Private and Unlisted REITs: Are They Safe

May 19, 2014 / Author Chris Vernon
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As attorneys who regularly represent investors, we believe the unique problems and risks associated with unlisted REITs are now coming home to roost. Although unlisted REITs may tout the fact they have outperformed public REITs, we believe these products have added risks relating to valuation and redemption rights.

These risks and concerns call in to question the appropriateness of these products for many investors, especially those with a limited liquid net worth or those with a significant portion of their remaining  net worth already invested in real estate.  We are also concerned about the accuracy and appropriateness of the marketing efforts employed by some “financial professionals” to sell these products to retail investors.

How REITs work

Real Estate Investment Trusts, or REITs, such as those issued by Inland, Wells (now known as Piedmont), and KBS are “pass-through” entities for tax purposes that invest in real estate.  These types of investments offer an equity interest in a pool of real estate assets, including land, buildings, shopping centers, hotels, and office properties.

Essentially, as an investor, you are giving your money to the REIT to go out and buy property that will conceptually generate enough appreciation or income to overcome costs that you might otherwise avoid by directly buying real estate for yourself.

Unlisted REITs include both private REITs and non-traded REITs that are not traded on a public market like the New York Stock Exchange or over the counter through Nasdaq.

Fatter commissions

A Feb. 25, 2009 Wall Street Journal article dubbed unlisted REITs controversial. The controversy includes criticism by some analysts who point out that unlisted REITs are typically sold by brokers and brokerage firms who receive much higher commissions than they would receive from selling publicly traded REITs.  These higher broker commissions, typically paid by the unlisted REIT from the funds invested in the REIT, significantly reduce the amount available to invest and, by extension, reduce the ability of the REIT to generate returns.

Difficulty Selling

The Wall Street Journal has also noted the increased liquidity risk of unlisted REITs compared to publicly traded REITs.

Due to concerns over the economy or a need for funds because of  current economic conditions, some REIT investors have decided to get out of their REIT investments. To their dismay, selling an unlisted REIT isn’t what many investors expected.  Although selling a publicly traded REIT is like selling a stock —  the sale goes through immediately — this is not so with unlisted REITs.

Financial professionals selling unlisted REITs may have represented that investors could redeem their investment after a holding period, which is typically a year’s time. But despite such representations, attempts to redeem may now be denied. This is because most unlisted REITs reserve the right to suspend redemptions or limit redemptions if too many investors try to redeem at once.

The potential inability to trade and liquidate shares, coupled with likely decreased dividends, places unlisted REIT investors in a precarious financial position.  Assets that are essentially illiquid with decreasing yields in a deteriorating economic environment can hardly be counted on for future financial needs.

Seeking help

In our opinion, investors who believe they were not informed of the true characteristics and risks of unlisted REITs and/or who are in or near retirement with more than a small portion of their liquid assets in nonpublic or private REITs, should have their portfolios independently evaluated.

Vernon Litigation Group represents investors nationwide who have been the victims of negligence or unethical behavior by investment professionals and who have suffered significant investment losses.  For more information about Vernon Litigation Group’s efforts on behalf of investors click here.

Mr. Vernon handles the litigation and arbitration of complex business and financial disputes, with an emphasis on securities fraud and securities arbitration, throughout the United States.