WATCH OUT NON-TRADED REIT INVESTORS: YOU ARE DESTINED TO LOSE!

According to a study performed by BlueVault Partners LLC and the University of Texas at Austin's McCombs School of Business, non-traded REITS consistently underperform the broad market of real estate investing in large part because of the high fees and commissions associated with these investments (the fees for non-traded REITs are often as high as 12-15%). The study found that 70% of the non-traded REITs included in the study underperformed basic benchmarks. The study is particularly timely as the initial public offering market for non-traded REITs, known in the industry as a "liquidity event" or "going full cycle," has heated up this year. Since March, three non-traded REITs have listed on exchanges, with more likely to come, each with limited to no success.

Notwithstanding the poor track record of these investments, brokerage firms have only increased the sale of such products. According to an executive summary of the study performed the non-traded REIT industry had $84 billion in assets under management at the end of 2011 (representing huge growth in the industry). Certainly, an inference can be made that the industry is actively looking to grow this investment area because of the very commissions that makes it so difficult for these investments to succeed.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

NON-TRADED REIT VALUATIONS VERY MURKY

The problems with these investments generally relate to the financial advisor's failure to adequately disclose the risks and illiquidity of these investments (as well as the high commission he/she earned which was no doubt the real driving force in recommending the investments).

The main complaint of REIT investors relates to the problems in the valuation of these investments. They are murky-not transparent. FINRA rules currently mandate that sponsors of non-traded REITs establish an estimated per-share valuation within 18 months after the REIT stops raising money from investors. The problem with this language is that fund raising often lasts for years which results in the per-share valuation potentially remaining unchanged for years.

Also, the conflict of interest in having the sponsor of the non-traded REIT establish the valuation of the REIT is obvious.

Notwithstanding this obvious conflict, certain non-traded REITs are still fighting the manner in which valuations will be done in the future. The Investment News recently reported that the non-traded-REIT industry is deeply divided about valuations as regulators prepare to codify rules on creating an estimated share value for these products. A key sticking point is whether REITs and other private investments should use an independent third party to conduct appraisals. Apparently certain non-traded REIT sponsors argued that the wide variety of private-investment products makes mandatory third-party appraisals inappropriate.

It also appears that the proposed changes in the FINRA rules may be moving in the wrong direction. Under the new proposal, broker-dealers no longer would be required to provide a per-share estimated value, unless the issuer provided an estimate based upon an appraisal of assets and liabilities in a periodic or current report under the Securities and Exchange Act of 1934. Instead, during the initial offering period, broker-dealers would have the option of using a modified net offering price or designating the securities as "not priced." The "not priced" method would be a step backward and open the door for more fraud. According to Robert Pearce, It is reminiscent of the way limited partnerships were priced and the widespread fraud with those investments twenty years ago. Instead of allowing broker-dealers to cloud the REIT waters, Wall Street regulators must force them to become transparent in all respects, including valuations and commissions.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.