The North American Securities Administrators Association has once again taken aim at REIT sales practices. According to the Wall Street Journal, the group wants to push legislation that would limit the percentage of an individual ‘s net worth that could be invested in nontraded REITs.
A REIT is a nontraded Real Estate Investment Trust. Created by Congress several decades ago, REITs allow ordinary investors to pool their money and invest in large real estate projects. Certain tax benefits make them a very popular investment tool. Many REITs can be bought and sold like stocks on a national stock exchange such as the New York Stock Exchange. Certain REITs, called private and nontraded REITs, are much riskier for individual investors.
Despite the risks, nontraded REITs are a multibillion per year industry. People pour in over a billion dollars per month into these products. Unfortunately, because they are not traded, getting out of one is often very difficult. It isn’t uncommon for investors to be forced to hold their investment for 7 or 10 years before being able to sell.
During that time period, there is no ready method of determining their worth either.
Stockbrokers love nontraded REITs because they generally carry big commissions. The fees associated with these products are often much higher as well but because there is no way to determine the value of these products after the offering closes, the fees are easily hidden.
Non traded REITs may be perfectly acceptable for institutional investors but they are generally a bad deal for seniors, people saving for retirement or individual investors who need access to their money.
Investors can always decide how they wish to invest their money but the NASAA wants to curtail the ability of stockbrokers to recommend more than a small percentage of individual investors’ portfolios include these illiquid REITs. Because so many investors rely on recommendations from stockbrokers, the NASAA proposals have teeth.
Massachusetts already has a concentration limit of 10% in any one REIT product.
Regulators also worry that these REITs begin to pay dividends immediately by using monies raised from investors instead of profits. That reduces the amount of money that can be invested and distorts the real value of REIT shares.
The SEC and the Financial Industry Regulatory Authority – FINRA – have similar concerns. Massachusetts regulators last year brought action against Royal Alliance, Securities America, Ameriprise, LPL Financial, Lincoln Financial Advisory and Commonwealth Financial Network over their REIT marketing practices and collected millions of dollars in restitution for state residents.
If you have lost money in a nontraded REIT or other illiquid or alternative investment scheme, you may be able to get back your hard earned money. REIT fraud and REIT losses are a growing problem among individual investors. Fortunately, stockbrokers and the firms they work for can be held responsible for these losses.