Shareholders of Strategic Realty Trust, once known as TNP Strategic Realty Trust, were notified by mail last week that their investments in the popular nontraded REIT had dropped by over 29%. Although it is hard to find solid data about thinly traded REITs, it appears that much of the drop is attributable to fees.
As recently as last year, investors were told that their Strategic Realty shares had increased by 6%.
Why the sudden discrepancy? The answer to that story centers around the lack of transparency, high fees and lack of liquidity common to nontraded REITs; the very reasons we constantly warn about these investments.
A REIT is a Real Estate Investment Trust. Created by Congress decades ago, REITs allow individual investors to invest in large commercial real estate deals previously reserved for institutional investors and the very wealthy.
There are several types of REITs, some safer and more suitable than others for the average investor. Many REITs are traded on the open market. That means they are liquid and usually have lower commissions. Nontraded REITs have no ready secondary market and fees are often hidden. They may be great for institutional clients but are rarely suitable for most individuals, especially if the investor is elderly or needs ready access to the money behind the investment.
Strategic Realty Trust was a nontraded REIT. Opened to investors in 2009, the trust carried the typical (but arbitrary) valuation of $10 per share. Investors frequently receive statements that show value but those statements often have little basis in fact. Because you can’t readily sell most thinly traded REITs, it is really difficult to know what they are worth. (It also makes them very unsuitable for people who need access to their funds because nontraded REITs sometimes must be held for a decade before they can be sold.)
Strategic Realty was created by noted real estate investor Tony Thompson. It was primarily marketed through independent stockbrokers and brokerage firms. As late as last January, Thompson was telling people the shares were worth $10.60. Later that year, Thompson was removed as the trust’s president. This year, in a settlement with the board of directors, Thompson was bought out at a price of $8.00 per share, a drop of 20%.
Now, it appears that a financial advisory firm, Robert A. Stanger & Associates, valued the REIT at just $7.11 per share. Why the drop?
Fees and lack of transparency – two common problems with nontraded REITs.
The trust says the properties owned by the REIT have appreciated nicely making the sudden drop in value even harder to swallow. The gains in the property were offset by “transaction costs” of $1.54 per share, offering and related costs of $1.03 per share (nontraded REITs carry large commission charges) and 73 cents per share in other losses.
The Financial Industry Regulatory Authority – FINRA – has a pending complaint against Strategic Realty’s creator and former CEO for unrelated problems.
Investors in nontraded REITs frequently find out that their shares greatly declined in value overnight. Worse, after they find out they usually remain stuck with the investment and can’t sell to cut further losses.
Thompson has his own battles to fight with regulators and others. The silver lining in this story, however, is that the stockbrokers who sold shares in Thompson’s REIT may be on the hook for investor losses.
Stockbrokers have a legal duty to understand their customer’s needs, only make recommendations that are suitable to their clients and must fully explain how the investment works. We have seen countless occasions when an investor will say that she or he had no idea they couldn’t sell when they needed cash. We know of one investor who was placed into a nontraded REIT around her 90th birthday. She may never see her money.
If you have purchased shares in TNP Strategic Realty Trust and believe you were misled by your stockbroker, you may have a claim. Cases against brokers and brokerage firms are usually handled on a contingency or “success” fee meaning no money is due the lawyers unless they win and collect your money.
For more information, contact John Chapman at Chapman Law LLC. He and his team of REIT fraud lawyers have helped dozens of people get back their hard earned money. John can be reached at 877-410-8172.