- August 22, 2021
Over the last two years, the Wolper Law Firm, P.A. has received calls from dozens of clients, who purchased shares of non-traded real estate investment trusts (“Non-Traded REITs”) and non-traded business development companies (“BDCs”). Most of these clients purchased the Non-Traded REITs and BDCs between 2013-2016 with assurances made by Financial Advisors that they would receive stable dividends, principal protection and liquidity within 1-3 years. None of these assurances have come to fruition and, over the last two years, many of the Non-Traded REITs and BDCs have either suspended their dividends, lowered their dividends and/or experienced substantial price per share depreciation.
By way of background, Non-Traded REITs are securities that do not trade on a public securities exchange. For this reason, non-traded REITs can be illiquid. 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 high commissions serve as an incentive for Financial Advisors to recommend these speculative investments.
Business Development Companies, or BDCs, are closed-end investment companies that help small companies meet their capital needs. The BDCs make loans to small businesses and finance those loans through capital raised from investors. Many BDCs do not trade on a public exchange and, consequently, are also highly illiquid.
Non-Traded REITs and BDCs also have high internal expenses, commonly known as middleman expenses, which dramactically lower the returns to investors. These fees, which can be between 12%-15%, erode the investment return. In order to overcome those high internal expenses, the Non-Traded REIT and BDC revenues have to remain sustainably high. Otherwise, returns are negatively impacted.
Business Development Corporation of America (BDCA) is a non-traded BDC that raised $1.9 billion between 2011 and 2015 at an initial purchase price of $10 per share. It purported to offer investors a dividend of more than 7%. Although BDCA continues to represent to investors that its valuation is more than $7 per share, in August 2021, Registered Investment Advisor, Mackenzie Capital, made a tender offer on the outstanding shares of BDCA in the amount of $2.50, a steep discount to its purported market value. Moreover, the secondary trading value of BDCA shares currently available through Central Trade and Transfer’s auction process is approximately $5 per share. The secondary trading value may be further negatively impacted by the Mackenzie tender offer.
BDCA has caused huge investor losses. Investors have effectively received a return of principal disguised as income and are now facing capital losses in the investment, which remains illiquid. Financial advisors have a legal and regulatory obligation to recommend only suitable investments that are appropriate for their clients’ needs and objectives. Their employing brokerage firm has a legal and regulatory obligation to supervise the Financial Advisors’ sales practices and dealings with clients. To the extent any of these duties are breached, the customer may be entitled to a recovery of his or her investment losses. In addition, brokerage firms have a duty to conduct due diligence into the Non-Traded REIT and BDC issuers prior to recommending the investments.
The Wolper Law Firm, P.A. represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, P.A., 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 firstname.lastname@example.org.