Today, the Financial Industry Regulatory Authority (“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.
“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,” said Gerri Walsh, FINRA’s Vice President for Investor Education.
Real estate investment trusts (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.