Are Non-Traded REITs a suitable investment for you?
According to Robert A. Stanger & Company, an investment banking firm that publishes The Stanger Report, non-traded REIT sales soared to $869 million in May 2019. Fundraising of $3.6 billion (year-to-date) has doubled from 2018 total of $1.7 billion, according to the report published by the DI Wire.
Stanger reports that the top sponsors of non-traded REITs are: Blackstone ($2.5 billion), Griffin Capital ($840 million), Bluerock Capital ($583 million), Inland Real Estate ($386 million), Owl Rock Capital ($372 million), Black Creek Group ($271 million), Hines Interest ($239 million), Starwood Capital ($219 million), and SmartStop Asset Management ($147 million).
A real estate investment trust, or REIT, is a corporation, trust or association that owns and often manages income-producing real estate. REITs pool the capital of numerous investors to purchase a portfolio of properties such as hotels, shopping centers or apartments.
Shares of non-traded REITs do not trade on a national securities exchange which makes them illiquid, sometimes for periods of eight years or more. Early redemption of shares is usually limited, and fees associated with the sale of these products can be as high as 7%- 10% and lessen total return.
Non-traded REITs may seem attractive to some investors because of periodic distributions, and often their broker or financial advisor may tout the tax advantages. However, they are high-risk, complex investments and are not suitable for many investors.
Risks of Non-traded REITs
- Distributions are not guaranteed and may exceed operating cash flow.
- Non-traded REITs are not traded on any exchange, meaning they are illiquid. Often when investors are looking to cash out of their non-traded REIT investment, the only option is to sell on a secondary market, often at a significant loss.
- High fees and commissions to the broker and the sponsor can eat up investor’s profits.
- Distributions and REIT status can carry tax consequences. If a portion of your distribution constitutes a return of capital, that portion is not taxed until your investment is sold or liquidated, at which time you will be taxed at capital gains rates.
Non-traded REITs are rarely, if ever, suitable for short-term investors and even long-term investors must be willing to bear the risks of illiquidity. You should consider the front-end cost relative to the sales costs you would incur to buy and sell other securities during the same holding period as the life of the REIT. You may also want to consider how much share price appreciation and distributions you will need to receive to overcome these front-end charges.
Your financial advisor has a responsibility to perform due diligence on any investment before recommending it to you. If your advisor unsuitably recommended a non-traded REIT and you lost money, the securities attorneys at The White Law Group may be able to help you by filing a FINRA Arbitration claim against the brokerage firm that sold you the investment.
The Financial Industry Regulatory Authority (FINRA) provides an arbitration forum for investors to resolve disputes with their brokerage firm. If a broker or brokerage firm makes an unsuitable investment recommendation or fails to adequately disclose the risks associated with an investment they may be found liable for investment losses in a FINRA arbitration claim.
For a free, no obligation consultation with a securities attorney, please contact the offices of The White Law Group at 1-888-637-5510.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois.
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