Investors beware: hidden risks and regulatory warnings for non-traded REITs

By Bradd Milove

Over the last few years,

non-traded REITs

– real estate investment trusts – have drawn increased interest from investors looking for a way to secure income amidst erratic market and low interest rate conditions. So popular were these investments that, according to figures from the Investment Program Association, they raised almost $10 billion in 2011 alone. However, as noted in a recent

New York Times

financial report, non-traded REITs are riddled with hidden risks and, in the hands of dishonest promoters, ripe for investment fraud – prompting FINRA regulators to warn investors and brokers alike against pursuing such investments in the future.

Traditional, publicly traded REITs are a popular way for investors to get involved in real estate profits without the hassle of actually purchasing or managing property. By allowing individuals to buy shares in a portfolio of real estate properties – many of which are highly liquid and therefore less risky for sophomore investors – these REITs, also referred to as “real estate stocks,” hold a wide appeal for a variety of buyers. When it comes to non-traded REITs, however, a complex web of hidden fees and concealed investment logistics make it all too easy for unscrupulous promoters to dupe elderly or unsuspecting investors into believing that they are getting into a low-risk situation – only to then rig the system and make supposed property-derived distributions that are in fact the investor’s own money being returned to them under the guise of income. In such cases, fraudulent promoters have also succeeded in making off with astronomical commissions and up-front fees – sometimes constituting up to 25% of the original investment and essentially robbing investors of their supposedly secure funds.

According to reports from

Registered Rep Magazine

, FINRA vice president of investor education Gerri Walsh has issued a warning urging investors to “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;” and in light of this and other indications of heightened scrutiny, legal advisors are likewise recommending that inexperienced investors be on their guard. In addition, FINRA has most recently engaged in aggressive enforcement actions against brokers and promoters who failed to diligently investigate and disclose the many risks attendant to non-traded REITs and the similar “TIC” - or Tenant In Common – real estate investment.

Expert advice and economic recovery with help from legal investment fraud professionals

We continue to view non-traded REITs – which, in our opinion, are bad and misrepresented investments -- as too risky to be worth pursuing…especially after weighing the siren song of modestly higher projected income returns against helping to line the pockets of the sponsors. As long-time

San Diego investment attorneys

, we at the Law Offices of Miller & Milove urge investors to proceed with extreme caution when presented with a non-traded REIT investment proposal. To learn more about protecting yourself and securing your investments, visit us online: