On December 25, 2023, KBS REIT III trustees cautioned that the REIT could experience sweeping defaults in 2024. We have represented REIT and other investors for over 20 years. Call to learn your options in recovering REIT loss.
The ominous warning, released on a holiday to hopefully downplay the issue, is dire news for investors. KBS states, “Considering the current commercial real estate lending environment, this raises substantial doubt as to KBS REIT III’s ability to continue.”
The REIT lost approximately $350 million in property value since September 2022. In January 2023, KBS III defaulted on a loan for a Portland office building. By July, this building was in foreclosure. While higher interest rates and changing work habits are given as reasons, these are not unforeseen issues. Further, REITs have always been highly risky investments.
In February 2024, KBS announced that it needed to raise $100 million in five months to retain a $643 office portfolio. This would allow it to extend a loan for a fourth time and prevent it from going into default.
In 2011, the Financial Industry Regulatory Authority (FINRA), the primary regulator overseeing securities brokerages, issued an investor alert concerning REITs. FINRA alerted attempted to alert investors that sales pitches for REITs as alternatives to stock market volatility hid the truth. Such a pitch glosses over the “lack of liquidity, fees and other risks” of non-traded real estate investment trusts.
The assertion that REITs, particularly non-traded REITs, have stable value can also be an illusion. While brokerages are required to list a value for the REIT, there is very little requiring the brokerage to list more than the net asset value of the REIT. Important factors, such as liabilities and market conditions are ignored in the valuation. This has always been known, and the Wall Street Journal recently highlighted this problem with non-traded REITs. This can leave investors unaware of a REIT’s pending collapse.
While traded REITs are down more than 35% since February 2022, non-traded REITs investing in similar properties have not changed their valuation. REITs avoid assigning accurate valuations because cutting the value to accurate levels angers advisors and investors.
As further evidence that REIT collapse, and the volatile nature of REITs, was known can be seen in January, 2024. Cantor Fitzgerald CEO, Howard Lutnick, predicted that $700 billion in non-traded REITs could default.
Despite these issues, brokerages love REITs. The heightened fees and costs pads the profits of brokerages and is rarely disclosed to the investor. Industry professionals should know that the REIT market is not stable, but are boom-and-bust investments.
The SEC has warned advisors and the investing public about REITs for years. Up front costs can be approximately 15%. Most of this is commission to the Advisor. Consequently, advisors have inappropriate motivation to recommend the investments. Once purchased, the ability to liquidate is nearly impossible.
We help investors recover losses from such inappropriate investments. Call for a free and confidential initial consultation concerning KBS REIT III or any other questionable investment.
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