Non-traded real estate investment trusts (REITs) have been a source of pain for many investors in recent years. Often pitched as safe income-earning investments numerous REITs have proved to be quite the opposite.
The Financial Industry Regulatory Authority (FINRA) issued an investor alert over REITs in light of concerns that:
some investors may be the recipients of misleading information regarding certain public non-traded REITS…some investors may also receive recommendations to purchase these products without adequate investigation by the firm or broker to determine whether these or similar investments are suitable.
In fact, FINRA developed this tip sheet to assist investors who are considering a REIT investment: http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/REITS/P151417.
Dangers associated with REITs include, for example: 1) distributions from the REIT derived not entirely (or at all) from REIT income, but rather from investments made into the REIT. In a sense, the REIT is cannibalizing itself and losing value while it appears to be healthy and generating income; 2) liquidity issues: whether or not the REIT is performing well, it may be difficult for investors to sell their REIT holdings when they need to because the REIT is not traded on securities exchanges; and, 3) misrepresentations by brokers or financial advisors regarding distribution rates, liquidity, stability/volatility, redemption features and liquidity events, and misleading comparisons to other real estate projects.
Examples of REITs that have experienced difficulties include Wells Timberland REIT, Pacific Cornerstone Core Properties REIT, Apple REIT nine, Behringer Harvard REIT, and Inland Western Retail REIT.
Investors who suffered losses due to REITS may have securities arbitration claims against their broker, brokerage firm, financial advisor, or financial advisory firm for unsuitability and misrepresentation, among other claims.