Rising interest rates are a major risk for non-traded Real Estate Investment Trusts (REITs).
Non-traded REITs gained popularity after the financial crisis when interest rates remained at all-time lows. Brokers collected large commission checks selling REITs to investors that needed income in retirement.
While these investments were always fundamentally flawed, rising interest rates are causing significant pricing pressure. Rising interest rates also make it more expensive for real estate funds to borrow money and still generate positive returns.
In addition, investors can now get safe yield in far less risky investments. Investors don’t need to take on unnecessary risk to generate retirement income. There are simpler and safer alternatives available that don’t come with a 100 plus page prospectus that is overwhelming and incomprehensible.
Background on REITS
There are two types of public REITs: those that trade on a national securities exchange and those that do not. The ones that are traded on a national securities exchange (e.g., NYSE, NASDAQ) can be bought and sold like any other stock. The other variety, which is the focus of this article, are not traded on an exchange and, as a result, referred to as Non-traded REITs, (the more formal name is publicly registered non-exchange traded REIT). Some examples of non-traded REITs would be: MVP Parking REIT, Blackstone REIT, Griffin Realty Trust n/k/a Peakstone Realty Trust, Healthcare Trust, and Northstar Health care. Because these Non-traded REITs are not listed on an exchange, their shares are illiquid, and they have substantial valuation and redemption risks as a result. Investors of non-traded REITs can typically only sell their shares after a holding period of a year and under a limited repurchase program. Moreover, once these Non-traded REITs begin to have problems, they become even more difficult – or even impossible – to sell.
To be clear, Non-traded REITs are illiquid investments with substantial risk. Non-traded REITs are opaque, do not re-price on a regular basis, are ridiculously expensive, have historically been outperformed by REITs that are traded on national exchanges, and carry other significant risk. From our perspective, the only reason that Non-traded REITs are so heavily recommended by financial firms and financial advisors is that Non-traded REITs pay very large commissions to financial firms and advisors for selling them to retail investors. In sum, non- traded REITs suffer from illiquidity, unreasonable commissions, poor diversification, and numerous conflicts of interest. Moreover, many of the dividend payments made by non-traded REITs do not actually represent distribution of earnings from the REIT, but instead either represent debt or a return of principal.
With respect to the difficulty in ridding yourself of these Non-traded REITs after you buy them, this is due to the lack of a public secondary market for shares of non-traded REITs. As a result, investors are effectively unable to sell their shares even if the value of the REIT or its underlying assets significantly decrease. To mask this illiquidity and justify their reported valuations, many non-traded REITs offer grossly imbalanced repurchase programs through which investors can sell their shares to other investors or back to brokers at a significantly lower price. These repurchase programs come with restrictions. Investors can participate in the repurchase program only after an initial holding period, typically a year, and if there are a large number of shareholders wanting to sell, the non-traded REITs’ management reserves the right to limit the number of investors who are permitted to redeem their shares.
What Recourse Do Investors Have
Investors that were improperly sold REITs by a FINRA registered financial advisor have the right to bring an arbitration claim. If you or someone you know is invested in non-traded REITS, Vernon Litigation Group recommends that you speak with one of the law firm's securities attorneys, who will provide you with a free and confidential overview of your situation and claims you may have as well as your legal options.
Vernon Litigation Group is based in Naples, Florida and has been successfully representing investors throughout the United States on Non-traded REIT claims for decades, with lawyers licensed in Florida, Tennessee, and Massachusetts. Contact Vernon Litigation Group at (239) 319-4434 to speak with a representative today.