Important Warning for REIT Investors
- Written by Vernon Litigation Group
- Research by Vernon Litigation Group
Do you invest in traded of non-traded REITS?
Each day we continue to see severe market fluctuations across all sectors due to Covid-19. The financial challenges caused by this pandemic are causing some nontraded-REITs to suspend their regular cash dividends. Nevertheless, many financial advisors are simultaneously using the chaos in the market to deceptively scare conservative investors into pouring more money into REITs under the auspices of “guaranteed income”.
Under REIT finance, the entity owns or operates real property and is classified as such due to its payout of 90% of their taxable income to investors...income that the REIT itself does not pay taxes on.
While many REITs are heavily pitched to conservative and or income-oriented investors, there have always been significant risks embedded in this type of investment. These risks are now amplified as a result of this global crisis, which is strongly impacting existing REITs that own commercial property, especially REITs concentrated in the hotel and gaming industries. Moreover, as the current pandemic-related crisis passes, many more REITs will be facing long-term problems in terms of significantly reduced demand for commercial real estate (as employers and employees further embrace working remotely which will significantly reduce the need for expensive office space.)
From an investors’ perspective, our law firm is especially negative on a version of REITs known as non-traded REITs. Below is an article we previously wrote about non-traded REITs that is now very relevant, given the circumstances we are now facing (and we believe establishes the foreseeability of these REIT problems that sellers/advisors should have recognized long before pitching REITs to conservative investors).
We believe it is clear that, among the REIT class of investments, the most dangerous is the non-traded REITs sold by many salespeople posing as financial advisors registered with broker-dealers. Over the past decade of economic expansion, billions of dollars poured into the coffers of non-traded REITs thanks to fat and outrageous commissions (of up to 9%) and even kick-back schemes offered to the brokers and brokerage firms hawking them. At Vernon Litigation Group, we have represented REIT investors for decades and written extensively about the dangers of these high-risk and potentially illiquid investments (especially in volatile times such as this Pandemic).
Consider this example of alarming industry-touted data that shows the non-traded REIT industry’s aggressive marketing campaign: Organizers of the 2009 IMN non-traded REIT Industry Symposium released information saying that $9 billion flowed into non-traded REITs during the financial crisis in 2008, with $2 billion of that pouring-in during the fourth quarter alone. Shortly after that trend, many non-traded REITs froze their assets, suspended dividends, and canceled redemptions. In essence, they became dead assets and thousands of investors lost billions. We are extremely concerned this will happen again as the industry uses the current market volatility to scare investors away from the stock market and into this high commission, illiquid products to the long-term detriment of investors. The industry also touts an industry-sponsored survey conducted on behalf of the IPA, a trade group for non-traded REITs, that says almost two-thirds of financial advisors who regularly recommend non-traded REITs, that says almost two-thirds of financial advisors who regularly recommend non-traded REITs now anticipate increasing sales volume to investors as a result of the recent market volatility.
At Vernon Litigation Group, we are increasingly hearing horror stories from existing investors who are now shocked to discover that their money is locked-up in an illiquid product because non-traded REIT fund managers have frozen redemptions.
Self-serving brokers and brokerage firms regularly turn to sell high-commission products to line their own pockets and, when they do, non-traded REITs often become their favorite product. The extremely high commissions paid by non-traded or unlisted REITs serve as a powerful motivator for brokers and brokerage firms to sell these products - especially in this economy. This creates a huge conflict of interest: Brokers and brokerage firms often neglect to objectively recommend products and strategies that are more appropriate and suitable- and instead push their clients to high-commission investment products such as non-traded REITs.
The attorneys are Vernon Litigation Group has been at the forefront of the fight against the broker-dealers who have been promoting and selling these defective products for more than twenty years.
Vernon Litigation Group is a law firm that represents clients in courtroom litigation, arbitration, including FINRA arbitration and mediation throughout the United States. Contact Us today or call (239) 319-4434.