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Non-Traded REITs – Investors Should Proceed with Caution!

With increasing frequency, given the current low interest rate environment, retail investors are steered into investing in products appearing to offer more advantageous yields than are available in traditional interest-bearing investments such as money market funds and CDs.  One example is the publicly registered non-exchange traded real estate investment trust (“REIT”) or “non-traded REIT.”  While non-traded REITS share certain similarities with their exchange-traded brethren, they differ in a number of key respects.

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To begin, a non-traded REIT is not listed for trading on a securities exchange.  Consequently, the secondary market for non-traded REITs is typically very limited in nature.  Furthermore, while some of an investor’s shares may be eligible for redemption after a certain passage of time (e.g., one year), and, even then, on a limited basis subject to certain restrictions, such redemption offers may well be priced below the purchase price or current price of the non-traded REIT.  Thus, lack of liquidity and pricing inefficiency are two disadvantages to non-traded REITs, as opposed to REITs that trade on an exchange (e.g., NYSE: BXP – Boston Properties).

Beyond such liquidity and pricing concerns, non-traded REITs often are sold with very high front-end fees.  These fees may include selling compensation and expenses (not to exceed 10%), as well as additional offering and organizational costs which are essentially passed along to the investor from the outset.  Conversely, purchasing a REIT which trades on a major exchange will only entail the associated brokerage commission.  Because of the fees associated with non-traded REITs, they are rarely suitable for an investor with a short-term time horizon; even long-term investors must remain mindful of the liquidity issues.

Finally, with non-traded REITs, investors may not always be aware of the anticipated source of returns on the underlying investments.  Often, with a non-traded REIT, income is passed along to the investors from distributions over several years – and it may also be the case that the income distributions include return of capital from other investors.  And upon liquidation, investors in a non-traded REIT may receive less than their initial investment depending on the value of the underlying assets. On the other hand, investors who purchase exchange traded REITS are typically seeking capital appreciation on the share price, in addition to income via dividends or distributions to shareholders.


Recently, one such non-traded REIT – Resource Office Innovation REIT (“Resource Office”) – elected to suspend its public offering, effective April 21, 2017.  Resource Office’s suspension of its offering was approved by its Board in connection with a plan to restructure its $1.1 billion IPO into a NAV REIT, as well as a perpetual life entity that will give the company the ability to conduct offerings for indefinite duration.  In addition to suspending its offering, Resource Office’s Board voted to suspend the company’s distribution reinvestment plan effective May 1, 2017, as well as its share repurchase program effective May 21, 2017.

If you have invested in a non-traded REIT that you believe was an unsuitable recommendation, and you have suffered significant losses as a result, you may be able to recover your losses in FINRA arbitration.  To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or for a no-cost, confidential consultation.

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