Our securities law firm has seen an influx of complaints involving Non-Listed Real Estate Investment Trusts (REITs) that were marketed and sold to investors looking for a moderate risk fixed-income investment offering an attractive yield. However, like most investments, high risk and high returns are closely related.
Investing in these types of REITs can be fraught with perils that most investors fail to appreciate until it's too late. The very complexity of a REIT investment is a risk factor in and of itself. Other risks include lack of liquidity and transparency. In short, investing in Non-Listed REITs is risky and is usually not suitable for investors seeking a conservative or even moderate risk fixed income investment. Most Non-Listed REITs can only be sold to investors who have a minimum net worth of $250,000 (excluding home equity, furnishings and automobiles). Even for qualified investors who are willing to assume more risk, Non-Listed REITs should only represent a small portion of an investor's overall portfolio.
The Liquidity Trap
Because Non-Listed REITs do not trade on a major exchange, investors will find it extremely difficult to sell their shares. The ability to redeem shares directly through the company is also very limited and subject to a reduction or penalty if an investor wants to get their money out in a short period of time, with typical holding periods ranging between 1-4 years. For example, if an investor wanted to redeem a $100,00 investment in the Dividend Capital Total Realty Trust REIT less than 1 year from the date of their investment, they would only receive $92,500. If they wanted to redeem 1-2 years after purchase, they would receive $95,000. The REIT keeps the difference.
The above discussion of risks is merely the tip of the proverbial iceberg. Always read the prospectus before investing. If you don't understand what you're getting yourself into, don't invest. If you're convinced a REIT is a good investment choice, follow the lead of more sophisticated institutional investors and invest in publicly traded REITs.
The Bottom Line
An investment in Non-Listed REIT's is inappropriate for most conservative or moderate risk investors. Even knowledgeable investors who are willing to assume some of the risks involved, a publicly traded REIT is a better option; however, a large concentrated investment in real estate, including REITs, still raises suitability concerns.
The Alcala Law Firm would like to thank the assistance of attorney Joshua Pittel who contributed to this blog post.
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