It’s no coincidence that the three top headlines in InvestmentNews Daily today all addressed the problems facing REITs. As lawyers that assist investors who were defrauded or misled by stockbrokers and investment advisors, we have heard many sad stories recently… elderly investors who were told to invest in thinly traded REITs, people who can’t redeem or sell despite the need to access their capital and people who have watched their investment plummet in value overnight. The central themes in all these stories are Real Estate Investment Trusts – REITs.
REITs allow ordinary investors to participate in large real estate projects. Many of these investments are publicly traded and listed on major stock exchanges. Others, however, are not listed on an exchange making them difficult to sell. These nontraded REITs offer a higher yield but at the price of little or no liquidity. Because of that feature, they are not recommended for anyone who may need sudden access to their money.
Some nontraded REITs require investors to hold on to their investment for 8 years or more. For that reason, they are often not suitable for baby boomers nearing retirement or the elderly.
Both the SEC and the Financial Industry Regulatory Authority (FINRA) issued warnings to investors last fall about these products. Brokers were warned too – be very careful to insure that investors fully understand the risks associated with these investments. Unfortunately, the investing public and investment advisers often didn’t heed the warnings. Now some REITs have dropped by as much as 75% and investors can neither redeem nor find a buyer for their shares. In other words, they are stuck.
According to InvestmentNews, one of the largest nontraded REIT, KBS REIT I with $3.4 billion in assets, halted distributions and reported that its share value was about half of the original offering price if someone can even find a buyer.
If you find yourself with a REIT that is the proverbial pig in a poke, you may have a claim against the person who sold it to you and his or her firm. While no stockbroker can guarantee future performance of investments, brokers are required to understand their customer’s needs before making a recommendation (“Know Your Customer” rules). Stockbrokers are also required to make suitable investment recommendations and must fully explain if a REIT share has limited redemption or no ready secondary market. From the calls we have received, many brokers failed to do those things.
If you purchased a REIT from an investment advisor, the rules are even more stringent.
[Ed. Note: This post originally appeared in Due Diligence on March 22, 2012].