Articles Tagged with nontraded REITs

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.

The investment fraud attorneys at Stoltmann Law Offices are evaluating recent reports that the NorthStar Healthcare Income, Inc. Real Estate Investment Trust (REIT) has announced it will completely stop making distributions to investors in order to retain cash. This most recent announcement follows up on the decision in April 2018 by the NorthStar Healthcare Income to suspend investor distributions. It should come as no surprise, that as the income component of this income investment was suspended, the purported value of the shares of this non-traded REIT has also plummeted.

According to HealthCare Income REIT, its NAV, or net-asset-value, is down to $7.10 per share, an almost 30% decline from its listing price of $10 per share. Importantly, shares of HealthCare Income REIT are not publicly traded, so investors cannot simply put in an order to sell their shares and have an exchange, like the NYSE, fill an order for the sale at a bid price. Because these non-traded REITs are illiquid, if investors want to sell their shares, this can only be facilitated through secondary market auctions.  According to  recent secondary market sales information,  shares of NorthStar Healthcare Income REIT were sold for only $4.76 per share on January 25, 2019 – a more than 50% decease from the offering price.  There have been no reported sales since, and the official announcement ending distributions is sure to drive the price of this REIT down even more.

Suspending distributions, ending distributions, freezing redemptions, and share prices that rarely reach the offering price are all too common storylines with non traded REITs. Non-Traded REITs have played a prominent role in our representation of investors since 2005. Financial Advisors commonly use non-traded REITs, like the NorthStar Healthcare REIT, as a piece of the fixed-income portion of an investor’s overall portfolio. They also use these non-traded REITs to fill the part of the diversification plot as exposure to the real estate sector. Neither of these reasons is sufficient to expose investors to a traditionally underperforming asset class. The fixed-income allure of these non-traded REITS really took hold after the dust settled from the financial crisis. Due to persistently low interest rates, investors just could not get any sort of yield from traditional fixed income securities. Financial advisors began to really push non-traded REITs offering distribution rates of more than 7%, all the while allegedly protecting the principal  investment with a portfolio of real estate. If this sales pitch sounds familiar and you have money stuck in the NorthStar Healthcare REIT, please call our Chicago-based securities attorneys at 312-332-4200 for a no-obligation free consultation.

The Financial Industry Regulatory Authority (FINRA) filed a complaint against VFG Securities, a small broker-dealer firm that allegedly garnered 95% of its revenue from the sale of nontraded real estate investment trusts (REITs) and other illiquid investments. REITs can be extremely risky investments, especially for those investors who are older, have less net worth and are less sophisticated. A broker must take into account these factors before recommending or selling investments, or else his brokerage firm may be held liable for investment losses. FIRNA alleged that VFG Securities generated nearly all of its revenue from the sale of nontraded REITs and direct participation programs from November 2010 until June 2012. FINRA also alleged that VFG’s president and owner, Jason Vanclef, used a book he had written titled “The Wealth Code,” as sales literature to promote investments in nontraded REITs and direct participation programs. They also accused him of telling investors that investing in the REITs would offer high returns and capital preservation. In actuality, they are speculative investments that contain a high degree of risk.

In September, LPL Financial agreed to pay $1.43 million in fines and return money to investors who paid for inappropriate sales of nontraded real estate investment trusts (REITs). This came after an investigation into the firm headed by the North American Securities Administrators Association (NASAA). LPL is remediating losses for unsuitable nontraded REITs from January 1st 2008 through December 31, 2013. Afterwards, LPL will give the NASAA a report detailing the amount of funds reimbursed. LPL also recently came to a $2.5 million agreement with the Commonwealth of Massachusetts to pay fines and restitution over certain sales of nontraded REITs to investors in that state since February 2013. LPL Financial Ordered to Pay. The issue came with how broker-dealers handled various settlements in paying clients who bought auction rate securities (ARS). ARS’ is a long-term debt issue, but acts as if it were a shorter term issue because interest rates are set every month, depending on whether the issue is tax exempt, and the interest is paid either shortly after the auction yield is settled or every quarter or half year. If you invested in REITs with LPL, please call our securities law firm in Chicago to speak to an attorney for free. We may be able to bring a claim against the firm in order to help you recover your investment losses. There is no obligation and we take cases on a contingency fee basis only.

On Wednesday, LPL agreed to pay $750,000 to settle charges related to the sale of nontraded real estate investment trusts (REITs) to an 81-year-old investor in New Hampshire. The state claims that the sale of the REITs was unsuitable and unlawful. The Bureau of Securities Regulation says the broker-dealer sold unsupervised nontraded REITs to the investor and this resulted in losses that were significant. For this, LPL was fined $750,000. Nontraded REITs can be very risky investments and are not suitable for every investor. When recommending a security, the broker must take into account the customer’s age, net worth, investment portfolio and investment objectives. If he does not, his brokerage firm can be held liable for investment losses, as they had a duty to reasonably supervise him while he was employed there. LPL settled a $1.43 million multi-state case brought by the North American Securities Administrators Association for certain nontraded REIT sales and inadequate supervision of the transactions. The firm also agreed to pay $1.8 million in fines to Massachusetts and $200,000 in fines to Delaware for unsuitable sales of leveraged exchange-traded funds. Finally, in May, the Financial Industry Regulatory Authority (FINRA) ordered LPL to pay $11.7 million in fines and restitution for “widespread supervisory failures” related to the sale of its products.

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