Non-Traded REITs

A real estate investment trust, or REIT, is a company that owns income-producing real estate. Established by the U.S. Congress in 1960, REITs were designed to provide an investment structure for real estate similar to that which mutual funds offer for an investment in multiple stocks. Because REITs are required by law to distribute at least 90% of their taxable income in the form of dividends to shareholders, many investors are attracted to their characteristic high yields.

A REIT operates by pooling the capital of numerous investors to acquire a portfolio of properties. These properties may include office buildings, residential units, hotels, shopping centers, or even farmland or timber-producing real estate. Many investors are familiar with publicly registered and traded REITs, which trade like traditional stocks on major securities exchanges.

There are also non-traded REITs, which are registered with the SEC, but are not publicly traded on any major securities exchange. In some instances, investors in non-traded REITs may have been solicited to invest by a financial advisor touting the investment’s supposed advantages, including less volatility than a traded REIT, thus offering a “pure play” on real estate. However, non-traded REITs are extremely complex and risky financial products, and investors who suffer losses may have claims to pursue before the Financial Industry Regulatory Authority (FINRA).

Non-traded REITs are complicated and often fraught with risk. To begin, non-traded REITs are illiquid and can generally only be redeemed (or sold back) to the sponsor of the REIT pursuant to an optional redemption program, and even then, often only during a limited time frame (for example, quarterly) and on a limited basis (such as an investor only being able to redeem a small percentage of his or her shares). In some instances, investors may only be able to sell their non-traded REIT shares on a thinly traded and fragmented secondary market, often at low prices.

Aside from their illiquid nature, non-traded REITs are usually sold with high front-end fees that are in some cases as high as 15% of the share price. These fees include selling compensation, including to brokers and third-party broker-dealers, as well as additional offering and organizational costs. These fees and expenses quickly add up and act as a drag on investment performance. Non-traded REITs may include other risks, such as the potential for a “blind pool” structure. Some non-traded REITs are structured as blind pool offerings, meaning that when they start out, investors won’t necessarily know which properties are to be purchased by the sponsor of the REIT. In general, if an investor cannot ascertain some or all of the actual properties to be acquired by the non-traded REIT, then the investment becomes riskier.

The attorneys at Giarrusso Law Group LLC possess considerable experience in successfully representing aggrieved investors in non-traded REITs and similar illiquid financial products who have lost money due to financial fraud or related misconduct. In many instances, investors may pursue claims to recover monies through securities arbitration before FINRA. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.