Our law firm is handling securities arbitration claims in the arbitration forum established by the Financial Industry Regulatory Authority (“FINRA”) to recover losses sustained in non-traded Desert Capital Real Estate Investment Trust (“REIT”). Sold by many independent broker-dealers, Desert Capital was represented to many investors to be a safe, low risk fixed income investment. However, Desert Capital was an illquid product and carried exposure to risky loans, including subprime and below investment grade loans.
Desert Capital REIT invested in loans to builders and developers to buy, develop and build on commercial or residential land. The REIT did not invest in traditional residential mortgages. The loans were structured so that the REIT received monthly interest payments during the life of the loan and a balloon principal payment upon the maturity of the loan. These types of loans carry much more risk than traditional mortgages. When the housing market crashed, defaults on the loans increased, liquidity dried up and the value of Desert Capital REIT declined.
On May 5, 2011, an involuntary petition for protection under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101 et. seq., was filed against Desert Capital REIT with the United States Bankruptcy Court for the District of Nevada, Las Vegas Division. Creditors with claims of over $43 million filed the petition to put Desert Capital into involuntary Chapter 11 bankruptcy. Initially, Desert Capital REIT objected to the involuntary bankruptcy. However, in June 2011, Desert Capital REIT advised the bankruptcy Judge that it was withdrawing its objection to the bankrutpcy proceeding.
In addition to participating in the bankruptcy proceeding, investors who purchased Desert Capital REIT from a brokerage firm may be able to recover their losses by filing an individual securities arbitration claim. Under FINRA Rules, brokerage firms have an obligation to make only suitable recommendations, and to fully disclose all risks associated with a recommended product. Moreover, brokerage firms have a duty to conduct a reasonable investigation of the issuer and the securities they recommend before approving them for sale to thier customers.
In October of 2011, FINRA issued a new Investor Alert called Public Non-Traded REITs-Perform a Careful Review Before Investing to help investors understand the benefits, risks, features and fees of these investments. While investors may find non-traded REITs appealing due to the potential opportunity for capital appreciation and the allure of a robust distribution, investors should also realize that the periodic distributions that help make non-traded REITs so appealing can, in some cases, be heavily subsidized by borrowed funds and include a return of investor principal. Additionally, early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total return.
According to FINRA, “Confronted with a volatile stock market and an extended period of low interest rates, many investors are looking for products that offer higher returns in turbulent times. However, investors should be wary of sales pitches that might play up non-traded REITs’ high yields and stability, while glossing over the lack of liquidity, fees and other risks.”
REITs pool the capital of numerous investors to purchase a portfolio of properties—from office buildings to hotels and apartments, even timber-producing land—which the typical investor might not otherwise be able to purchase individually. There are two types of public REITs: those that trade on a national securities exchange and those that do not. FINRA’s alert focuses on publicly registered non-exchange traded, or simply non-traded REITs.
Public Non-Traded REITs outlines the features, complexities, risks and costs associated with non-traded REITs.
Public Non-Traded REITs-Perform a Careful Review Before Investing also warns investors about private REITs—generally sold only to accredited investors—which not only do not trade on an exchange, but are also generally exempt from Securities Act registration. FINRA cautions that it is extremely difficult for investors to make an informed decision about private REITs due to their lack of disclosure documents.
If you invested in Desert Capital REIT and sustained losses of $100,000 or more, please contact our law firm for a free evaluation of your case.