Stoltmann Law Offices, P.C. has represented hundreds of investors in arbitration actions against brokerage firms for losses in connection with non-traded Real Estate Investment Trusts (REITs). Non-Traded REITs are the darlings of brokers and their firms because of the huge commissions and “hands-free” management approach they foster. Brokers sell non-traded REITs under the guise of “high income” and “non-stock market risk”, when the money investors receive from REIT distributions is mostly made up of their own money, and are actually as speculative to invest in as the stock of any company.
According to FINRA, the regulatory agency responsible for policing brokers and their firms, Mike Patatian sold made 89 unsuitable recommendations to 59 clients who invested more than $7.8 million in non-traded REITS. FINRA alleges that Patatian did not understand the REITs he sold, including basis features and risks, and therefore lacked a reasonable basis to make the recommendations. Patatian is also alleged to have recommended that clients liquidate annuities, incur surrender charges, and then roll the proceeds into non-traded REITs. He is also accused of inflating client net worth on forms in order to circumvent REIT limitations. Patatian denies FINRA’s allegations, which can be found here.
Stoltmann Law has blogged extensively on issues related to non-traded REITs. Between the speculative risk, high commissions, lack of liquidity, and complicated structure, there are numerous better options for an investor who wants exposure to the real estate sector. There are hundreds of fully liquid REITs traded on the New York Stock Exchange every day for investors that want to invest in REITs. There is no reason to invest in a non-traded REIT other than the sales pitch by the broker selling them.