Investment fraud lawyers note that independent broker-dealers have a responsibility to perform adequate due diligence when selling any investment, especially complex, illiquid products. Since the 2008 market collapse, FINRA has been aggressive with broker-dealers who failed to do so. Axelrod stated to the Securities Industry and Financial Markets Association’s Complex Products Forum that, “FINRA examiners have noted that in the instances of REITs that have experienced financial difficulties, red flags existed and should have been considered by firms prior to the product being offered to firm clients.”

Another problem with non-traded REITs, according to Axelrod, is that “non-traded REITs may also borrow funds to make distributions if operating cash flow is insufficient, and excessive borrowing may increase the risk of default or devaluation. In addition, non-traded-REIT distributions may actually be a return on principal.”

Some of the non-traded REITs currently being investigated by the stock fraud lawyers at Christopher J. Gray are Inland Western, Inland American, KBS REIT, Cornerstone Healthcare REIT, Behringer Harvard REIT, Paladin Realty Income Properties REIT, Wells REIT, Apple REIT, Desert Capital REIT, TNP Strategic Retail Trust, Dividend Capital REIT, Whitestone REIT, ArciTerra National REIT and CNL Lifestyle Properties REIT.

If you suffered significant losses as a result of your investment in a non-traded REIT, you may be able to recover your losses through securities arbitration. To find out more about your legal rights and options, contact an investment fraud lawyer at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

According to investment fraud lawyers, while most REITs experience value changes every day because they are traded on stock exchanges, “non-traded,” “private,” or “unlisted” REITs were not traded on exchanges with regulations. Furthermore, these investors of non-traded REITs paid additional layers of fees because the investments were mostly sold by brokers. Generally, investors were promised stable prices and healthy income generation from these investments, but the decline in the commercial real estate market and management problems have resulted in a significant decline in the value of many non-traded REITs.

Many brokers unsuitably recommended non-traded REITs; after all, they were extremely profitable to them thanks to the hefty fees associated with the investment. Many brokers told investors that the REITs values would remain the same while providing income, but many non-traded REITs have temporarily — or indefinitely — suspended payments to investors. That said, securities fraud attorneys note that most public REITs that have been responsibly managed are providing reliable income to their investors.

Reportedly, there are several factors about non-traded REITs that investors either didn’t know or were never told:

• If liabilities exceeded asset value, the REITs could go under water.
• Distributions to investors were not guaranteed.
• Non-traded REIT front-end fees amounted to as much as 15 percent of the investment’s per share price.
• The secondary market for these investments was insignificant at best, nonexistent at worst. Non-traded REIT investors who wanted to sell their products were left with no buyers or took a huge hit and were forced to sell their investments at a discount.
• These investments carried a significant risk.
• In many cases, payments received by investors were a return of capital, not a return on investment.

If you suffered significant losses as a result of your investment in the Dividend Capital REIT, you may be able to recover losses through securities arbitration. To find out more about your legal rights and options, contact an investment fraud lawyer at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

In July, Dividend Capital Total Realty Trust Inc. revised its per share value to $6.69, down from its March value of $8.45 per share. The Dividend Capital REIT raised $1.8 billion at a $10 per share price. Dividend Capital REIT president, Guy Arnold, failed to return calls seeking comment on the REIT’s performance. For more information about the Dividend Capital REIT, see the previous blog post, “Dividend Capital REIT Restructuring Could be a Sign of Trouble.”

Another non-traded REIT, CNL Lifestyle Properties Inc., experienced a share price drop to $7.31. The CNL Lifestyle Properties REIT raised $2.7 billion at a $10 per share price, according to investment fraud lawyers.

These eight REITs each raised more than $1 billion and the equity declines they experienced amounted to more than 20 percent of their value. These investments account for a significant portion of the non-traded REIT and “direct participation program.” This program will, reportedly, raise from $9 billion to $10 billion this year from investors.

Industry observers say that near the end of 2007, during the commercial real estate market surge, some non-traded REITs were sold to clients by registered representatives characterized as bond alternatives. According to securities arbitration lawyers, while some of these investments were sold appropriately, many were not.

If you suffered significant losses as a result of your investment in the Dividend Capital REIT, or another non-traded REIT, you may be able to recover your losses through FINRA arbitration. To find out more about your legal rights and options, contact an investment fraud lawyer at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

This new offering is purportedly a means for the company to offer liquidity, securities fraud attorneys say. Generally, non-traded REIT shares are illiquid but, when the REIT is liquidated, are sold to another REIT, or goes public, the shares are sold. The SEC filing states that the offering is intended to replenish the capital of their fund shares. As a result, they will not have to list a termination date, should one of the aforementioned events occur. This new plan is scheduled to go into effect on October 1, 2012 and purportedly allows investors to liquidate shares at any time. The price of the shares at liquidation is determined by the company’s Net Asset Value’s daily calculation. However, restrictions on this plan include the following:

• While Class A, W or I shares may be redeemed at any time, a “Quarterly Cap” has been instituted by Dividend Capital, which will limit redemptions equal to 5 percent of the total Net Asset Value of all shares set upon completion of the prior calendar quarter.
• Class E Dividend Reinvestment Plan shares are not included in this new plan and, as such, the company will redeem only 5 percent of these shares in a year.
• The right to alter or suspend the redemption plan is reserved by the Board of Directors.

According to investment fraud lawyers, similar restructuring methods have been undertaken by other non-traded REITs in the past. Though the current state of Dividend Capital is unclear at this time, similar efforts in the past have been used to prop up REITs that were later discovered to be greatly troubled investments.

Financial Industry Regulatory Authority rules have established that brokers and firms have an obligation to fully disclose all the risks of a given investment when making recommendations, and those recommendations must be suitable for the individual investor receiving the recommendation given their age, investment objectives and risk tolerance. Non-traded REITs are illiquid and inherently risky and, therefore, not suitable for many investors. However, because of the high-commissions these investments generally offer, many brokers make unsuitable recommendations of REITs to investors.

If you suffered significant losses as a result of your investment in a Dividend Capital REIT or another non-traded REIT, you may have a valid securities arbitration claim. To find out more about your legal rights and options, contact a securities fraud attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.