FINRA Continues their Focus on Non-traded REITs with an Investor Alert

Wednesday, October 5th, 2011

FINRA released an investor alert for public non-traded REITs “to help investors understand the benefits, risks, features and fees of these investments.”

This year FINRA has paid particularly close attention to the sale of non-traded REITs. In May, FINRA charged David Lerner & Associates “…with Soliciting Investors to Purchase REITs Without Fully Investigating Suitability.” David Lerner & Associates sell the Apple series of non-traded REITs. More recently, there has been discussion of proposals to modify regulations pertaining to how non-traded REITs are valued and how the prices of the products are listed on customer statements.

This most recent move by FINRA to shed light on non-traded REITs, by way of this investor alert titled Public Non-Traded REITs-Perform a Careful Review Before Investing, is a call for investors to be better educated about this type of investment vehicle.

Non-traded REITs are a legitimate investment option for the right investor, but it important for investments to be suitable for each individual investor.

In a public release FINRA noted that, “While investors may find non-traded REITs appealing due to the potential opportunity for capital appreciation and the allure of a robust distribution, investors should also realize that the periodic distributions that help make non-traded REITs so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal. Additionally, early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total return.”

Sometimes unscrupulous or uniformed financial professionals have emphasized the positive attributes of non-traded REITs and encouraged unsuitable investors to purchase them. Non-traded REITs also often pay a high commission to brokers, sometimes as much as %10, which may in some cases motivate them to sell the products to unsuitable investors.

FINRA investor education official Gerri Walsh was quoted on FINRA.org as saying, “Confronted with a volatile stock market and an extended period of low interest rates, many investors are looking for products that offer higher returns in turbulent times. However, investors should be wary of sales pitches that might play up non-traded REITs’ high yields and stability, while glossing over the lack of liquidity, fees and other risks.”

The full text of the alert (available here http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/REITS/P124232) outlines a breadth of important information about non-traded REITs that all prospective investors should be encouraged to read. In their release about the alert FINRA highlights 4 “features, complexities, risks and costs associated with non-traded REITs.”

- “Distributions are not guaranteed and may exceed operating cash flow. In newer programs, distributions may be funded in part or entirely by cash from investor capital or borrowings. Distributions can also be suspended for a period of time or halted altogether.”

- “Lack of a public trading market creates illiquidity and valuation complexities. Most non-traded REITs are structured as a “finite life investment,” meaning that at the end of a given timeframe, the REIT is required either to list on a national securities exchange or liquidate. Many factors affect the valuation of non-traded REITs, including the portfolio of real estate assets owned, strength of the trust’s balance sheet, overhead expenses and cost of capital.”

- “Early redemption is often restrictive and may be expensive. Most non-traded REITs place limits on the amount of shares that can be redeemed prior to liquidation. These limits can be as restrictive as 5—or even 3—percent of the weighted average number of shares outstanding during the previous year. Additionally, the redemption price is generally lower than the purchase price, sometimes by as much as 10 percent.”

- “Non-traded REITs can be expensive. State and FINRA guidelines limit front-end fees to 15 percent, but a 15-percent front-end fee on a $10,000 investment means that only $8,500 is going to work for an investor.”

The White Law Group is currently involved in many cases involving non-traded REITs on behalf of damaged investors.

If you are concerned about your investment in a non-traded REIT and would like to speak to a securities attorney, please call our Chicago office at 312/238-9650.

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at http://www.whitesecuritieslaw.com.

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