California REIT Attorneys
Real estate investment trusts pool investor money to own or finance income-producing real estate. Publicly traded REITs list on an exchange, report to the SEC, and can be bought and sold at quoted prices whenever the market is open. Non-traded REITs do none of those things. They are sold through broker-dealers, do not trade on a public exchange, and impose holding periods that can stretch seven years or longer.
That structural difference is the source of most non-traded REIT claims. Investors who believed they were buying something comparable to a publicly traded REIT end up with an investment they cannot sell, cannot value, and cannot exit when circumstances change.
Why Non-Traded REITs Generate Claims
Illiquidity. There is no secondary market. Investors who need access to their capital either cannot sell at all or are forced to accept steep discounts through limited sponsor-run redemption programs. Those programs frequently suspend redemptions during market stress, which is often when investors most need liquidity.
Front-loaded fees. Non-traded REITs typically charge sales commissions, dealer-manager fees, and organizational and offering costs that can consume 10 to 15 percent of the investment before a single dollar is deployed into real estate. An investor who contributes $100,000 starts with an investment worth roughly $85,000 to $90,000.
Opaque valuation. With no public market to set a price, the sponsor determines what the shares are worth. Share prices on account statements often hold steady at the offering price for years, masking losses until a secondary offering, a merger, or a liquidation event forces a markdown.
Commission incentive. Brokers earn far larger commissions on non-traded REIT sales than on publicly traded REITs. That creates a financial reason to recommend the non-traded product regardless of fit with the client’s objectives.
How We Pursue These Claims
Most non-traded REIT cases come down to suitability: whether the investor had the risk tolerance, time horizon, and liquidity needs that a non-traded REIT requires, and whether the broker or firm properly disclosed the fees, illiquidity, and valuation uncertainty. We analyze the investor’s financial profile at the time of the recommendation, the broker’s compensation, the firm’s supervisory records, and the performance of the investment against suitable alternatives. These claims proceed in FINRA arbitration, and we typically name both the broker and the firm as respondents under failure to supervise theories.
FAQs
Why are non-traded REITs considered risky?
Three reasons: illiquidity, high fees, and valuation uncertainty. Investors cannot sell on demand, often lose 10 to 15 percent of their investment to upfront costs, and cannot verify the true value of their shares because there is no public market pricing them. The combination makes non-traded REITs unsuitable for most retail investors, particularly retirees and others who may need access to their capital.
Are all REIT investments unsuitable?
No. Publicly traded REITs are liquid, transparent, and widely held. The suitability concern applies specifically to non-traded REITs, which carry the liquidity, fee, and valuation problems described above. A client whose broker recommended a publicly traded REIT generally will not have a claim based on the REIT structure alone.
My non-traded REIT is still paying distributions. Do I have a claim?
Possibly. Distributions from non-traded REITs often exceed the REIT’s actual operating income, with the shortfall funded by investor capital or borrowed money. A REIT that is paying investors out of their own principal looks healthy on a statement but is quietly liquidating itself. When the distributions stop or the share price is eventually marked down, the losses become visible. If the broker did not disclose that distributions were not fully covered by operating income, the investor may have a suitability or misrepresentation claim regardless of whether distributions are still flowing.
Talk to a California REIT Lawyer
If your broker recommended a non-traded REIT that was unsuitable for your financial situation or did not fully disclose the fees, illiquidity, or valuation risks, contact Rosenberger + Kawabata. Call (310) 894-6921 or submit an inquiry through our contact form.