This week, a FINRA arbitration panel in Florida turned some heads with a $900,000 award to investors who had lost money in two non-traded REITs offered by Inland American Real Estate Trust, Inc. One of the nation’s largest real estate trusts, Inland American controls more than $11 billion in real estate assets. The REITs at issue in the case were Inland Western Real Estate Investment Trust and Inland American Real Estate Investment Trust.
photo by Kevin Dooley (Creative Commons)
Maybe you’ve heard of REITs already. They’re real estate trusts that pool investor money in order to control large assets such as shopping malls, apartment complexes, even timber land. There are two basic kinds of REITs that are publicly registered (as well as something called a “private REIT” or “private placement REITs” which we we’ll talk about another time): exchanged-traded REITs and non-exchanged-traded REITs. In the case of traded REITs, they are similar to more familiar securities like stock in that their shares are listed on a national securities exchange and they can be sold rather easily on the secondary market.
Non-traded REITs are different. Their shares are not traded on a national securities exchange, they demand high fees, and they are highly illiquid. Often, investors will not be able to get their money out of a non-traded REIT for 8 years or more. Finally, distributions thrown off by a REIT are subject to reductions or stoppages by the issuer of the REIT if they deem it necessary--and there’s nothing you can do about it. These factors make REITs, and especially non-traded REITs, rather risky investments, especially for novice investors who do not fully understand the liquidity issues involved.
In summer 2012, FINRA dedicated one of its “Investor Alerts” to the subject of non-traded REITs. For more information, please click here. Below you’ll find a helpful chart provided by FINRA that helps describe and distinguish between traded and non-traded REITs:
We’ve litigated numerous cases in which brokers seeking higher fees placed unwitting investors in non-traded REITs without informing them of the risks involved, especially the risks related to liquidity. Years later, when the REITs stop issuing distributions or the investors want out, they find themselves stuck in a product they don’t understand and that is not appropriate for them. Because there is no secondary market for such securities, investors simply have nowhere to go.
If you or anyone you know has been the victim of broker misconduct or investment fraud, please contact us immediately at 1-855-462-3330 for a free consultation.