Earlier today, FINRA issued an investor alert with respect to non-traded REITs outlining the products’ features and potential drawbacks, such as high fees and illiquidity.
“Turbulence in the stock market and an extended period of low interest rates have contributed to investors’ seeking products offering attractive yields,” the alert stated. “One such product is the publicly registered non-exchange-traded real estate investment trust, or ‘nontraded REIT,’ for short.”
This investor alert is yet another indication of the regulator’s intense interest in the product and should be viewed in conjunction with last month’s FINRA issuance of a rule proposal that would drastically change how the value of non-traded REITs appear on client account statements. Such valuations are problematic given the products’ general illiquidity. FINRA’s new proposal also focuses on brokers’ commissions and other upfront costs.
Investors have purchased over $4.5 billion in non-traded REITs through the first half of 2011, according to two consultants who follow the industry. That put sales on a pace to top 2010’s full-year total of about $8.4 billion, the third-highest ever, according to Direct Investments Spectrum, a newsletter that follows the non-traded-REIT marketplace.
“Nontraded REITs are generally illiquid, often for periods of eight years or more,” FINRA noted. “Early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total returns.” Indeed, front-end fees can be as much as 15% of the per-unit price.
In its alert, FINRA also highlighted a number of “complexities and risks” associated with these products. One such risk relates to non-traded REIT dividends, which are an essential component to attracting investors to the product in that they “are not guaranteed and may exceed operating cash flow.” “Distributions can be suspended for a period of time or halted altogether,” according to the alert.