brokerwatch

What is a REIT?

REITs are companies that own or finance income-producing real estate or related assets. There are several different types of REITs,  everything from office or apartment buildings to hotels to mortgages or loans, with many specializing in a single type of real estate, such as retail, residential or industrial, among others. While some REITs are publicly traded, many REITs are non-traded and private, which pose unique risks to investors.

Brokers and financial advisors are often drawn to recommending REOTS because of the high commissions associated with the transaction. These alternative investments are generally only suitable for savvy investors who are wealthy and sophisticated, because they are complex investment products that are often highly illiquid (meaning investors may be stuck and not able to access their money). Moreover, many illiquid REITs cannot be freely sold in the marketplace. All too often, investors trying to exit or access their money are faced with two bad options: sell the shares directly back to the sponsor at a heavily discounted price or sell the shares for pennies on the dollar through the limited secondary markets.

If you believe you lost money because of unsuitable REIT recommendations, it is important to take action. Contact Peiffer Wolf today by filling out a Contact Form on our website or by calling 585-310-5140 to schedule a FREE Case Evaluation.

REITs: What are the risks?

According to the US Securities and Exchange Commission, “[b]ecause they do not trade on a stock exchange, non-traded REITs involve special risks”.

They are illiquid investments, which means that “if you need to sell an asset to raise money quickly, you may not be able to do so with shares of a non-traded REIT.” Moreover, “it can be difficult to determine the value of a share of a non-traded REIT. Non-traded REITs typically do not provide an estimate of their value per share until 18 months after their offering closes. This may be years after you have made your investment. As a result, for a significant time period you may be unable to assess the value of your non-traded REIT investment and its volatility.”

 Other significant risks according to the SEC?

• Distributions May Be Paid from Offering Proceeds and Borrowings: Investors may be attracted to non-traded REITs by their relatively high dividend yields compared to those of publicly traded REITs. Unlike publicly traded REITs, however, non-traded REITs frequently pay distributions in excess of their funds from operations. To do so, they may use offering proceeds and borrowings. This practice, which is typically not used by publicly traded REITs, reduces the value of the shares and the cash available to the company to purchase additional assets.
• Conflicts of Interest: Non-traded REITs typically have an external manager instead of their own employees. This can lead to potential conflicts of interests with shareholders. For example, the REIT may pay the external manager significant fees based on the amount of property acquisitions and assets under management. These fee incentives may not necessarily align with the interests of shareholders.

The Financial Industry Regulatory Authority also warns investors about the risks of real estate investment trusts:

• Distributions are not guaranteed and may exceed operating cash flow. Deciding whether to pay distributions and the amount of any distribution is within discretion of a REIT’s Board of Directors in the exercise of its fiduciary duties;
• Distributions and REIT status carry tax consequences;
• Lack of a public trading market creates illiquidity and valuation complexities;
• Early redemption is often restrictive and may be expensive;
• Fees can add up;
• Properties may not be specified;
• Diversification can be limited;
• Remember Real Estate Risk. (“There are risks associated with both the real estate market as a whole and any specific subset of the real estate market on which a particular REIT concentrates.”)

If you have REITS in your portfolio, you should contact Peiffer Wolf today by filling out a Contact Form on our website or by calling 585-310-5140 to schedule a FREE Case Evaluation.

REIT Lawsuits | Do you have these REITs in your portfolio?

If you have one or more of the following REITs in your portfolio, you should contact Peiffer Wolf immediately:

• ARC NYC REIT (American Realty Capital)
• AFIN, ARC, VEREIT
• HIT REIT (Hospitality Investors Trust REIT)
• Moody National REIT
• NorthStar REIT (NorthStar Real Estate Income Trust)
• Phillips Edison REIT
• Starwood Capital Real Estate Income Trust (SCREIT)

Peiffer Wolf updates this list constantly, so make sure you bookmark this page!

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