The Financial Industry Regulatory Authority (FINRA) reissued an alert regarding publicly registered, non-exchange traded real estate investment trusts (REITs).
REIT investments are instruments that join a group of investors, allowing the group to purchase real estate items they might not have been able to individually.
While non-traded REITs may be financially enticing to securities customers, these trusts also carry several complexities and risks.
» REIT distributions are not guaranteed, meaning a REIT's Board of Directors exercises its discretion in deciding whether to pay distributions and, if so, what amount to include as that distribution. Because REIT distributions may be funded by investor capital or borrowing as opposed to actual real estate income, whether or not a distribution is paid may depend on factors other than real estate performance.
» Some REITs may be taxed as ordinary income, not as qualified dividends, meaning that investors may incur greater tax liability by investing in these products.
» Because these REITs do not have a public trading market, certain valuation complexities may result in a customer's investment going down or losing all value just as it may increase. It also means it can be extremely difficult to determine the market price for shares of a REIT
» Beware early redemption restrictions and fees: Many non-traded REITs both limit the number of shares a consumer may redeem prior to liquidation and set the redemption price as lower than the purchase price. Additionally, customers may incur issuer costs, selling expenses and other fees associated with purchasing, owning and selling REITs.
» Because REITs are joint ventures, the specific properties the group invests in may not always be accurately disclosed, as the list of properties the REIT plans to acquire may differ from the list of properties the REIT is actually able to acquire in the end.
FINRA issued the non-traded REIT alert due to a concern that some firms or brokers may provide unsuitable recommendations due to a lack of adequate investigation and due diligence.
REITs carry risk characteristics that can make them both unsuitable for certain investors and desirable for broker commission, as evidenced by the non-traded REITs' previous inclusion on the 2012 Annual Regulatory & Examinations Priorities bulletin in which FINRA identified several "key risk areas," or investment products that have the potential to violate industry rules or be hotbeds for scammers and white collar criminals.
If you believe that an improper REIT recommendation from a firm or individual broker has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.