Articles Tagged with Non-traded REITs

Stoltmann Law Offices, P.C. has represented investors in arbitration claims against brokerage firms involving non-traded REITs hundreds of times. We understand these products better than the brokers who sell them, which is what makes us effective advocates for our clients. If you invested your hard-earned money in the NorthStar Healthcare REIT and would like to discuss your options to recover your investment losses, please contact Stoltmann Law Offices at 312-332-4200.

On December 23, 2020, it was reported that the NorthStar Healthcare REIT was reducing its share price from $6.25 to $3.89. The facts on the ground for this non-traded REIT do not portend well for investors. According to published reports, the REIT retained a valuation expert to determine how the REIT can get out of the debt it is buried in. Unfortunately, the value of the REITs portfolio is only $1.6 billion but cost $2.2 billion.

Non-Traded REITs are the darlings of brokers and financial advisors. They are perfect investments from their perspective. They offer huge selling commissions, are not “volatile” because they do not trade on the open market, and offer a high income rate. Brokers do not need to “manage”  a position in a non-traded REIT like they do a well-managed portfolio. Even though they get paid 7X more for selling a non-traded REIT than they do for managing an account, (1% fee versus 7% commission), brokers love non-Traded REITs because they get to sell it and forget it.  The investor is left holding the bag when the REIT stops paying distributions, freezes redemptions, and cuts the share price by 70%. Then once the investor looks a little closer, you come to realize that “dividend” you’ve been paid all of these years was actually, mostly, just a return of your money – the REIT takes your money, shells out at least 10% for commissions and fees, puts the rest of it into its real estate portfolio, then shells out distributions that are mostly your own money given back to you.

Stoltmann Law Offices, P.C. is a Chicago-based investor rights law firm that offers representation nationwide on a contingency fee basis. We represent investors that lose money in bad investment products like Watermark Lodging Trust REIT in cases against brokerage firms and investment advisers. If you or someone you know has suffered investment losses in Carey Watermark n/k/a Watermark Lodging Trust REIT, please contact Stoltmann Law Offices for a no-obligation, free initial consultation.

In late November, Watermark Lodging Trust REIT reported its “NAV” or “Net-Asset-Value” as $5.51 per Class A share and $5.45 per Class T share. When this REIT was sold to investors, the NAV was $10 per share. Investors are looking at a loss on their December statement of nearly 50% of their principal investment. The Watermark Lodging Trust REIT was previously known as the Carey Watermark Investor and Carey Watermark Investors 1 REITs, which merged in April 2020.

If investors try to sell their shares on the secondary market, the bids are as low as $3 per share. Watermark Lodging REIT concentrates its real estate portfolio in hotels/hospitality which has been devastated this year by the COVID-19 pandemic. Although it is easy to blame the pandemic for these losses, an excuse brokers will certainly rely on, the fact is, this REIT has always been a high risk, speculative investment that concentrated investor money in a few properties in one narrow sector of the real estate world; hotels.  Non-Traded REITs are sold, not bought, by investors because financial advisors and brokers receive massive sales commissions for selling them.  These are “alternative” investments that offer higher income rates on paper, but in reality, usually distributed your own money back to you as a “distribution” and rarely generate enough income from the underlying portfolio to sustain their distribution rates. Most non-traded REITs are heavily indebted so that they can use debt to pay distributions to keep the flow of investor money coming in.

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.

Chicago-based securities law firm Stoltmann Law Offices continues to investigate nationwide claims involving American Realty Capital (“ARC”) New York City REIT.  New York City REIT, Inc. is a non-traded real estate investment trust that owns a portfolio of high-quality commercial real estate located within the five boroughs of New York City, particularly Manhattan.  In order to induce clients to invest in the ARC New York City REIT, brokers pitched the REIT as maximizing total shareholder returns through appreciation and current income, maintaining a low loan to value rate, targeting liquidity events, acquiring high-quality New York City real estate and as having a diversified group of tenants. Stoltmann Law Offices is investigating claims against stockbrokers and investment advisors who recommended this complex high commission based product to investors.

