The Dangers of Real Estate Investment Trusts
Strong investment advocacy for REITs that cause financial damage
A Real Estate Investment Trusts (REIT) is a company that owns or finances real estate. The real estate could include office buildings, apartments, shopping malls, restaurants, mortgages, etc. Most REITS purchase assets as part of their own investment portfolio. REITS allow investors to earn a share of the income produced by the underlying assets.
The legal team at The Frankowski Firm has sadly seen the fortunes of too many investors crushed when Non-Traded REITs fail to perform due to up-front broker fees and other risks. Our securities negligence lawyers hold brokers and brokerage firms accountable when these financial advisors oversell REITs in order to gain a fee. We also hold these advisors responsible when conflicts of interest exist, when brokers fail to make proper disclosures, and when investment firms fail to supervise their brokers.
What are the risks on Non-Traded REITs?
Brokers have a duty to explain the dangers of Non-Traded REITs to investors before they recommend them. Some of the known dangers of this type of security investment are:
- Large upfront fees. The front-end fees on Traded-REITs can run up to seven percent while the front-end fees for Non-Traded REITs can be as high as 15%. For many investors, investments with much lower commissions and fees such as mutual funds are a better choice. Traded REITs that can be bought in secondary markets are also usually a better choice. Brokers, at a minimum, must explain the choices and the alternative investments to fulfill their duties to the investor.
- Non-Traded REITs are not as safe and stable as they purport to be. Brokers may claim these investments are stable and predictable. FINRA and the SEC have stated that the reverse is often true.
- Early redemption can be costly and is often restrictive. There are often limits on the number of shares that can be redeemed before liquidation.
- Lack of property specification. With Non-Traded REITs, the properties are often not identified, at the time of purchase. Instead, they’re part of a blind pool.
- Lack of liquidity.
- Share Value Transparency. While market prices for REITS are available to investors, the actual value of the underlying assets is much more difficult to ascertain. Also, non-traded REITS often do not provide an estimate of share value until 18 months after their offering closes.
- Conflicts of Interest. Non-traded REITS use external managers who are paid significant incentive fees based on assets under management. These fees may not be in the best interest of investors.
What are common conflicts of interest in terms of REITS?
Often, the portfolio manager, who makes money off of fees such as asset-based fees and incentive fees, has a conflict of interest with the Non-Traded REIT sponsors. These conflicts consist of portfolio managers affiliated with the sponsor, transactions with related parties, and governance structures ensuring absolute power and discretion to affiliated parties. These structures can prevent investors from making changes to the mangers of the REIT and from disciplining management.
Required disclosures for REITS
Brokers and investment companies that sell non-traded REITs must disclose, according to FINRA:
- That the securities cannot be found on a securities exchange
- That the securities are illiquid and, therefore, hard to sell
- That, when a sale can be arranged, it is often for less than full value
Additional concerns about REITs are that they can be difficult to value and that they have special tax considerations.
What are the differences between Non-Traded and Traded REITs?
Both types of REITS require that 90% of taxable income must be distributed to shareholders. For Traded REITs, investors typically seek profits through capital appreciation based due to the traded of the shared on the exchanges. Traded-REITs also can pay shareholder distributions. For Non-Traded REITs, investors seek value through distributions of income. There also may be increased or decreased when the assets are liquidated.
Both types of REITs raise a concern about overconcentration/lack of diversity, since REITs focus just on real property.
Hold brokers and brokerage firms accountable for selling unsuitable products
The attorneys at The Frankowski Firm hold brokers and advisors accountable when they self-deal at the expense of the very investors they are supposed to be helping. Our securities fraud attorneys have the experience, financial acumen, and resources needed to prove conflicts of interest and poor management by brokers or firms. We investigate the financial representation from the initial contact through the recommendation and purchase to the ultimately crushing financial loss. To get answers to your questions and economic justice, call 888-741-7503 or fill out our contact form.