Popular Non-Traded REITs Are Raising Red Flags For Regulators

Non-traded real estate investment trusts (REITs) are attracting increased scrutiny by regulators, after their meteoric rise in popularity among investors, according to Investment News and others. There has been nearly $10 billion worth of new money invested in non-traded REITs this year alone, notwithstanding their illiquidity, lack of transparency, high fees and the way they are valued on account statements to customers. Unfortunately, during a time of extreme volatility in the markets and low interest rates, investors seeking investment vehicles offering higher returns overlook or are not told about the negatives involved with investing in non-traded REITs, since the broker is more focused upon the exceptionally high commissions he will receive for the sale.

The Financial Industry Regulatory Authority (FINRA) cracked down on David Lerner & Associates in May 2011, regarding the distribution and evaluation of the Apple REITs and specifically the Apple REIT Ten. Since that time, FINRA has issued an investor warning about non-traded REITs as recent as October 2011. Then just last week, FINRA fined Wells Investment Securities $300,000 for using misleading marketing materials associated with the marketing and sale of its Wells Timberland REIT.

As a result of the increased scrutiny by regulators, many firms are reassessing which products they will continue to sell and increasing their internal due diligence on the ones they intend to continue to promote. By and large, firms seem to be paring back their portfolios containing non-traded REITs. For example, Linsco Private Ledger of LPL Financial, one of the biggest peddlers of non-traded REITs has cut 20% of the non-traded REITs on its platform and ramped up its internal due diligence on the non-traded REITs it intends to keep. According to the report, there are some 73 REITs in today's market from 50 different sponsors. This is nearly double the 38 REITs and 28 sponsors that existed in 2008.

Non-traded REITs have caused investors, especially senior investors, to lose considerable amounts of their retirement money. The following is a list of non-traded REITs that have been marketed and sold to investors:

  • Inland American Real Estate Trust
  • Inland Western Retail Real Estate Trust
  • Wells Timberland REIT
  • Wells REIT II
  • Behringer Harvard REIT I
  • Corporate Property Associates 16 Global
  • Cole Credit Property Trust I & II
  • Dividend Capital Total Realty Trust
  • Apple REITs Six, Seven, Eight, Nine & Ten
  • Hines Real Estate Investment Trust
  • Healthcare Trust of America
  • KBS Real Estate Investment Trust & II
  • Apartment Trust of America
  • CNL Lifestyle Properties
  • Corporate Property Associates 15
  • Lightstone Value Plus REIT
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