A Real Estate Investment Trust, or “REIT”, is an investment company that raises capital from investors for the purpose of acquiring real estate. Some REIT’s are publicly traded and can be easily bought and sold in the stock market. Other REITs are privately held and referred to as “Non-Traded.”
Non-Traded REITs are securities that do not trade on a public securities exchange. For this reason, Non-Traded REITs can be illiquid, meaning investors may be unable to sell their investments on demand. The underlying collateral of the REITs consists of income producing residential or commercial real estate. Typically, the commissions generated on Non-Traded REITs are higher than industry norm (approx. 7%) and the investments themselves may be subject to extreme volatility due to associated risk factors. Non-Traded REITs are only suitable for investors with a long-term investment horizon who are willing to accept higher levels of risk in their investments.
The prospectus for Non-Traded REITs confirm that these securities carry a high degree of risk and that their income stream is subject to fluctuation or suspension. In recent years, Non-Traded REITs have been oversold by brokerages and many of the Non-Traded REITs have suspended dividends. When this has occurred, the principal value of the Non-Traded REITs is impacted. Because Non-Traded REITs are illiquid, investors have no way to sell the investment and limit their loss.
An Example Of Fraud In Connection With The Sale Of Non-Traded REITs
A recent example of fraud in connection with the sale of Non-Traded REITs occurred with American Realty Capital family of Non-Traded REITs, which is a global asset manager with a variety of investment programs, principally consisting of REITs invested in real estate throughout the United States and Europe. Its affiliate, AR Capital, sponsors REITs in a variety of industries, including healthcare, retail shopping centers and commercial properties. AR Capital was founded by Nicholas Schorsch, the disgraced real estate asset manager that recently agreed to pay fines of more than $60 million in connection with the REITs sponsored by AR Capital. In addition, Schorsch, his publicly traded REITs, known as Vereit, and their accounting firm, paid an additional $1 billion to settle a class action regarding, among other things, manipulation of company financials. (See https://www.investmentnews.com/article/20190909/FREE/190909943/nicholas-schorschs-former-flagship-reit-settles-with-investors-for-1).
Financial Advisors continued to sell American Realty Capital without disclosure of the underlying misconduct by the issuer. Many of the American Realty Capital products suspended dividends and declined substantially in principal value.