Chicago-based Stoltmann Law Offices continues to see a surge of complaints from investors who bought unlisted or non-traded Real Estate Investment Trusts (REITs). For most investors, the prospect of getting a higher yield on any investment has been alluring. With rates near zero, it’s been hard to earn a return that beats inflation. Enter REITs and funds that invest in them. These are special vehicles that bundle real estate properties into one investment: You can invest in everything from apartment buildings to storage units.
Many REITs are listed and traded on stock exchanges, but some are not, which are called “private” or “unlisted” REITs. In their heyday, REITs routinely paid double-digit yields. Unlisted or “non-traded” REITs have been a consistent sore spot for investors in recent years. Many are loaded with fees and commissions, which dramatically lower investors’ net returns. They even may be money losers, even though they are sold with the promise that 90% of the income generated by properties they hold must be paid to investors. Middleman expenses, which can be as high as 15%, eat up returns in most cases.
Disclosure of the actual financial condition of these vehicles has also been troublesome. It’s hard for investors to know the true value of the properties within these vehicles, which have been aggressively sold by broker-dealers, who make high commissions selling them. When the COVID-19 crisis wracked the economy earlier this year – at first hitting commercial real estate developers and owners particularly hard – REITs that specialized in retail and office properties got clobbered. Retail and Hotel REITs were down 48% and 53%, respectively (as of April 15), according to Deloitte. Investors in these funds, of course, may be still experiencing large losses.
Notable declines were reported by American Hotel Income Properties, Cominar REIT and RioCan, among others. Not surprisingly, any REIT investing in shopping, hospitality or office buildings was hurt. Tenants were unable to pay rents due to loss of business during the crisis and the resulting shutdowns of buildings and malls. Overall, REITs lost nearly 22% in the second quarter alone, according to NAREIT, the trade association for real estate trusts.
Brokers specializing in unlisted REITs have not only oversold potential returns, they have to account for products that will lose even more money. For example, brokers have aggressively sold American Realty Capital New York City REIT. The trust stopped paying investors some two years ago and has been the object of multiple investor actions.
Although FINRA, the securities industry regulator, issued warnings about unlisted REITs more than seven years ago, investors still hold them. Advisors who failed to inform investors about the risks and expenses of these vehicles have been subject to fines and sanctions. James Gregory McKinney, a former broker with Cetera Advisors in Tulsa, for example, was barred from the securities industry by FINRA earlier this year for failure to disclose information on private REITs he was selling.
FINRA and the SEC have strict rules on disclosing risk profiles on all investments sold by brokers and investment advisers. The Stoltmann Law Group has been investigating cases where investors were not told of the hidden costs and risks of investments such as unlisted REITs. Firms are also legally required by FINRA to monitor and supervise what their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk and return information about the vehicles sold. Investors can file FINRA arbitration complaints if these rules are broken.
If your financial advisor sold you investments in non-traded or private REITs and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!