Non-traded REITs


Real estate investment trusts (REIT.) that are non-traded are considered non-liquid investments that expose investors to significant liquidity risk. Non-traded REITs have an expected investment life which typically 7-10 years. During the investment lifecycle, non-traded REIT investments are expected to establish positive operating cash flow earnings to enhance the real estate portfolio’s value. The real estate portfolio earnings must recoup the initial start-up costs which can be 15-18% of the capital raised which is paid to financial advisors and promoters of the investment, plus the pay the ongoing management fees before valuations can increase.

Non-traded REITs facilitate limited liquidity through Repurchase Agreements. Repurchase agreements provide for the sale of a limited number of investor units or shares back to the REIT usually a small percentage of the total outstanding shares which can be purchased from investors. Because of liquidity risk, limiting the amount invested in non-traded REITs is the only risk management tool which can be used.  A financial advisor who fails to limit the amount invested in non-traded REITs subjects a client to the risks of securities concentration. Securities concentration risk occurs when a portfolio is over-weighted in a particular asset class or investment product.

Non-traded REIT investments are difficult to value over time because the investment units or shares do not trade on a securities exchange like a publicly-traded REIT. Most non-traded REITs are valued at the initial cost of the investment even though significant start-up costs have been deducted. Even though non-traded REITs report a current yield as a percentage of the Net Asset Value (NAV), in some instances the cash payments are not financed entirely from positive cash flows. In fact, the non-traded REIT payments are financed through use of borrowed funds or as a return of capital. These payments can continue while the NAV is still valued at investment cost leaving investor with inaccurate valuations.

According to Financial Regulatory Industry Authority (FINRA), non-traded BDCs are not suitable for all investors. Suitability standards generally require an investor to have either a net worth of at least $250,000, or an annual gross income of at least US $70,000.  To improve investor ability to better evaluate non-traded BDCs, FINRA Notice to Members 15-02, provides greater transparency and suitability standards including updated account statement valuations.

It is important to determine what percentage of your investment portfolio should be invested in Non-Traded Real Estate Investment Trusts based on your investment objectives, risk tolerances and investment time horizon.

Investors are advised to seek competent financial, tax and legal advice concerning the decisions they make with their investments. Klayman & Toskes, P.A. can provide you with a free consultation concerning any securities industry violations related to the handling of your investments accounts by a full-service brokerage firm or registered investment advisor.

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and should not be considered legal advice.
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