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Recent Non-Traded REIT Announcements Signal Trouble on the Horizon for Investors

The Wolper Law Firm continues to investigate various brokerages who oversold Non-Traded Real Estate Investment Trusts (“Non-Traded REITs”) to retail customers. In recent months, the number of non-traded REITs reporting low trading prices and reduced or ceased dividends has increased, threatening not just the income that investors were hoping for but jeopardizing their capital investment as well.

Why do investors choose non-traded REITs?

Non-traded REITs do not trade a public securities exchange. For this reason, Non-Traded REITs can be illiquid, meaning investors may be unable to sell their investments on demand. Typically, the commissions generated on non-traded REITs are higher than industry norm and 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.

For some investors, Non-Traded REITs offer an opportunity to diversify their portfolios with the kind of properties that wouldn’t otherwise be accessible to them as non-accredited investors. REITs generally hold income-generating properties like apartment complexes, office buildings, or retail developments. When these properties have no vacancies and long-term leasing agreements are in place, they have the potential to generate income for investors.

One of the appeals of investing in REITs is that nearly all of its taxable income goes back to investors. Some REITs are publicly traded while others are non-traded. Non-Traded REITs are subject to the same IRS and SEC regulations as publicly-traded REITs; however, they’re significantly different in several ways. Non-Traded REITs typically put limits on how many shares investors can buy and sell and how long they need to hold their shares; investors may pay as much as 15% per share in fees; and when sold, investors may end up losing money compared to their initial investment. In addition, there’s almost no secondary market for shares, which can limit an investor’s ability to liquefy assets if needed.

The Potential Risks of Non-Traded REITs

Unfortunately, when the income of a REIT declines, so does its ability to fulfill its obligations to its investors; in addition, share prices decline. This is part of the fallout from the economic slowdown brought about, in part, by the coronavirus pandemic. These are among the recent non-traded REITs to reduce their payments to investors and revise their repurchase plans:

• Steadfast Apartment REIT Inc. (“STAR”), a publicly registered non-traded real estate investment trust, has reportedly lowered its distributions to investors and amended its share repurchase plan (SRP) to limit repurchase requests to investors who have died or have a qualifying disability. The per-share distribution fell from $0.90 to $0.5250 as of February 1, 2021. Repurchasing has also been limited to occasions where the investor has died or experienced a qualifying disability, as of April 30, 2021.
• Investors in Hospitality Investors Trust or HIT, a non-traded real estate investment trust (“REIT”) with a focus on hospitality properties in the United States, have seen their shares purchased at $25 decline in value to a rough net asset value of $8.35, with secondary market shares going for as little as $1 per share.
• Investors in NorthStar Healthcare Income, Inc. (“NorthStar Healthcare”) a public, non-traded REIT, have seen the net estimated value of their shares drop from $10 each to $3.89.
• Shares of Resource Real Estate Opportunity REIT and Resource Real Estate Opportunity REIT II, estimated net asset values of $11.10 and $9.09 per share respectively, have recently traded for as little as $6.50 and $4.50 per share.
• The estimated net asset value of shares of Moody’s National REIT II, a non-traded real estate investment trust, was recently said to be $23.50; however, shares have been traded on the secondary market for as little as $7.50.

When evaluating your shares’ performance in Non-Traded REITs, it’s important to consider the prospectus materials offered prior to your purchase. Even though they’re not traded through public markets, they’re still subject to industry regulations. If those regulations haven’t been followed, investors may have legal recourse.

The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at 800.931.8452 or by email at mwolper@wolperlawfirm.com.

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