Real Estate Investment Trusts, or REITs, are corporations that work by pooling the resources of numerous smaller investors into one large fund which is then invested in various real estate holdings. While REITs are often marketed as low-risk, high yield investments, industry watchdog organizations including FINRA and the SEC are leading increased scrutiny into the way non-traded REITs are marketed to the public. Many investors have reported being unable to redeem their shares from non-traded REITs and remain stuck in these uncertain investments as a result of REIT Fraud.
If you invested in a REIT and lost a significant amount of money, had your distribution payments suspended, or remain stuck in your investment, you may be able to recover your losses. Contact our securities lawyers today to learn more about your options and our REIT Lawsuit experience.
What is a REIT and How Does it Work?
Real estate investment trusts are companies that gain income from owning or financing real estate from a variety of property sectors. These properties may include, among others, hospitals and other healthcare facilities, commercial real estate such as hotels and apartment complexes, office buildings, and even infrastructure such as cell towers and energy pipelines. Most REITs focus on a specific real estate sector, but some REITs diversify the types of properties in their portfolio.
Companies must meet certain requirements to qualify as REITs. These requirements include investing at least 75% of the company’s total assets in income-generating real-estate, cash, or U.S. Treasuries and distributing the income from this real-estate to shareholders.
While many REITs may be good and viable investments, other REITs have lost investors significant amounts of money. Investors should conduct a fair amount of research and know what to look out for before committing to investing in a specific REIT.
Visit our FAQ’s to learn more about when and why non-traded REITs are created.
Types of REITs
There are many different types of REITs. These REITs differ based on the types of business they practice and the ways the REIT shares are bought and sold. The main types of REITs include:
| Equity REITs | Equity REITs own and mange income-producing real-estate. The main income of these REITs comes from rents on the properties. |
| Mortgage REITs | Mortgage REITs, or mREITs, operate by lending money to real-estate owners and managers. These companies earn income primarily from the difference between the interest they earn on the mortgage loans and the cost of providing these loans, known as the net interest margin. Since these REITs are primarily focused on mortgages, they may be sensitive to changes in the interest rate. |
| Hybrid REITs | Hybrid REITs are a mix of Equity and Mortgage REITs, and focus on both the ownership of property and the lending of funds. Different hybrid REITs may focus more on one aspect than the other. |
| Publicly Traded REITs | Shares of publicly traded REITs are bought and sold on a national securities exchange, such as the NYSE or NASDAQ, and are regulated by the Securities and Exchange Commission (SEC). |
| Public Non-Traded REITs | While non-traded REITs are registered with the SEC, shares of non-traded REITs are not sold on a national securities exchange. These REITs are less subject to market fluctuations than publicly traded REITs, but are often less liquid. |
| Private REITs | Private REITs work as private placements and are only sold to a select list of investors. These REITs are not registered with the SEC and do not trade on national securities exchanges. |
Different REITs carry different types of risk and many not be suitable for certain investors. Stock brokers and financial advisors should take into account an investor’s desired risk level and experience when recommending REIT investments.
Traded REIT and Non-Traded REIT Differences
Some differences between Traded REITs and Non Traded REITs include:
| Traded REITs | Non-Traded REITs | |
|---|---|---|
| Primary Differences | Traded on stock exchanges, unlike non-traded REITs. | Not traded on public stock exchanges and generally may only be bought through private offerings, unlike traded REITs. |
| Liquidity | Traded on stock exchange, generally easy to sell. | Typically, a limited number of shares are redeemable but with a number of restrictions. Can be difficult to sell. |
| Up-Front Fees | Underwriting fees may be 7% or more, can be subject to brokerage fees when bought on the open market. | Fees may be as much as 15% of the price per share. |
| Valuation | Share valuation is determined by market value. | Valuation is determined by the fund managers or a third party. |
Are REITs Good Investments?
While REITs are often marketed as low-risk investments, FINRA and the SEC have recently increased scrutiny into the marketing of these investments. The risks associated with REITs can change depending on how investors are able to buy and sell shares and the ease in which they can track the valuation of their investment.
Publicly traded REIT Risks
Publicly traded REITs can be subjected to real-estate market fluctuations, and do not guarantee a profit or ensure against loss.
Non-traded REIT Risks
Non-traded REITs can be dangerous for a number of reasons. The risks associated with non-traded REITs include:
- These REITs are generally illiquid, meaning that your money may be tied up in a REIT for a period of eight or more years.
