.
Non-traded REITs differ significantly from market traded REITs, most notably because the market price of a non-traded REIT doesn’t remotely reflect either the value of the REIT’s underlying holdings or the REIT’s potential for future dividend payments. Because non-traded REITs aren’t openly traded, their reported prices are set at the discretion of management and don’t reflect the judgment of the efficient market. Thus, reported prices for non-traded REITs generally are unrelated to the true value of the REIT or its holdings and usually are very misleading.
To make matters worse, managers of non-traded REITs aren’t required to regularly update their share prices to reflect accurate market value. Because the share prices remain unchanged for long periods of time, managers are able to hide significant financial concerns, including the fact that the REITs are highly leveraged and use both debt and the newly invested principal of other investors to pay dividends. This model is often unsustainable and the result is that many non-traded REITs have been or will eventually be disastrous for investors.
If you own a now-defunct REIT and you’ve suffered substantial losses, call us today.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.