What is a REIT?
“REIT” stands for real estate investment trust. An REIT is a tax designation for a corporate entity that invests in real estate. The designation is used for the purpose of eliminating or reducing corporate taxes. In return for special tax treatment, REITs must distribute 90% of their taxable income to shareholders in the form of dividends and invest at least 75% of their assets in real estate. REITs generally invest in many types of real estate, including apartments, office buildings, shopping centers, storage facilities, hotels and other commercial properties.
A non-traded REIT is not available on any securities exchange, and is a relatively illiquid investment. Non-traded REITs are frequently promoted to elderly and other risk-adverse investors as very conservative investments. They are often sold to investors with the promise of providing consistently high dividend income.
Non-traded REITs are complex investments. It is difficult to identify the quality and financial condition of the real estate underlying the REIT. Non-traded REITs are also difficult to sell, and investors generally must hold them until they mature or are sold off to another REIT.
The sale of structured products, in theory, offers an opportunity for larger returns and many of them purport to protect principal, but they present hidden risks and can cause substantial losses.- Jacob H. Zamansky
Since 2000, non-traded REITs have raised nearly $60 billion from investors. Some of the largest non-traded REITs are managed by Behringer Harvard, Inland Western, Inland America, Wells Real Estate Trust, Lightstone, CNL Income Properties, Hines Real Estate Trust, W.P. Carey, Apple, Cole Credit Property Trust, Piedmont Office Realty Trust and American Real Estate Trust.
Problems Associated With Non-Traded REITs
In March 2009, the Financial Industry Regulatory Authority (FINRA) opened an official investigation into non-traded REITs, with an examination of documentation and data from various brokers who sell the investments. FINRA is examining the compensation paid to brokers who sold non-traded REITs. Specifically, regulators want to know if investors are being properly informed about the products, including the underlying financial condition of the REIT, and if brokers made any misrepresentations about fees, dividends and liquidity.
Because non-traded REITs have liquidity restrictions, many of these REITs have specific suitability guidelines for investors. Typically, these guidelines require a minimum income of $70,000 and minimum net worth of $250,000. Non-traded REITs are not suitable for purchase by investors who do not meet these guidelines, and may not be suitable for investors for other reasons as well. FINRA is examining whether brokers sold non-traded REITs to investors knowing it was an unsuitable investment.
Investors have lost substantial amounts of money from non-traded REITs by being fooled into believing that they were purchasing a low risk investment with the guarantee of consistently high dividends. For example, when the U.S. housing market crashed, investors suffered significant losses: 7-8% dividends were reduced to a mere 2%. These investors may be able to bring legal claims against their brokers and brokerage firms for unsuitability and/or misrepresentation.
An Investment Losses Lawyer Will Investigate Your Case
Each FINRA attorney at Zamansky LLC understands the risks and problems associated with non-traded REITs. Our securities fraud law firm has extensive experience in this area of the law. We currently serve as co-lead counsel for the investors in the David Lerner/Apple REIT class action lawsuit, and have brought individual cases against brokerage firms for investors involved in other REITs. To read more about the David Lerner/Apple REIT case and others, please review our current investigations.
Each investment fraud lawyer at Zamansky LLC is well-versed in non-traded REITs. Our attorneys will analyze your case to determine if you may be able to recover losses associated with these types of investments.
If you have questions about REITs, or believe that you may have a claim, please contact our securities fraud law firm today for a free, no-obligation consultation.