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The combination of a volatile stock market and an extended period of low interest rates has driven investors to seek higher yields in less traditional investment products. One product that has gained popularity in recent years is the non-traded or “unlisted” real estate investment trust (“REIT”).

Not to be confused with exchange-traded REITs, there are several significant problems associated with non-traded REITs, which are not traded on a national securities exchange such as the New York Stock Exchange and have no market to determine a share price.

First, the offering price of the shares is not established on an independent basis and may bear no relationship to the value of the properties held in the portfolio. This means investors may dramatically overpay for what they are purchasing. Moreover, subsequent valuations of the non-traded REIT, even if performed properly, may or may not be accurate and reliable over the long- or intermediate term. An investor may not really know what his or her investment is worth until it is liquidated. At that point, he or she may be in for an unpleasant surprise, receiving a return of capital that is far less than the amount he or she originally invested.

Of course, that assumes the investment can be liquidated, which can be another challenge with these investments. The secondary market for non-traded REITs is extremely limited. While a portion of outstanding shares may be redeemable each year, subject to limitations, redemption offers may be priced below the purchase price or the current price.

As for the higher returns promised by these investment products? Distributions are not guaranteed and may exceed operating cash flow. Deciding whether to pay distributions and the amount of any distribution is within the discretion of the non-traded REIT’s Board of Directors. Thus, an investor may receive no distribution in a particular year or years, or may receive a distribution that has the effect of diminishing capital.

These and other problems are discussed in an October 22, 2012 Order issued by the Financial Industry Regulatory Authority (FINRA) to accept an offer of settlement from David Lerner & Associates (DLA). DLA was the market maker for the Apple series of non-traded REITs and was accused of making false and misleading claims regarding potential investment returns, targeting unsophisticated and elderly customers to buy illiquid securities and failing to perform sufficient due diligence related to certain REITs. Unfortunately, the DLA situation is not unique. The complexity of these products makes it easy for unscrupulous brokers to mislead clients about the risks and returns attendant to their investment.

If you have suffered losses related to a non-traded REIT and would like to discuss your legal rights, please contact us. Our initial consultation is free.

About Graves Bartle Marcus & Garrett

GBMG successfully represents individuals who have suffered significant investment losses commonly exceeding $50,000 as a result of bad investment advice. Our investment loss attorneys help people all over the United States who have suffered investment losses. That is our focus. It takes years of hard work and discipline to save money for retirement, for education, for charitable use, or to pursue dreams. Yet, bad investment advice can suddenly wipe it all out. Our investment loss attorneys will help you quickly determine whether you can recover your losses and then will guide you through the recovery process.


FINRA Investor Alert -

FINRA Order Accepting Settlement

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