Recovering Losses From Non-Traded REITs
Investors often do not know the investments that make up their portfolio. This is problematic for a few reasons. One, your broker is under a duty to obtain your authorization before making a trade. If you do not understand what the investment product is, it is probably not suitable for you. Second, these complex investments often carry oversized risk or higher commissions that are not apparent when recommended by the broker. Non-Traded REITs are an example of a complex product that customers often do not understand and have the potential to lose big.
What is a Non-Traded Real Estate Investment Trust (REIT)?
A non-traded REIT is a form of real estate investment method that is designed to reduce or eliminate tax while providing returns on real estate. Non-traded Real Estate Investment Trusts sell shares to retail investors primarily through independent broker-dealer networks in continuous offerings spanning long periods of time at a constant price – usually $10. Once a certain amount of capital is raised through this process, the trust will begin purchasing properties. The trust comes full circle when a liquidity event occurs, which is typically when the trust is listed on the NASDAQ. The time from an initial offering to a liquidity event averages about 7 years.
Non-traded REIT investors pay-up front fees that average around 13 percent. This dramatically reduces the capital available to purchase other portfolio holdings. Non-traded REIT offerings are sold primarily to retail investors through an affiliated dealer manager. The REIT then compensates that dealer-manager by awarding commissions. Commissions linked to REIT are typically higher than those offered by mutual funds. Thus, making it an enticing product for broker-dealers. The expectation for investors is to see a return on the real estate that the REIT has purchased. This income could be from rents or from hotel fees.
Non-Traded REITs can be an attractive investment… But be cautious
Brokers argue that non-traded REITs are an attractive investment product for those with a long-term investment horizon. This is because the REIT will not become liquid for up to ten years. Brokers will also argue that publicly traded REITs are subject to market movements and market volatility in their ability to raise capital. Non-traded REITs, brokers argue, are less susceptible to the market downturn in raising capital.
Investors should be cautious however because non-traded REITs have their downsides. They typically have low rates of returns, near low liquidity, and high fees. Historically, non-traded REITs have performed far worse than their traded counterparts. This is because of the up-front fees that primarily compensate salesmen. The non-traded REITs bear the same returns as a treasury bond, but with much higher risk. The non-traded REIT internal rate of return averages about 6.3 percent, compared to 11.6 percent for traded REITs.
Another risk associated with non-traded REITs is that they are illiquid – meaning that they cannot be sold readily in the market. Instead, investors generally must wait until the non-traded REIT lists its shares on an exchange or liquidates its assets to achieve liquidity. This liquidity event may take up to 10 years. If you are a short time horizon investor, non-traded REITs are clearly not suitable for you.
Attorney Sean Sweeney has extensive experience with non-traded REIT claims and he understands their complexities.
Your broker has a duty to only recommend investments that are suitable to your investment profile. Your investment profile consists of your age, investment time horizon, tax status, net worth, and your current holdings. If your broker recommends or suggests an investment that is unsuitable to your investment profile, they may be liable for the losses you suffer.
We Only Get Paid if We Win
Attorney Sean Sweeney has extensive experience with suitability claims and understands the complexities of these types of investments. He will use all possible resources to help ensure his clients are in a better situation once their case is complete. The firm will not be paid unless the case is successfully settled or won. To learn more about whether your advisor has acted contrary to the rules laid out by FINRA, send us a message or call us at (414) 877-8502 to schedule a consultation.
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