Investors in Columbia Property Trust, a popular non-traded REIT, got some bad news in late 2013. Columbia’s investors learned their investment had actually lost value while similar traded REITs doubled in value.
Columbia began raising money in 2004. Like many non-traded REITs, it claimed a value of $10.00 per share. The real value of nontraded REITs is often difficult to determine, however. That’s because there is no ready secondary market on which to sell the shares.
In October, Columbia Property Trust went public thus fixing a value of the shares. The company sold shares at $22.50 but that is after undergoing a reverse 4 to 1 split. That means investors got back far less than what they paid. For many investors, however, the public offering meant they could at least cash out.
Non-Traded Real Estate Investment Trusts must often be held for 8 years before an investor can sell or cash in. That makes them unsuitable for many older investors, retirees and those that may need access to their money in the short and medium term.
Columbia Property Trust has also twice previously cut its distributions. (REITs are required to distribute at least 90% of their earnings to investors.) Investors holding common stocks and mutual funds will often cut their losses and simply sell when an investment doesn’t perform as expected. REIT owners often can’t sell and don’t even know what their shares are worth.
Publicly traded REITs have done very well in recent years while many non-traded REITs such as Columbia Property Trust have lost money. The non-traded REITs typically carry higher fees and commissions too which can further contribute to investor losses.
As several non-traded REITs go public or have “liquidity” events in the near future, many investors will finally be able to sell or cash out. Unfortunately, they may then find their investment has dropped significantly in value.
Stockbrokers and investment advisers are required to fully understand their clients’ investment needs, risk tolerance and need for access to capital. Unfortunately, some brokers were more interested in large commissions and didn’t even understand what they were selling.
Investors who suddenly found themselves unable to sell their shares or access their capital may have claim against their broker and his or her employer. Several large brokerage firms have recently been fined by authorities for deceptive marketing practices and for permitting their brokers to make unsuitable investment recommendations.
Unfortunately, we expect to see many more claims in the upcoming year as the non-traded REIT market continues to shake out.