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The Trouble with Non-Publically Traded REITs

I don’t like non-publically traded REITs. At all. And I’ve said as much countless times.

Non-publically traded REITs are what they sound like: real estate investment trusts (which own income-producing real estate) that are not traded publically. Non-publically traded REITs are littered with problems for investors, and those problems were the subject of a recent FINRA investor alert.

The warning was issued in October. And the report exposed the reasons why investors should avoid these products.

Because shares are not listed on an exchange, non-publically traded REITs are illiquid. They are also not liquid because most of them limit the number of shares that can be redeemed by investors prior to liquidation. And those limits can be modified, or redemption programs can be suspended altogether…meaning investors cannot rely on them as an emergency exit. So the investment is locked in, with little to no way out.

Not only are redemptions often very restrictive….they can be very expensive. Redemptions are typically priced below the purchase price, in some cases by as much as 10%.

And the expenses of non-publically traded REITs can mount quickly. Front-end fees can run as high as 15% (which is the limit set by FINRA and state guidelines). Selling compensation can be as high as 10%, and another 5% for additional offering and organizational costs. A 15% hit on the front end means that for a $10,000 investment, only $8,500 goes to work for an investor…that means the total return is eroded from the start.

There are other problems… like a lack of clear information on what properties the REIT will purchase. Non-publically traded REITs typically begin as blind pools, with no specifics on what will be bought. Some will specify only a portion of the properties the REIT is planning to buy. And the distributions (which are the big attraction for many investors) are not guaranteed. They may be suspended, or terminated altogether, at the discretion of the REITs Board of Directors. But even more troubling is the fact that distributions can come from borrowed funds…or they can actually be a return of investor principal.

FINRA put its warning simply: “Be wary of pitches or sales literature offering simplistic reasons to buy a REIT investment. Sales pitches might play up high yields and stability while glossing over the product’s lack of liquidity, fees and other risks”.

2011 was possibly a record year for non-publically traded REITs, with sales of $9 billion. That number only makes FINRA’s alert all the more urgent.


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