One of the hardest-hit investments because of the coronavirus are REITS. Unfortunately, many investors may not fully understand the extent of their losses. As an investor, the names and terminology may be similar, but the reasons your investment losses may not necessarily be market losses might differ.
While publicly traded real estate investment trust (REIT) investments typically represent more liquid and transparent investments, they are currently impacted by market factors. Still, investors overconcentrating in the real estate sector, or a particular segment of the real estate sector may find that they have a potential claim to recoup their investment losses based on unsuitable investment recommendations or an inappropriate investment strategy.
While those issues might similarly apply to investors in non-traded REITs, some additional factors and considerations often lead to even more problems with these products for investors. Let’s start with the basics:
What is a real estate investment trust (REIT)?
The answer is that a REIT is an investment company/trust that owns and operates real estate related businesses that could involve the acquisition, financing, operation, or management of certain assets. It can run the gamut from apartment buildings to mortgage and financing businesses, residential real estate development, or commercial real estate.
There are three different kinds of real estate investment trusts (REITs), all of which give investors a chance to invest in a security that provides exposure to real estate related businesses and generally the purpose of these investments is to provide a return and a dividend income stream, most often for conservative to moderate risk investors. They perceive the underlying business assets as being in real estate as a sense of added security.
The three main types of REITs:
Publicly Traded REITs
These types of REITs are liquid investments (traded on the exchanges), highly regulated, and US Securities and Exchange-Commission (SEC)-registered. Anyone can invest in them, and they trade on a recognized exchange. Because the REIT stocks are listed on the stock exchanges, there is market volatility, but investors can quickly sell their REIT just like a stock.
These types of REITS are not registered with or regulated by the SEC and often sold by financial advisors under the private placement rule. They can’t be found on public exchanges, which means the pricing is not publically impacted by market activity or events.
Unfortunately, there is not a lot of public information is available about private REITs, and often investors are forced to sell them for losses on secondary markets. Only accredited investors with a $1M net worth, minus the value of their private home, or those who have earned $200K annually for the last two years are allowed to invest in private investments. Liquidity may vary depending on the REIT and can be limited.
Public, Non-Traded REITs
These have to be registered with and regulated by the SEC. Although public and registered with the SEC, these non-traded REITs do not trade on any recognized stock exchanges. They are generally illiquid, which means investors cannot typically sell when they choose, and there is little in the way of transparent pricing. The sponsor stated values might appear on investor account statements, but the actual value of the investment may not be anything close to those valuations.
Many non-traded REITs also include high up-front fees. These investments are often sold to retail investors, sometimes being represented or misrepresented to retirees and those who are attracted by the initially promised distribution income streams, but who might not otherwise understand the products or the risks associated with these investments. Sales of these products are often very lucrative for the broker-dealer firm and financial firm selling the investments.
Investors must obtain disclosure regarding these REIT investments and know precisely what you are buying so that you can make fully informed investment decisions:
For example, did your financial advisor review with you the following risks:
- Was it explained that the inconsistent and fluctuating value of some REITs, especially those that are non-traded?
- Possible, unanticipated tax consequences?
- Strict rules regarding redemption and fees charged for redeeming too early, or the limitations you might face in trying to liquidate?
- High commissions along with “issuer costs” as well as the financial advisor and broker-dealer firm incentives for selling that product to you?
- Some can include unspecified properties, which can leave investors with no way of knowing whether/not these are reliable investments.
- Did you understand the underlying investment and investment strategy?
- The risks of concentration in any individual position, any particular product, geographic region, asset, market, sector, etc. Is the investment correlated? Are too many eggs in one basket?
- Do you understand the material risks of the individual investments as well as the overall investment strategy?
- Poor liquidity, which makes it hard for investors to get their money back if they need the funds
These are just some of the types of issues and material risks that should have been disclosed and which you likely needed to know and make an informed investment decision.
Additional Problems with REITs
In addition to inadequate disclosures as outlined above, financial advisors often gloss over the details in presenting these investments to customers, leaving investors unaware of the risks they are taking on with these investments, as well as a lack of clarity or any understanding of where these individual investment pieces might fit in with an overall investment strategy and how they could potentially impact the portfolio.
Broker-dealers must adequately supervise their financial advisors who are recommending these investments to customers as they are only permitted to recommend these investments to customers when they are considered suitable and only to investors who can handle the risks involved.
What Can You Do If Your Financial Advisor Sold You A REIT?
A popular option form many investors is a Financial Regulatory Authority (FINRA) customer arbitration dispute. This is a dispute process at FINRA is private and quicker and more efficient than traditional court litigation. Typically with FINRA, there are not any depositions and mostly paper-based discovery. It is recommended you hire an expired investment attorney to handle the process.
Haselkorn & Thibaut (InvestmentFraudLawyers.com) offers free consultations and case reviews for investors. They can be called at 888-628-5590.