- Most non-traded REITs offer limited early redemption of shares, meaning it may be hard for certain investors to get out of these investments.
- Advisor and broker fees are often very high when it comes to REITs.
- There is no guarantee of profit or assurance against loss.
- It can be difficult to determine the true value of non-traded REIT shares. In fact, most non-traded REITs do not provide an estimate of their value until 18 months after the close of the offering.
- Distribution payments for non-traded REITs are not as straight forward as those paid for stock investments traded on national exchanges. REIT distributions can be subsidized by borrowed funds and may even include a return of investor principle. This can reduce the value of the shares as well as the company’s ability to purchase additional assets.
- Since the manager of a non-traded REIT is often not an employee of the company, there may be fee incentives for the manager that do not align with shareholder interests.
Private REIT Risks
Private REITs are generally not required to register under the Securities Act. This means that these REITs are not obligated to provide the same disclosure documents that registered REITs are. Further, the true value of these investments is not always publicly available. With limited disclosures pertaining to the finances of the private placements, investors may be unable to foresee some of the pitfalls of their REIT investment.
While there are many dangers associated with private placements and other non-traded REITs, advisors often recommend risky private placements to investors because these investments pay high commissions.
If your advisor sold you a private placement or non-traded REIT, and failed to mention the risks associated with this investment, you may have a claim. Speak with a securities lawyer about recovering your losses.
Can you Lose Money in a REIT?
Many investors have reported significant losses from certain REIT investments. Some of these investments include:
- Hospitality Investors Trust: Hospitality Investors Trust is a non-traded REIT which was originally offered at $25 per share. As of December 31, 2018, the REITs net asset value was estimated at $9.21 per share. Additionally, the company suspended distributions in 2017, significantly harming investors.
- Benefit Street Partners: Benefit Street Partners REIT is a non-traded REIT which conducted its initial public offering at $25 per share. The price of the REIT has decreased substantially since then, reaching an estimated net asset value of $18.75 per share as of September 30, 2018.
- Northstar Healthcare Income: Northstar Healthcare Income is a non-traded REIT that was originally valued at $10.20 per share in 2013. By 2018 the REIT had lost 30% of its value. Then, in 2019, the company cut its distributions, causing many investors to lose their monthly investment income.
- The Parking REIT: The Parking REIT conducted its initial public offering at $25 per share. Since then, tender offers for the purchase of these shares have ranged as low as 48% below the original price.
Are REITs Safe?
Some REITs may be safer investments than others, but this depends on the investor’s interest and goals, as well as they type of REIT investment.
Some investors may be happy investing in REITs, but REIT investments are not suitable for everyone. A good investment advisor or stock broker should warn investors about the dangers of REITs, and place investors only in REITs that are good for their age, risk tolerance, investment goals, and investment experience.
Stock Brokers and Investment Advisors REIT Fraud
Our securities lawyers have received a number of claims about certain investment advisors and stock brokers placing investors in unsuitable REITs.
We are currently investigating Cetera and East West Bank on allegations that Cetera advisors were steering conservative investors into risky private placements and REITs, including Hospitality Investors Trust, Northstar Healthcare, and Arc Realty Finance.
Financial advisor misconduct is not uncommon, and should be taken very seriously. If you believe your stock broker or financial advisor placed you in an unsuitable investment, you may be able to recover your losses. Contact our securities team to learn more.
Non-Traded REITs Lawsuits & Investigations
Following complaints from investors, FINRA and the SEC have increased scrutiny into a number of brokerage and investment firms who market and manage non-traded REITs. Investors have complained that they were sold non traded REITs as low-risk, high yield investments, which may be inaccurate. Furthermore, a number of these investors report that they are unable to redeem their shares and feel stuck in an uncertain investment.
In response to these reports, Gibbs Law Group’ securities fraud lawyers have filed a class action lawsuit against David Lerner Associates, Inc. and Apple REITs alleging violations in connection with the sale of these investments.
In addition, we have also filed a number of individual claims and are currently investigating similar allegations against a variety of different REITs, including:
- Northstar Healthcare Income
- Hospitality Investors Trust
- Benefit Street Partners Realty Trust
- FS Credit Real Estate Income Trust–I
- The Parking REIT
- Cole Credit Property Trust III (“CCPT III”)
If you invested in any of these REITs, or others, we may be able to help. Speak with a lawyer to learn more.
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