Investor Lawyers Investigate Misleading Sales of Non-Traded REITs

It is no news to investors that the types of fixed income investments that retirees and other investors have traditionally relied upon for a safe and steady stream of income from their savings- bonds, money market funds, and certificates of deposit or “CDs”- have returned extremely low interest rates for several years.  Drops in the interest rates available by investing in traditional fixed income investments have contributed to investors seeking products offering attractive yields. Some unscrupulous stockbrokers and investment advisors are only too anxious to take advantage of this investor appetite for decent rates of income by offering investment products that advertise high yields but also pose significant risk of loss of principal. One such category of non-conventional investment product is the publicly registered non-exchange traded real estate investment trust (REIT) or “non-traded REIT” for short.  

A real estate investment trust, or REIT, is a corporation, trust or association that owns (and might also manage) income-producing real estate. REITs pool the capital of numerous investors to purchase a portfolio of properties—from office buildings and shopping centers to hotels and apartments, even timber-producing land—which the typical investor might not otherwise be able to purchase individually.  Many REITs are traded on national securities exchanges, can be sold in liquid public markets at publicly quoted prices, and are covered by securities analysts.  However, non-traded REITS are not publicly traded and may be sold only in thinly traded secondary markets or pursuant to optional redemption programs sometimes offered by the REITs themselves.

Although non-traded REITs are not traded on any national securities exchange, they do typically file periodic reports with the Securities and Exchange Commission and may be marketed to a wide array of public investors (unlike certain other types of private placement investments included private REITs that can only be markets to certain high net worth investors). In recent years dating back to about 2004 brokerage firms have widely marketed non-traded REITs to retail customers, in many cases without regard to the suitability of the investments for the customers.  Further, many customers are not aware (for example) that non-traded REITs are generally illiquid, often for periods of eight years or more.  Early redemption of shares is often very limited. 

Investors often do not realize that fees associated with the sale of these products can be high and erode total return.  These fees are often deducted from the purchase price- typically $9.50 or $10.00 a share- so that the investors may not even be aware of the level of fees being charged.  Further, the periodic distributions of “income” that help make these products so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal.

Finally, investors in non-traded REITS may be unaware that they face potential losses of half or more of their investments in non-traded REITs, since the investments are frequently marketed as higher interest bearing alternatives to CDs, bonds or money market funds.  Many of these REITs (discussed in separate pages on, see links below) have in fact lost half or more of their value, leaving investors who believed that the investments were safe shaking their heads.

A recent Financial Industry Authority Investor Alert issued in August 2012 summarizes the significant differences between exchange-traded REIT’s and non-traded REIT’s as follows:


Non-Traded REITs

Exchange-Traded REITs

Listing Status

Shares do not list on a national securities exchange.

Shares trade on a national securities exchange.

Secondary Market

Very limited. While a portion of total shares outstanding may be redeemable each year, subject to limitations, redemption offers may be priced below the purchase price or current price.

Exchange traded. Generally easy for investors to buy and sell.

Front-End Fees

Front-end fees that can be as much as 15% of the per share price. Those fees include selling compensation and expenses, which cannot exceed 10%, and additional offering and organizational costs.

Front-end underwriting fees in the form of a discount may be 7% or more of the offering proceeds. Investors who buy shares in the open market pay a brokerage commission.

Anticipated Source of Return

Investors typically seek income from distributions over a period of years. Upon liquidation, return of capital may be more or less than the original investment depending on the value of assets.

Investors typically seek capital appreciation based on prices at which REIT’s shares trade on an exchange. REIT’s also may pay distributions to shareholders.

