Non-traded REITs can appear to offer real estate income and diversification, but their structure can make losses difficult to detect and even harder to escape. Unlike exchange-listed REITs, these investments generally do not have a readily available public market price, and redemption programs may be limited. That can leave investors, particularly people 65 and older who need dependable access to retirement funds, relying on estimates while their money remains committed for years.
If a non-traded REIT has trapped your retirement savings, contact The Frankowski Firm today for a free case evaluation.
Non-traded REIT losses often stem from illiquidity, uncertain valuations, and high fees. A broker’s failure to evaluate whether the investment fit the customer’s age, liquidity needs, time horizon, and risk tolerance can be another cause. When a recommendation was unsuitable or risks were not adequately explained, the investor may have a claim for recovery through FINRA arbitration.
Understanding how these risks combine helps clarify whether a disappointing result reflects ordinary market risk or a recommendation that was mishandled. The pattern often begins with the way the investment was sold, including the incentives and suitability analysis behind the recommendation.
Why Non-Traded REIT Losses Happen So Often
Non-traded REITs can be especially damaging when a recommendation emphasizes income while minimizing fees, liquidity limits, and the investor’s need for accessible savings. The structure may look attractive on paper, but the way it is sold can create a conflict between compensation and suitability. For investors who trusted a broker’s recommendation, particularly seniors 65+ planning around retirement income, that conflict can have serious consequences.
The Appeal of High, Stable Distributions
Non-traded REITs are often presented as a way to pursue regular distributions without the day-to-day price movement associated with publicly traded securities. That presentation may appeal to a retiree seeking dependable cash flow. It does not, however, make the investment appropriate for every investor or guarantee that distributions reflect operating earnings.
The compensation structure deserves careful attention. The SEC reports that broker-dealer commissions and other upfront costs typically account for 10% to 15% of the investment. Those charges reduce the amount working for the investor from the outset. Some products may also impose back-end fees or ongoing expenses. The SEC’s investor bulletin explains these non-traded REIT costs and risks.
When Compensation Overrides Suitability
High upfront compensation does not by itself prove misconduct. It can, however, make the recommendation process important evidence when an investor’s circumstances were not fully considered. FINRA Rule 2111 requires a firm or associated person to have a reasonable basis to believe a recommended security or investment strategy is suitable for the customer. The rule recognizes reasonable-basis, customer-specific, and quantitative suitability obligations. FINRA’s Rule 2111 guidance describes those duties.
A customer-specific analysis should address age, investment experience, time horizon, liquidity needs, and risk tolerance. A 65+ investor who may need retirement funds for living expenses or medical care may not be able to tolerate an investment that is difficult to sell. If the broker treated a general desire for income as enough to justify the recommendation, without examining those practical needs, the conduct may support a broker negligence claim.
Investors reviewing these circumstances may also benefit from understanding broker fraud and negligence, including how suitability failures are evaluated. Account statements, risk questionnaires, emails, and sales materials can help show what the investor needed, what the broker knew, and whether the recommendation matched those facts.
How Illiquidity Locks Up Retirement Savings
For a retiree, an investment cannot be evaluated only by its projected return. Access matters. A 65+ investor may need savings for living expenses, medical care, family obligations, or an unexpected change in circumstances. Non-traded REIT shares can make that access difficult because they are not traded on public stock exchanges. The SEC explains that redemption programs vary by issuer and are limited, and that a minimum holding period generally applies.
That structure can turn a six- to 10-year investment horizon into a serious financial problem. The SEC notes that an investor’s exit may depend on a planned liquidation, often after 10 years, or a future listing on a national stock exchange. Until then, an investor may have no ordinary market where shares can be sold when cash is needed. For someone relying on retirement assets for income, the inability to sell is itself the loss. A paper valuation does not pay a bill if the funds cannot be accessed.
Redemption Programs Are Not a Reliable Exit
A redemption program may appear to provide an escape route, but it is not the same as a liquid public market. The program’s terms, timing, and availability depend on the issuer. Requests may be limited, and a program can be suspended or unavailable when investors need it most. An investor seeking an early exit may also receive a price below the stated value of the shares. The program’s terms and prevailing conditions govern the outcome.
These restrictions deserve particular attention when a recommendation is made to a 65+ investor with near-term income needs or limited liquid reserves. FINRA suitability guidance identifies age, time horizon, liquidity needs, and risk tolerance as customer information that firms generally must obtain and analyze. A recommendation that ignores the possibility of a six- to 10-year lock-up may expose the investor to a risk that was incompatible with the retirement plan.
Illiquidity is not unique to REITs. Investors reviewing oil and gas investment losses may encounter similar concerns with other alternative investments that are difficult to sell. The specific product and transaction history matter, but the central question remains: could the investor reasonably access the money when it was needed?
