Non-Traded REITs

Los Angeles Lawyers Assisting Victims of Securities Fraud

When it comes to finances, many of us are thankful that we can call upon an experienced advisor to guide us through navigating the securities world and to help us make the most of each investment. In many cases, hiring a broker to help you handle your finances requires you to place a great deal of faith and trust in that individual, especially if you do not have any prior experience with financial investments. Although many brokers take their responsibilities to their investor clients seriously, some brokers see it as a chance to make an easy commission by misleading their clients. Experienced securities law attorney Steve A. Buchwalter has helped many people in Los Angeles County and the surrounding areas pursue the compensation that they are owed after they have been burned by their brokers.

Bringing Claims Based on Misconduct InvolvingNon-traded REITs

In recent years, non-traded real estate investment (“REIT”) funds, also known as non-listed REITs, have received a large amount of investor attention. This is in part because investors are perpetually on the hunt for larger investment yields and broader portfolio diversification away from simple stock purchases. Although they have become popular, there are many investment experts who are skeptical about whether non-traded REITs are a wise investment.

Unlike regular REITs, non-traded REITs are not traded in the regular stock market. According to the experts, it is hard to say that non-traded REITs are even traded at all.

In general, non-traded REITs work quite simply. After a non-traded REIT amasses enough money from investors, the money is invested in real estate with the goal of liquidation through the sale of the real estate holdings, a merger, or an initial public opening (“IPO”). According to most estimates, each non-traded REIT has a life cycle of roughly seven to 10 years, with recent reports suggesting that figure may be trending toward two to three years.

Non-traded REITs are much more risky than those REITs traded on an exchange. One risk is contained in the name—non-traded REITs. Once this money is entrusted to the sponsor, it stays there until the properties are liquidated—two to ten years later. Secondly, non-traded REITs are incestuous; the same parties control numerous REITs, resulting in conflicts of interest. But the most obvious risk is in returns: Studies have shown that non-traded REITs return 40% less over time than exchange-traded REITs.

Why do brokers even sell such an inferior product? The answer is commissions. Fully half the reason why non-traded REITs perform so poorly is that they pay high sales fees to the broker who sells them—or rather, the investor pays those fees. Absent those higher fees (or commissions earned by the broker), it is unlikely that any reputable broker would recommend such an inferior investment. The other, less obvious, reason is that non-traded REITs are not transparent; an investor who cannot track the course of his investment on a regular basis has no way of knowing he has lost money until years after the fact, making complaining difficult.

It is required that a broker warn his or her client about the potential downsides of investing in non-traded REITs. But what investor would buy such an inferior investment knowing the risks? Who would surrender their assets for up to 10 years for an inferior illiquid investment when a liquid investment would yield greater results at a lower cost?

According to the law, due to a broker’s position as a fiduciary to an investor, brokers owe their clients a heightened standard of care when it comes to providing investment advice. Brokers know this, and have actively campaigned to limit the scope of their fiduciary responsibilities. A broker who fails to warn his or her client about any risks or dangers associated with an investment, or who intentionally deceives his or her client about the nature of an investment for the purposes of generating additional fees, has breached this fiduciary duty. An investor who has suffered financial harm as a result of his or her broker’s breach generally will be entitled to the difference between the value of his or her account without the breach and the actual value of his or her account following the broker’s breach.

Dedicated Broker Fraud Attorneys Advising Residents of Los Angeles

If you have been burned by your broker, you may be entitled to compensation. Knowledgeable lawyer Steve A. Buchwalter has brought fraud claims on behalf of individuals in Los Angeles and the surrounding cities, such as Beverly Hills, Newport Beach, Santa Barbara, and Irvine. We offer a free consultation, so you have nothing to lose. Call us now at 818-501-8987 or contact us online to set up your appointment.