Brokers sold the ARC New York City REIT to customers as having primary objectives of preservation and protection of capital and capital appreciation.  Unfortunately, the ARC New York City REIT ceased paying distributions on March 1, 2018.  Furthermore, the ARC New York City REIT paid substantial fees to advisors.  No public market existed for the ARC New York City REIT and the investment is illiquid pending its IPO.  As of December 31, 2017, ARC New York City REIT owned only six properties and therefore had limited diversification.  The value of the shares of ARC New York City REIT have declined substantially leaving investors stuck with the illiquid investment and a principal loss.

The New York City REIT is a “non-traded” REIT, which means it falls into a subset of the broader REIT investment class. REITs generally speaking are trusts designed to provide tax incentives to the owners of the underlying property. In order to maintain their status as a REIT, the REIT managers have to ensure that at least 90% of all taxable income generated by the REIT trickles down to the investors via dividends. REITs are concentrated investments in income producing property and are basically by definition non-diversified. The real issues investors have traditionally had with REITs are the liquidity and conflicts problems in the non-traded variety, of which the ARC New York REIT was a member.

Chicago-based Stoltmann Law Offices, P.C. is a securities investor protection law firm offering representation nationwide to investors seeking to recover investment losses.  Our team is monitoring and reviewing information in connection with former LPL  financial advisor Donald Stephen Woods. According to published reports, Mr. Woods, of Louisville, Kentucky and currently registered with Thurston Springer Financial, intentionally manipulated and changed documents at LPL to qualify non-traded REIT sales that would have otherwise not been approved. LPL has certain limitations on how much of an investor’s declared liquid net worth can be concentrated in alternative investments, like non-Traded REITs.  Typically, LPL limits this exposure to 25% of liquid net worth, but can be lower for elderly investors and those with more conservative investment objectives. Brokers like Woods get around this limitation by inflating the client’s net worth numbers adjusting them upwards by a few hundred thousand dollars can be the difference between compliance approving the transaction and the broker getting paid his massive commission, and not approving it, leaving the broker to find something else to sell the client.

Ultimately, the responsibility for this sort of amateur chicanery engaged in by Mr. Woods falls on his firm. Stoltmann Law Offices has represented hundreds of investors in cases just like this. Almost always, there is an obvious disconnect or contradiction between the net worth numbers on the alternative investment forms, and the client’s new account forms. Compliance has a responsibility to ensure that brokers like Mr. Woods are not artificially inflating client net-worth numbers on these forms in order to qualify them for the investment. Most of the time all it would take is a simple phone call from compliance to the client to determine the accuracy of these numbers and reveal that the broker either forged the documents altogether, or advised the client to ignore the net worth numbers included on the form, to trust their adviser, and not worry about it.

Non-Traded REITs have been selling at rates not seen since before the financial crisis in 2008. There is one reason for this – commissions.  Non-Traded REITs like those offered by Northstar, Cottonwood, Highlands REIT, KBS Growth & Income REIT, Resource Innovation Office REIT, and InvenTrust Properties Corp., pay brokers like Mr. Woods and their firms like LPL commission rates that are many times higher than if they just sold clients publicly-traded, liquid REITs.  The SEC, FINRA, and NASAA all warn about issues related to these non-traded REITs.  Scholarly articles decry them as being poor investments long term compared to their publicly-traded cousins. Some of the issues about these non-traded REITs include:

On Monday, the Idaho Department of Finance released its annual list of top investor threats. Among the things to look out for are unsolicited investments, especially those involving promissory notes, oil and gas deals and real estate investment opportunities, including real estate investment trusts (REITs). The top threats were determined by surveying members of the North American Securities Administrators Association. They include:

  1. Unregistered Products/Unlicensed Salesmen: The offer of securities by an individual without a valid securities license should be a red flag for investors, as should pitches of investments as “limited or no risk” and high returns.
  2. Promissory Notes: Most promissory notes available to retail investors must be registered as securities with the Securities and Exchange Commission (SEC) and the states in which they are sold. Average investors should be cautious about offers of promissory notes with a duration of nine months or less, which in some instances, do not require registration at the federal level. Short term notes that appear to be exempt from securities registration have been the source of most fraudulent activity involving promissory notes.
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