South Florida Arbitration & Litigation Lawyer Blog
When considering whether or not to invest in a non-traded REIT, there are a number of factors to consider. Some of these are:
(a). Lack of Liquidity: Non-traded REITs are illiquid investments; they generally cannot be sold readily on the open market. If you need to sell an asset to raise money quickly, you may not be able to do so with shares of a non-traded REIT. Although non-traded REITs usually offer share redemption programs, these are typically subject to significant limitations and may be discontinued at the discretion of the company. Investors may have to wait to receive a return of their capital until the company decides to engage in a transaction such as the listing of the shares on an exchange or a liquidation of the company’s assets. The timing of these liquidity events is at the discretion of the company, and may be more than 10 years after the investment is made.
(b). Share Value Transparency: While the market price of a publicly traded REIT is readily accessible, it can be difficult to determine the value of a share of a non-traded REIT. Because non-traded REITs are not traded on an exchange there is no market price available. Non-traded REITs typically do not provide an estimate of their value per share until 18 months after their offering closes, but this may be years after you have made your investment. As a result, you may not be able to assess the value of your non-traded REIT investment for a significant time period and may not be able to assess the volatility of your investment.
(c). Significant Up-Front Fees: Non-traded REITs are typically sold by financial advisers. Non-traded REITs generally have high upfront fees that lower the value of the investment by a significant amount. They usually charge sales commissions and upfront offering fees of approximately nine to 10 percent. Investors should understand that a portion of the share purchase price represents sales commissions and that the amount actually invested in the company is reduced by these commissions.
(d). Distributions May Be Paid from Offering Proceeds and Borrowings: Investors may be attracted to non-traded REITs by their relatively high dividend yields compared to those of publicly traded REITs. However, investors should consider the total return of a non-traded REIT – capital appreciation plus dividends – instead of focusing exclusively on the high dividend yield. Unlike publicly traded REITs, non-traded REITs frequently pay distributions in excess of their funds from operations. To do so, they may use offering proceeds and borrowings. This practice, which is typically not used by publicly traded REITs, reduces the value of the shares and reduces the cash available to the company to purchase additional assets. In considering an investment in a non-traded REIT, you should assess the extent to which distributions have been paid from sources other than funds from operations.
(e). Conflicts of Interest: Non-traded REITs are typically externally managed-meaning the REITs do not have their own employees. The external manager may be paid significant fees by the REIT for things that may not necessarily be aligned with the interests of shareholders, such as fees based on the amount of property acquisitions and assets under management. In addition, the external manager may also manage other companies that may compete with the REIT.
Please keep in mind that this information is being provided educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. Before considering investing in a non-traded REIT, you are strongly urged to consult with a qualified professional.