Non-Trade or Privately Traded REITs
Private REITs (Real Estate Investment Trusts) are technically considered securities, but they do not trade on any securities exchange such as the New York Stock Exchange ("NYSE") or the American Stock Exchange ("AMEX"). As such, being privately traded, these types of REITs are generally illiquid. Basically, the investor is locked in and cannot get their cash back. There are some third-party vendors who may purchase them, but at a steep discount. The underlying collateral for REITs, regardless if they are privately or publicly traded, is made up of real estate, preferably the kind that produces income. REITs tend to be composed of commercial real estate, but several will have some residential exposure. Think of a REIT as a mutual fund that owns real property instead of stocks.
It is unclear why anyone would want to own a private REIT as there are over 225 publicly traded REITs with long track records and public disclosures. However, a broker or advisor who sells these products has many talking points. They may throw out terms such as stable pricing or larger dividends. The financial advisor/broker may also entice the client with stories of great capital appreciation once the private REIT goes public. What’s left out in the pitch to the client is that the alleged price stability is simply based on the fact that one cannot know what the actual price is or is not. The price will look unchanged on a statement, but that does not mean that it has not changed. As a non-traded product, there are no formal exchanges to verify the actual value. Touting larger dividends is also illusory as every financial advisor knows, or should know, increased reward always equates to increased risk. The latter part of the equation is usually omitted from the sales pitch. Lastly, most privately traded REITs do not go Public, and when they do it is usually disastrous.
What is also omitted? The commissions/fees paid to the broker. Usually, the pay-out is 7% to the salesperson but sometimes can pay up to 12% in various fees and commissions to the advisors and firms involved. In contrast, public REITs pay the broker about the same in commissions he or she would get if they sold you GE or Exxon stock. Not a lot for a long-term product.
Besides larger fees, one of the other negative aspects of non-traded REITs are risks and performance. Beginning with risks, it is important to understand these are new, untested products that were not good enough to go public. They often contain questionable conflicts of interests associated with the properties purchased and even management of the properties and the very REIT itself. Often properties are purchased at over-valued prices and revenue projections (rent collections) are way off from the forecasts. Disclosures by most privately traded REITs are thin and are not up to the standards of their publicly traded brethren. Dividend declines and stoppages are common. As discussed, if things go south, there is not much one can do. With a public REIT, it can be sold any day the markets are open. Lastly, publicly traded REITs, as a whole, simply outperform their private counterparts. One of the largest factors for the underperformance, besides mismanagement due to conflicts, is the very costs associated with private REITs, from the commissions paid out to the salesforce to the management itself.Has Your Portfolio Suffered Steep Declines as a Result of Recommendations to Purchase Privately Traded Reits? Our Broker Fraud Lawyers Can Assist You
For over thirty years we have been contacted by investors who were taken advantage of by financial advisors or stockbrokers that touted an investment as a safe, fixed income alternative. Declines in value can be devastating to retirement plans and other earmarked endeavors. The lawyers at SSEK have experience representing clients that are victims of unscrupulous advisors/brokers. Misrepresenting risks or omitting facts associated with an investment is a prime example of unsuitable conduct. Concentration in these types of products exponentially increases the risks for consumers thus compounding suitability issues. If you were a victim of private REIT negligence or fraud, you are not to blame. The experienced lawyers with Shepherd Smith Edwards & Kantas have decades of experience suing brokerage firms on behalf of consumers. We have filed thousands of lawsuits through FINRA for clients wronged by unscrupulous brokers and advisors and their employers. Contact us now for free, no-obligation case consultation and we will work hard for you.