Investments in Non-Traded REITs hit a 4-year high.
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On April 20, 2022 GWG Holdings, Inc. (GWG) filed for bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas (case 22-90032). According to an article in the Wall Street Journal, published on the same day, the bankruptcy was due to “accounting issues...read more
As reported in the DI Wire, non-traded REITs posted the highest monthly fundraising in nearly 4 years. As FINRA arbitration attorneys, our firm has represented a number of clients who have sued their stockbrokers or financial advisors for the improper sale of illiquid, alternative investments – including non-traded REITs.
Unlike publicly traded REITs, non-traded REITs can be nearly impossible to sell, are difficult to value, and their performance is very difficult to gauge. Many of our clients received monthly distributions from non-traded REITS, believing that these payments were profit on their investment, only to find later that these payments were simply a small return of their own invested capital. It can be impossible to determine if an investor’s distribution payments reflect profits from the REIT, or are simply a small return or give back of the money handed to the company.
Stockbrokers and financial advisors love to sell non-traded REITs to their clients for one simple reason – the high commissions. Standard sales commissions to brokers or advisors often range from 8 to 10%.
That is not to say that non-traded REITs are always a bad investment. We have seen clients realize substantial returns from non-traded REITs. In our experience, the outcome of the non-traded REIT investment is often dictated by the experience and care of the sponsoring company. Some companies have a stellar track record, choose their properties with great care, and are responsible stewards of their investors’ money. Other companies (in our view) are primarily interested in draining as much of their investors’ money as possible. When it comes to deciding whether or not to invest in a non-traded REIT, a potential customer must carefully scrutinize the prior performance of the sponsorship company, as well as any pending or prior lawsuits against the company, the principals in the company, and its related entities.
In addition to a company’s established track record, our firm has also noticed the difference between the performance and safety of multi-family residential properties vs. commercial properties, particularly if a non-traded REIT is holding a single property. If a residential property is affordable, well-maintained, and in a desirable area – multi-family residential property REITs can prove to be a better bet (though there are no ‘sure thing’ investments). We have seen clients really get burned in commercial non-traded REITs, especially REITs that hold a single building or office park.
A recent, illustrative example is as follows. Our client (relying on the promises of their advisor who was motivated by the very high upfront sales commission), invested money in a commercial property non-traded REIT. This REIT owned office space in a single location near a major research university. The same university entered into a lease with the REIT for nearly all of its available square footage. As such, it appeared to be a great investment. However, after a few years the university pulled out of the lease – and the building was left mostly vacant. As the location was in a ‘university town’ – there were not many other options for filling the vacant space. Soon after, the REIT went bankrupt and our clients lost nearly all of their very substantial investment. This scenario usually does not happen with residential multi-family REITs. Tenants move in and out, but there is always a necessary demand for housing in a thriving area, and vacancy rates are usually held below 10% at any given time.
Finally, and of equal importance, is we see clients get into serious trouble with non-traded REITs when they are too concentrated in these illiquid, alternative investments. Some states have strict rules preventing advisors and brokers from selling too many alternative investments to any one client (as calculated by a concentration of the customer’s net worth). But most states have no rules at all. See here for our firm’s in depth discussion of this issue. In our view, it is a recipe for trouble for any individual investor to have more than 10% of his or her liquid net worth in illiquid alternative investments (often called private placements).
If you were misled into investing in a non-traded REIT sponsored by a problematic company, are holding a poor performing non-traded REIT, or were led to invest too much of your money in alternative illiquid investments, feel free to contact our law firm – Epperson & Greenidge, P.A.. Through a narrow and specialized area of the law called FINRA arbitration, our firm has a proven track record of recovering customers’ losses due to the unlawful or negligent actions of their stockbrokers or financial advisors. Call us today at 877.445.9261 or send us an inquiry via our website.