Non-Traded REITs – A Risky Proposition

NorthStar Healthcare Income, Inc. is a publicly registered non-traded real estate investment trust (REIT).  According to its prospectus, Northstar REIT was formed as a Maryland corporation in October 2010 for the purpose of acquiring, originating and managing a “[d]iversified portfolio of equity and debt investments in healthcare real estate, with a focus on the mid-acuity senior housing sector.”  REIT investments are popular investment products for investment advisors to sell to unsuspecting customers due to their high up front commissions.  Northstar is a variety of a non-traded REIT. A non-traded REIT looks on an account statement like any other stock that might be purchased by an investment advisor or Broker as part of a Customer’s portfolio. 

However, a non-traded REIT is not an investment in a publicly traded company (like Apple or Microsoft). A non-traded REIT like Northstar REIT poses manyadditional risks that are often not readily apparent to an investor.  Further, the additional risks associated with some REITs are not accompanied by an expected increase in upside potential.  In other words, the risk of failure for some non-traded REITs is not outweighed by returns that are large enough to cover the risk associated with the investment.

Non-traded REITs are generally speculative, high risk investments and due to these risks are often unsuitable for most investors.  Further, it is often the case that a financial advisor fails to properly explain the relative weaknesses for these relatively obscure investments.  These risks include the fact that non-traded REITs typically carry high fees, that the non-traded REITs are illiquid in nature (meaning that under most circumstances these investments cannot readily be sold for a number of years after purchase and even then, it is difficult for someone to find a party interested in purchasing the REIT).  In other words, non-traded REITs cannot be sold on the stock market if the investor is experiencing losses in the investment.  There is no built in escape valve if the investment is not successful.  The Customer is often forced to hold onto the REIT and suffer the losses without any choice for getting out of the investment. Many investors in non-traded REITs come to learn too late that their ability to exit their investment position is limited.  Prior to recommending the purchase of an illiquid investment, such as a Northstar REIT, a financial advisor must have a reasonable basis for the recommending the purchase of the investment. 

Moreover, the investment advisor must not misrepresent the terms of the investment to the Customer.

If your investment advisor or broker purchased the Northstar REIT in your account and did not explain to you all of the risks of purchasing a non-traded REIT in your account, you may be able to recover the losses associated with the purchase of this investment.  Moreover, if your investment advisor or broker did not ensure that this was a suitable investment for your portfolio prior to purchasing the Northstar REIT in your account, you may be able to recover the losses associated with the purchase of this investment.