Private REITs: The Need for Tougher Oversight?

Our institutional investment fraud lawyers have reported often on real estate investment trusts (REITs). Today we’d like to talk about private REITs.

An REIT is a trust, corporation, or association that owns income-producing real estate. Investors’ capital is pooled by REITs to buy a portfolio of properties. There are public REITs, which include ones traded on a national securities exchange and those that are not traded but are publicly registered. Then there are non-traded REITs, which cannot be found on a national securities exchange, but may be traded in a limited capacity in a secondary market. There is also another kind of REIT known as the private-placement, or private, REIT.

Private REITs, like their non-traded counterparts, are not traded on an exchange. They also come with significant risks. They are not subject to the disclosure requirements that public non-traded REITs have to honor. The fact that they are unlisted makes them difficult to value and insufficient disclosure documents makes it challenging for investors to make educated choices about their investment.

Only accredited investors generally can buy private REITs. According to Forbes.com, these buyers are generally told that prices and high-yields won’t change. Other challenges surrounding private unlisted REITs are that they usually involve higher fees, inadequate transparencies, and net asset values that may have gone down significantly from what the broker had initially promised. Also, private REITs may be extremely liquid, making it very hard or costly for an investor to get out.

While the Financial Industry Regulatory Authority has thought about cracking down on private REITS, Forbes.com says that the SRO hasn’t done a lot in this respect. Already, there have been in problems. FINRA filed a complaint against David Lerner & Associates last year for allegedly failing to determine whether a non-traded REIT was appropriate for investors and giving out misleading information about the Apple REIT Ten. David Lerner has denied the allegations. The financial firms claims it took care of the necessary due diligence and that all disclosures were not only in compliance with regulatory requirements, but also were accurate.

Over seven years the financial firm had earned over $600M in commissions and fees and five Apple REITs earned over $6B in proceeds. The REITs had been presented as safe for conservative investors. In June 2011, investors filed a securities fraud lawsuit over $6.8B in REIT underwriting and sales of Apple Real Estate Investment Trusts shares.

If you have suffered losses by investing in an REIT and you feel that you weren’t fully apprised of the risks involved or that a broker recommended that you invest even though this was unsuitable for you, contact our securities fraud law firm today.

For future reference, FINRA has advised that investors considering REITs:
• Find out how much the seller will get in commissions and fees for selling you the REIT.
• Watch out for sales material or pitches presenting you with simple reasons to invest in an REIT.
• Make the person soliciting you tell you why the REIT is an appropriate investment for you and explain will help you achieve your investment goals.
• Find out about fees related to the REIT.
• Make sure you are told how the distribution is being funded and whether part of that is the return of investor capital.
• Be clear about the risks involved in an REIT investment.
• Look over the prospectus and any supplements.

David Lerner Associates Is Sued by Investors Over $6.8 Billion REIT Sale, Bloomberg, June 20, 2011

Public Non-Traded REITs—Perform a Careful Review Before Investing, FINRA

When Will FINRA Get Serious About Unlisted REITs?, Forbes, February 17, 2012

More Blog Posts:
Investor Complains to FINRA About Behringer Harvard Holdings, LLC-Related Real Estate Investment Losses, Institutional Investor Securities Blog, January 24, 2012

Wells Investment Securities Agrees to $300,000 Fine by FINRA for Alleged Use of Misleading Marketing Materials for REIT Offerings, Institutional Investor Securities Blog, November 23, 2011

David Lerner & Associates Ignored Suitability of REITs When Recommending to Investors, Claims FINRA, Stockbroker Fraud Blog, June 8, 2011