Blau & Malmfeldt has tracked the performance of every public, non-traded real estate investment trust (“REIT”) for the period 2006 through the present as reported in these companies’ filings with the Securities and Exchange Commission (“SEC”). What we have learned through our research is that there have been very few success stories and many failures, notably Behringer Harvard REIT I, Inc., KBS REIT I, Inc., NetREIT, Inc., CNL Lifestyle Properties, Inc., Dividend Capital REIT, Inc., and Inland American Real Estate Trust, Inc.
Given the fundamental problems inherent to the non-traded REIT industry, the multitude of failures should come as no surprise. Investors typically pay up-front commissions of between 10-15% on their purchase of the securities. The forfeiture of 10-15% of the initial investment results in a substantial impairment to the REIT. Non-traded REITs typically pay annual dividends between 6-10%. Even under the best real estate market conditions, it is virtually impossible to acquire real estate to support these returns given the 10-15% up-front fees and the other fees associated with the investment.
To sustain “dividends” of 6-10%, the REIT’s manager will typically return capital that has been raised from new shareholders back to the shareholders in the form of dividends. In other cases, the REIT manager raises money through the sale of notes to retail investors in order to raise cash to pay the dividends to shareholders. So, the “dividends” that non-traded REITs pay are often not profits but are rather borrowings or proceeds from new investors.
As a result of the obvious problems inherent to this industry, Forbes recently dubbed non-traded REITs as an “unnecessary niche.”
Despite all of these past failures, many high commissioned brokerage firms continue to push these investments upon unsuspecting retail customers. A recent article in the Wall Street Journal describes that one non-traded REIT, American Realty Capital Trust IV, Inc. (“ARCT IV”) has managed to raise $3.6 Billion in the first half of 2013 through the sale of common stock. The non-traded REIT industry as a whole is on pace to raise $17 Billion in 2013.
It appears that ARCT IV has been unable to invest all of the capital that it has raised prudently — it has resorted to filling its new property acquisitions with tenants of low credit quality. ARCT IV’s incentive is to raise as much capital as possible — its sponsor receives an up-front commission on the sale of every share of stock — regardless of whether all of this capital can be invested prudently and regardless of whether it makes sense for existing shareholders.
Blau & Malmfeldt is representing numerous investors in disputes against broker-dealer firms relating to their sale of non-traded REITs. If your broker misrepresented non-traded REITs to you, concealed its commissions from you, or recommended that you concentrate your savings in real estate investments, please call us at 312-443-1600 or email Paul Malmfeldt at email@example.com for a free consultation.