Merrill Lynch Enters the Non-Listed REIT Market

As noted in a recent blog post, we have seen an influx of cases involving non-traded Real Estate Investment Trusts (“REITs”). We have also been trying to spread the word about the hazards of these little understood investment vehicles through our blog postings. [See Investors Beware: Non-Listed REITs] With all the negative attention given to non-traded REITS, it came as a surprise to learn that Bank of America’s Merrill Lynch subsidiary had recently begun offering the Jones Lang LaSalle Income Property Trust, Inc. to it’s “mass-affluent” customers (i.e., investors with a net worth between $100,000 to $1 million, excluding their home).

Suitability: Moderate Risk Investors Need Not Apply

For a detailed discussion of suitability criteria and risk factors, be sure to read the prospectus. Below is a summary of the minimum suitability criteria established by this REIT:

  • The minimum amount that can be invested in this REIT is $10,000.
  • The REIT can only be sold to investors who have either: (1) a minimum net worth of $250,000; or (2) a minimum gross annual income of at least $70,000 and a minimum net worth of at least $100,000.
  • Investors may not invest more than 10% of their liquid net worth in this REIT, either alone or in combination with other similar illiquid investments.

Investors should not be lulled into a false sense of security about the safety of this REIT. Notwithstanding the REIT’s stated investment objective to “preserve and protect our stockholder’s capital investments,” when push comes to shove, Merrill Lynch’s attorneys will argue that the REIT’s prospectus clearly stated that the investment “involves a high degree of risk” and that investors should only purchase this security if they can afford the “complete loss” of their investment. Thus, this investment is only suitable for investors who have a high risk tolerance.

Illiquidity: Consider a Publicly Traded REIT

As previously stated, there is no public market for this REIT. All sales are subject to the REIT’s share repurchase plan which require investors to hold their shares for at least a year before they are available for repurchase. Furthermore, the REIT may suspend repurchases if there is a run on the bank and honoring repurchase requests would adversely affect operations of the REIT. This is exactly what happened to a number of REITs and other privately offered real estate investments that were adversely affect by the recession in 2008.

As we stated in a previous blog post: If you are convinced that a REIT is an appropriate investment, do what sophisticated institutional investors do and invest in a publicly traded REIT instead.