Since the financial crisis the non-traded real estate investment trust (REIT) market has been a financial boon for the brokerage industry. A REIT is a security that invests typically in real estate related assets. Generally, REITs can be publicly or privately held. While publicly held REITs can be sold on an exchange, are liquid, and have lower commissions and fees, non-traded REITs are sold are private, are speculative, illiquid, and often charge fees of over 10%. Nonetheless, non-traded REITs have become a darling product of the financial industry, mostly because of the fat fees brokers earn for recommending these speculative products.
Brokers selling these products sometimes claim that non-traded REITs offer stable returns compared to the volatile stock market. As the Financial Industry Regulatory Authority (FINRA) and the Securities Exchange Commission (SEC) have recently noted, these products may not be as safe and stabile as advertised.
InvestmentNews recently ranked non listed REITs by second quarter 2014 invested assets. As shown below, investment in these funds are substantial and continues to grow each quarter
|Company||2Q invested assets ($M)||Original share price||Current share value||Original distribution rate||Current distribution rate||2Q14 FFO 2 payout ratio|
|Inland American Real Estate Trust||$10,128.5||$10||$6.94||6.20%||5.00%||75%|
|Corporate Property Associates 17 Global||$4,564.7||$10||$9.50||6.50%||6.50%||81%|
|Industrial Income Trust||$3,747.6||$10||$10.40||6.00%||6.00%||100%|
|CNL Lifestyle Properties||$3,343.4||$10||$6.85||6.25%||4.25%||108%|
|Griffin-American Healthcare REIT II||$3,056.2||$10||$10.22||6.50%||6.65%||143%|
|Monogram Residential Trust||$2,879.1||$10||$10.03||7.00%||3.50%||189%|
|Cole Credit Property Trust IV||$2,833.0||$10||$10.00||6.25%||6.25%||145%|
|KBS Real Estate Investment Trust II||$2,714.1||$10||$10.29||6.50%||6.50%||98%|
|Cole Corporate Income Trust||$2,606.3||$10||$10.00||6.50%||6.50%||94%|
|Hines Real Estate Investment Trust||$2,422.1||$10||$6.40||6.00%||2.90%||88%|
|American Realty Capital Trust V||$2,233.5||$25||$25.00||6.60%||6.60%||86%|
|KBS Real Estate Investment Trust||$2,058.0||$10||$4.45||7.00%||0.00%||N/A|
|Landmark Apartment Trust||$1,889.4||$10||$8.15||6.00%||3.00%||38%|
|Phillips Edison – ARC Shopping Center||$1,846.9||$10||$10.00||6.50%||6.70%||129%|
|Steadfast Income REIT||$1,592.7||$10||$10.24||7.00%||7.00%||165%|
|Strategic Storage Trust||$731.5||$10||$10.79||7.00%||6.50%||120%|
|Lightstone Value Plus REIT||$643.2||$10||$11.80||7.00%||7.00%||69%|
Many brokerage firms have come under fire for their non-traded REIT sales practices. For instance LPL Financial in particular has been accused by several regulators of failing to reign in their broker’s sales practices concerning alternative investments. On March 24, 2014, LPL Financial was fined $950,000 by the Financial Industry Regulatory Authority (FINRA) for failing to supervise its brokers’ marketing of nontraditional investments. LPL Financial was alleged to have deficient supervision in the sale of certain alternative investment products, including REITs, oil and gas partnerships, business development companies (BDC’s), hedge funds, and managed futures.
LPL Financial also paid a $500,000 fine to the Massachusetts Securities Division and was ordered to pay $4.8 million in restitution for supervisory and suitability related violations concerning non-traded REITs. In total six firms paid $11 million in restitution and fines related to REIT sales. The other firms including Ameriprise Financial Inc., Lincoln National, Commonwealth Financial Network, Royal Alliance Associates, and Securities America.
The attorneys at Gana Weinstein LLP are experienced in representing investors to recover their financial losses through the misrepresentation of non-traded REITs. Our consultations are free of charge and the firm is only compensated if you recover.