Non-Traded REITs

Because there is no market where you can sell, getting your money back depends on the REIT’s own repurchase rules, which can limit buybacks. The SEC also notes that these REITs generally carry high up-front fees and may pay distributions from offering proceeds and borrowings, not only from earnings. Losing money in a non-traded REIT is not, by itself, a claim. The key questions are whether the investment fit the investor and whether the professional who recommended it fulfilled their duties.

This May Not Be Your Fault

Many investors learn how a non-traded REIT really works only when they try to use their money, for a medical bill, a move, or a change in plans. Discovering the limits late does not mean you failed to read carefully enough.

The professional who recommended it had a duty to you. Under FINRA’s suitability rule, and under Regulation Best Interest for recommendations to everyday investors since 2020, a broker must understand the risks and costs of what they recommend, and must have a reasonable basis to believe it fits your goals, your age, and your need for access to your savings. When that did not happen, the responsibility belongs with the broker and the firm.

What Makes Non-Traded REITs Risky

The SEC describes a REIT as a company that owns and typically operates income-producing real estate or related assets. A publicly traded REIT is listed on an exchange and can be sold on any trading day at the market price. A non-traded REIT is not, and that difference drives most of the risks below. The SEC’s Investor Bulletin on non-traded REITs and FINRA’s REIT guidance point to these in particular:

• Hard to sell. The SEC calls non-traded REITs illiquid, meaning they cannot be sold readily in the market. Share repurchase programs are typically subject to significant limitations, can be discontinued at the REIT’s discretion without notice, and may pay a discount. The SEC also warns that an exit through a listing or sale of the REIT might not come until more than ten years after you invest.
• Distributions may not come from earnings. The SEC notes that non-traded REITs frequently pay distributions in excess of their funds from operations, a measure of what the properties actually earn. They may be paid from offering proceeds, which includes the money investors put in, and from borrowings.
• The value is an estimate. With no market price, share values rest on periodic or annual appraisals. The SEC says non-traded REITs typically do not give an estimate of value per share until 18 months after the offering closes.
• High up-front fees. The SEC says sales commissions and up-front offering fees usually total about 9 to 10 percent of the investment, and its bulletin notes they can represent up to 15 percent of the offering price.
• An outside manager. Most non-traded REITs have no employees of their own. The SEC cautions that the manager’s fees may not align with shareholders’ interests.

Example: a retiree who may need cash for care or housing costs in a few years may be a poor fit for a REIT that limits repurchases, may stop them without notice, and could take a decade or more to return capital.

Common Examples of Non-Traded REIT Claims

• Non-traded REITs described as “safe,” “steady,” or like a bond or CD, without a plain explanation of repurchase limits, fees, and the chance of losing principal — see Misrepresentation and Omission
• An illiquid, long-term investment recommended to someone who would need the money soon — see Unsuitable Recommendations
• A large share of an account placed in one non-traded REIT, or in several at once — see Overconcentration
• A firm that approved sales without catching a pattern of concentrated or poorly matched recommendations — see Failure to Supervise
• A higher-commission REIT recommended when a lower-cost alternative would have served the investor as well — see Regulation Best Interest
• Distributions described as income or “earnings” when they were partly the investor’s own money or borrowed funds
• An older investor placed in a REIT they could not exit during the years they most needed their savings — see Elder Financial Abuse

How Can You Protect Yourself From Non-Traded REIT Losses?

Real estate can belong in a portfolio. A few questions help you see exactly what you would own and how you could exit:

• Ask how and when you could get your money out. Ask what the repurchase program allows, whether it can be limited or stopped, and what you would receive.
• Ask where distributions come from. Request the REIT’s own report on how much was paid from earnings and how much from offering proceeds or borrowing.
• Ask what the fees are. Find the up-front costs in the prospectus and ask how much of each dollar is invested in property.
• Ask how the share value is set. Find out who estimates it, how often, and when the first estimate is given.
• Check how much is going in. One REIT as a modest part of a diversified account is very different from a large share of your retirement savings.

Signs Your Non-Traded REIT May Have Been Unsuitable

• You asked to cash out and received only part of what you requested, or nothing
• You were told the REIT was “like a bond,” a safe way to earn income, or a substitute for a CD
• No one explained that repurchases could be limited, delayed, or stopped
• You did not know how much of your payment went to commissions and fees
• Distributions were reduced or suspended, or you later learned they were not fully paid from earnings
• The share value stayed flat for a long time, then dropped sharply
• A large part of your savings, or most of your retirement money, went into one REIT or several
• You needed the money within a few years, and no one weighed that when it was recommended
• No one walked you through the prospectus