When a broker failed to explain these limitations, or recommended the investment without adequately considering the customer’s liquidity needs, the resulting harm may support a securities claim. The facts can be evaluated in FINRA arbitration, where the recommendation, disclosures, account records, and investor’s financial circumstances are examined together.
Why Valuation and Pricing Transparency Matter
A non-traded REIT can appear stable on an account statement even when the underlying real estate is losing value. That possibility makes valuation more than an accounting detail. It affects whether an investor can recognize a problem, evaluate a recommendation, and decide whether retirement savings remain positioned appropriately.
| Feature | Publicly Traded REIT | Non-Traded REIT |
|---|---|---|
| Market price | Readily available on national exchanges. | No exchange listing and no ready market price. |
| Liquidity | Shares can generally be sold during market hours. | Redemption programs are limited, and long holding periods often apply. |
| Valuation basis | Continuous market pricing. | Periodic or annual appraisals that may lag or overstate value. |
| Typical upfront fees | Lower commission structures. | Commissions and upfront costs often reach 10 to 15 percent. |
| Exit options | Ordinary exchange sale. | Planned liquidation or eventual listing, often many years away. |
Publicly traded REITs have market prices that are widely available and change as investors assess property performance, financing conditions, and broader market risks. Non-traded REIT shares do not trade on a national exchange, so there is no readily available market price. The SEC explains that this absence makes valuation difficult for investors. See the Investor Bulletin on non-traded REITs for the regulatory explanation.
Instead, the share value shown to an investor may rely on periodic or annual appraisals. Those appraisals can be inaccurate or untimely. They may lag behind changes in occupancy, property income, debt costs, local real estate conditions, or the value of the properties held by the issuer. As a result, a stated value can overstate actual performance, or fail to show deterioration until later. The number on a statement is not necessarily the price an investor could receive by selling the shares.
Why account statements require careful review
FINRA Notice 09-09 addresses the valuation of non-traded REITs and similar securities on customer account statements. Its guidance reflects the concern that estimated values can affect how investors understand their holdings. A statement that shows little change may create a false sense of security when there is no active market to confirm the estimate.
SEC registration and regular SEC reporting do not eliminate this concern. Non-traded REITs may be registered with the SEC and file reports, while their shares remain unlisted and not publicly traded. The investment therefore carries materially different risks from a publicly traded REIT, particularly around liquidity and valuation. Investors reviewing non-traded REIT risks should compare the stated value with the available information. An account statement alone does not prove the investment is performing as represented.
How inflated valuations can delay action
An inflated or stale valuation can conceal a failing investment. If the reported share value remains steady, an investor may not realize that the underlying assets are weakening. Distributions may not be supported by operating performance, or the eventual exit could produce a substantially different result. By the time the problem becomes visible, limited redemption programs and the absence of an exchange market may leave few practical options.
These risks matter when assessing non-traded REIT losses and whether the investment was suitable for the customer. A review should consider what the broker and issuer represented about value, liquidity, and risk, along with whether the available disclosures supported those representations.
When Non-Traded REIT Losses Stem from an Unsuitable Recommendation
A non-traded REIT recommendation may be unsuitable when it does not account for the investor’s circumstances, financial objectives, or ability to tolerate the investment’s risks. FINRA Rule 2111 describes three related suitability duties: reasonable-basis, customer-specific, and quantitative suitability. The rule also applies to an investment strategy involving securities, not only to a single purchase. See FINRA’s Rule 2111 guidance.
First, a brokerage firm or associated person must perform reasonable diligence to understand the recommended security and its potential risks and rewards. That analysis should recognize that non-traded REITs are not exchange-listed, may lack a readily available market price, and can be difficult to exit. A recommendation cannot be justified simply because the investment generates distributions or holds real estate assets.
Second, the recommendation must fit the particular customer. FINRA guidance identifies factors such as age, investment experience, time horizon, liquidity needs, and risk tolerance. These considerations are especially important for a retiree over 65 who may need dependable access to savings for living expenses, medical care, or other unexpected costs. A multi-year holding requirement can conflict directly with those needs.
Warning Signs of Overconcentration
Concentration is a central suitability concern. An investor already holding substantial real estate exposure, or concentrated in one illiquid non-traded REIT, may face amplified risk if the position cannot be sold. The issue is not limited to whether the investment was individually described. The broader portfolio, available cash, income needs, and stated objectives matter.
Warning signs may include a recommendation that consumes a large share of retirement assets, a failure to explain redemption limits, or a strategy that leaves little liquid cash. Repeated purchases or recommendations that steadily increase exposure can also raise quantitative suitability concerns, even if each transaction appears acceptable in isolation.
