Naples, Fla. — The Vernon Litigation Group law firm issued an investor alert Monday about the risks of non-traded REITs. Main Street is still reeling from subprime losses, yet professionals who stand to gain from the sale of non-traded REITs are heralding REITs as the next big thing for investors to jump at “before it’s too late.”
Recently, the Vernon Litigation Group Law Firm filed a $1 million claim involving non-traded REITs, and its investigation into REIT sales practices has found that these private REITs are being improperly peddled to investors looking for steady income. Behind the misleading sales pitch for non-traded REITs are brokers, brokerage firms, and REIT issuers and operators who stand to make significant commissions and fees whether the investors do well or not.
According to Christopher Vernon, founder of the firm, there is a troubling sense of urgency within the commercial real estate industry to move the risks of commercial real estate into the hands of retail investors in order to spare the sector’s big players who see the problems ahead. Insiders know that the commercial real estate market overheated in the mid-2000s, leading to easy lending and many marginal projects. Those questionable loans and projects will come home to roost in the next few years as refinancing occurs. With dramatically lower values, tighter lending standards, lower rents, and owners who are less financially stable, many of these loans and projects will ultimately blow up in the hands of whoever is holding them. Many will be REIT investors.
The handwriting is on the wall in terms of the risk in commercial real estate. RealPoint’s monthly delinquency report showed that unpaid CMBS (commercial mortgage-backed securities) principal balances increased by almost 400 percent. The report also showed that many CMBS loans are worth no more than 48 cents on the dollar.
There is strong evidence that this classic product dump on retail investors is now occurring. Despite the conditions described above, about $20 billion worth of REITs are in registration and yet to be issued. Unfortunately, by creating buzz about the REIT opportunities and causing a spike in sales, brokers are able to point to the short-term run-up in REIT pricing as further support for their sales pitch.
As well, the sales pitch for non-traded REITs often involves an explanation by the financial advisor that REITs are simply stepping into the role banks usually play in funding significant real estate investment because banks are refusing to lend money. This pitch comes at a time when some are predicting that commercial real estate will give rise to the next leg of the financial crisis. While this type of investment may be a speculative bet that pays off, it is not an appropriate investment for fixed-income investors looking for a low liquidity and credit risk investment that is a reliable source of income.
Many investors already bought into non-traded REITs such as Desert Capital, Wells (REIT II, Piedmont, and Wells Timberland), Cole REIT II, Behringer Harvard Opportunity REIT I, Hines REIT, Grubb & Ellis Apartment REIT, Lightstone Value Plus REIT, Prime Group Realty Trust, and W.P. Carey CPA (14 and 15) have discovered that they currently are not able to remove their money because the REITs have closed redemptions. “This potential lack of liquidity is another reason why these products are inappropriate for many investors,” Vernon said.
Vernon Litigation Group urges investors now considering private commercial non-traded REITS to ask brokers pushing the REIT the following basic questions:
- If it is an existing REIT, are dividends being paid from loans or investors’ funds rather than net income from operations?
- How much will the brokerage firm and the seller receive for selling the recommended non-traded REIT?
The Vernon Litigation Group law firm is centered on investor advocacy and was created to pursue business and investment wrongdoers. The firm focuses its practice on complex financial litigation as well as arbitration involving individuals, groups of individuals, and businesses. Vernon Litigation Group represents investors nationwide who are victims of securities fraud and stock losses due to brokerage fraud and broker fraud. Vernon Litigation Group has litigation and arbitration experience in cases involving hedge funds, tax shelters, structured products, real estate, insurance, retirement assets (including 401(k) and pensions), bonds, variable and equity-indexed annuities, mutual funds, and other financial matters.
Most clients come to Vernon Litigation Group because they were misled by a company of professionals focused on their own best interests who overpromised and under-delivered on the product or service they pitched. As a result, Vernon Litigation Group is vigilant about providing objective advice on likely outcomes based on decades of experience pursuing the largest financial institutions in the world in court and arbitration. The firm believes its job is to assist clients in analyzing the likely net benefit of pursuing litigation and arbitration as well as aggressively pursuing the client’s claims.
For more information, contact:
Christopher T. Vernon, Attorney at Law