The FINRA Investor Alert further summarizes the risks of non-traded REIT’s as follows:

  • Distributions are not guaranteed and may exceed operating cash flow. Deciding whether to pay distributions and the amount of any distribution is within discretion of a REIT’s Board of Directors in the exercise of its fiduciary duties. Distributions can be suspended for a period of time or halted altogether. Many factors may influence the composition of these payments. For example, in newer programs, distributions may be funded in part or entirely by cash from investor capital or borrowings—leveraged money that does not come from income generated by the real estate itself, such as rents or hotel occupancy fees. The REIT’s articles of incorporation often allow it to increase debt, dip into cash reserves and apply proceeds of the sale of new shares to sustain or even increase distributions. Some REIT’s even allow borrowing in excess of 100 percent of net assets. Leveraging, including the use of borrowed funds to pay distributions, can place the REIT at greater risk of default and devaluation, which can result in investment losses when it comes time to redeem or liquidate shares, as well as a reduction in, or suspension of, distributions.
  • Lack of a public trading market creates illiquidity and valuation complexities. As their name implies, non-traded REIT’s have no public trading market. However, most non-traded REIT’s are structured as a “finite life investment,” meaning that at the end of a given time frame, the REIT is required either to list on a national securities exchange or liquidate. Even if a liquidity event takes place, there is no guarantee that the value of your investment will have gone up—and it may go down or lose all its value. Indeed, valuation of non-traded REIT’s is complex. Many factors affect the pricing, including the portfolio of real estate assets owned, strength of the trust’s balance sheet (assets versus liabilities), overhead expenses, cost of capital and more. The boards and managers of non-traded REIT’s might even rely on third-party sources to estimate a per-share value.
  • Early redemption is often restrictive and may be expensive. Most public non-traded REIT offerings place limits on the amount of shares that can be redeemed prior to liquidation. Redemption provisions can be as restrictive as 5 —or even 3 —percent of the weighted average number of shares outstanding during the previous year. In addition, shares may have to be held for some period, typically one year, before they can be redeemed. Redemption programs may be terminated or adjusted, so investors should not count on them, even as an emergency exit strategy. While a redemption program may allow you to sell your shares prior to a liquidity event, the redemption price is generally lower than the purchase price, sometimes by as much as 10 percent.
  • Properties may not be specified. Most non-traded REIT’s start out as blind pools, which have not yet specified the properties to be purchased. Others may specify a portion of the properties the REIT plans to acquire, or they may be in various stages of acquisition. In general, the more properties that have been specified for purchase or that have actually been acquired the less risk an investor incurs because the investor has the opportunity to assess the nature and quality of the assets of the REIT before investing. 

Despite these significant risks- especially the significant risk that investors may not be able to sell their non-traded REIT shares for a long period of time after the initial purchase and the risk that investors may lose a large part of their initial investment- investment fraud attorneys have witnessed a virtual epidemic of misleading sales of these products to retail investors without appropriate disclosures.   Stockbrokers and financial advisors incentivized by much higher sales commissions than they receive for selling other types of securities often misleading present these non-traded REITs as a safe, higher yielding alternative to CDs., money market funds or bonds.  Unfortunately, many stockbrokers and advisors also sell these non-traded REITs to retirees who simply cannot afford to risk any loss of their investment, let alone a substantial loss of half their initial investment or more.

Investors have a right to arbitrate claims concerning improper sales of non-traded REITs by stockbrokers or financial advisors in a dispute resolution process known as arbitration before the Financial Industry Regulatory Authority.  Investors who believe they may have been sold unsuitable non-traded REITs or who believe they have been misled into purchasing non-traded REITs may contact Law Office of Christopher J. Gray, P.C. for a confidential, no obligation consultation

Non-traded REITs that may have been improperly sold by stockbrokers or financial advisors include the following (click to see specifics concerning each REIT):

Inland Western REIT (now Retail Properties of America)

Inland American REIT

Behringer Harvard REIT I

Behringer Harvard Multifamily REIT I

Behringer Harvard Opportunity REIT I

Dividend Capital REIT

CNL Lifestyle Properties REIT I

Cole Credit Property Trust II


ArciTerra National REIT

Whitestone REIT

TNP Strategic Trust REIT

Desert Capital REIT

Wells REIT

Healthcare Trust of America REIT