Investors who believe a recommendation ignored these factors may be dealing with broker fraud and negligence. Account statements, risk questionnaires, emails, transaction records, and conversations about liquidity can help establish what the broker knew and whether the recommendation was consistent with the investor’s profile. The facts may support a claim pursued through FINRA arbitration, where the focus is on the conduct, the recommendation, and the resulting losses.
How FINRA Arbitration Can Address Non-Traded REIT Losses
FINRA arbitration provides a structured forum for investors seeking to address losses connected to unsuitable non-traded REIT recommendations. A claim may focus on whether the broker or brokerage firm reasonably evaluated the investment, the investor’s circumstances, and the risks that were disclosed. Common issues include concentration in illiquid products, recommendations that did not fit the investor’s time horizon or liquidity needs, and inadequate disclosure of valuation and redemption limits.
FINRA Regulatory Notice 15-02 provides regulatory context for transactions involving direct participation programs and unlisted REIT securities.
The process generally develops through the following stages:
- Review account and investment records. The investor’s statements, subscription documents, financial records, correspondence, risk disclosures, and transaction history help establish what was recommended and how the position performed. The review may also examine whether the account became overconcentrated in non-traded REITs or other illiquid investments.
- Prepare and file a statement of claim. The statement identifies the parties, explains the alleged misconduct, and describes the harm. Depending on the facts, the allegations may include unsuitable recommendations, failure to consider liquidity needs, failure to disclose material risks, or broker negligence. The claim is filed within FINRA’s arbitration system, subject to applicable filing requirements and deadlines.
- Participate in FINRA case management and discovery. After the case begins, the parties address scheduling, document exchange, information requests, and other case-management issues. Brokerage records can help clarify the investor profile, prior holdings, recommendation history, commissions, communications, and the firm’s understanding of the product. FINRA’s suitability guidance recognizes reasonable-basis and customer-specific obligations under Rule 2111, including consideration of factors such as age, time horizon, liquidity needs, and risk tolerance. See the securities arbitration process for additional context.
- Present the case at a hearing. If the dispute does not resolve earlier, the parties present evidence and argument to a FINRA arbitration panel. The presentation may address what the investor was told, whether the risks of illiquidity were explained, and whether the recommendations fit the investor’s circumstances. Concerns involving broker fraud and negligence may be evaluated alongside the account’s broader investment history.
- Address the award and enforcement. The panel issues an arbitration award after considering the record. If the award provides relief, the parties follow the applicable procedures for payment and enforcement. The result depends on the evidence, legal issues, defenses, and circumstances of the individual claim. Investors should preserve records and seek advice promptly because filing deadlines can affect available remedies.
A careful review can help determine whether the facts support a FINRA arbitration claim and what records may be important. It can also distinguish investment losses caused by market conditions from losses linked to a recommendation that did not fit the investor’s needs or failed to explain material risks.
Ready to review a non-traded REIT recommendation? Contact The Frankowski Firm for a free case evaluation and learn whether FINRA arbitration could help recover your losses.
Frequently Asked Questions
Why do non-traded REITs often lead to financial losses?
Several risks can compound. Shares are not traded on public exchanges, redemption programs are limited, and investors may face a long holding period before a planned liquidation. Upfront commissions and other costs typically account for 10 to 15 percent of the investment, reducing the capital working for the investor from the start. The SEC explains these non-traded REIT risks.
Can I recover investment losses from a non-traded REIT?
Possibly, depending on how the investment was recommended, sold, and managed. A FINRA arbitration claim may be appropriate when a broker failed to investigate the investment. The claim may also apply when the broker ignored the investor’s finances or recommended an illiquid product. FINRA Rule 2111 addresses reasonable-basis and customer-specific suitability obligations. A review of account records can help identify whether broker negligence contributed to the losses.
How do non-traded REITs differ from publicly traded REITs?
Publicly traded REITs trade on national exchanges, so investors generally have access to a readily available market price and a more established market for selling shares. Non-traded REIT shares do not trade on an exchange. Their valuations may rely on periodic appraisals, and redemption programs can be restricted. The different liquidity and pricing structure can matter greatly when an investor needs access to retirement funds.
What should I do if my non-traded REIT has lost significant value?
Preserve account statements, transaction confirmations, prospectuses, correspondence, and records showing your age, income, liquidity needs, and investment objectives when the recommendation was made. Avoid making decisions based only on an account statement value. Have the recommendation and resulting losses reviewed for suitability and broker negligence, then discuss whether FINRA arbitration is available and what deadlines may apply.
Contact us to discuss your next step
If a non-traded REIT affected your liquidity or retirement plans, reviewing the recommendation and account history may help clarify whether FINRA arbitration is an appropriate path. Contact The Frankowski Firm for a free case evaluation and discuss the circumstances of your investment losses with the firm.