Jeffrey Pederson is a Colorado REIT loss lawyer, located in the Denver Tech Center and licensed in Colorado since 1998. He has helped hundreds of Colorado residents in securities disputes over the last 20 years and recovered substantial sums. Call 303-300-5022.
Real estate investment trusts are high-risk securities. Advisors like to sell these investments because commissions can exceed 10% for a REIT while your average blue-chip share of stock generally pays a commission of around 1%.
Financial advisors knew of the downfall of non-traded (not sold on a major stock market) REITs for sometime. Red flags concerning the downfall of the commercial real estate market put these advisors on notice.
Regulators warned advisors of REITs’ high risks over a decade ago. The investments have unique risks, which are commonly not disclosed, in the sale of the high-commission investments. Most REITs are not publicly traded. This means that there is no active market whose price reflects if the investment is in trouble. It also means that there are limited ways to get out of the investment if it does become troubled. The high fees paid to your advisor also erode the ability return in the investment.
The securities industry experienced substantial failures in the REIT market in the past. Attempts to revive REIT trading proved equally futile. This all raises the question of whether advisors and brokers made non-traded REIT recommendations for the investors interests or their own.
Advisors often sell non-traded REITs as a way to avoid market fluctuation. The only reason the value does not fluctuate is because the value is based upon a periodic accounting, referred to as a “net asset value” (NAV) and not a public market.
Further, the NAV is listed is often manipulated. This is a value set internally by individuals with an interest in the value being higher. The Wall Street Journal recently reported about the manipulation in the valuation of non-traded REITs. WSJ reported that while REITs traded on securities exchanges fell significantly in 2023, nearly identical non-traded REITs increased in value per their NAV. Also, the true volatility and risk to the asset exist with these non-traded REITs, but simply not conveyed to the investors.
The NAVs are largely calculated by financial advisory firms with conflicts as to the valuation. As such, these valuations come with substantial disclaimers about their accuracy – in very small print. As such, non-GAAP accounting can be used and questionable accounting methods, such as not subtracting liabilities of the REIT, are sometimes used in generating NAV.
The most common non-traded REIT is Blackstone REIT (BREIT). BREIT has been experiencing trouble for most of 2023 and continues to suffer. In August 2023, Blackstone announced that it was limiting or blocking withdrawals for the ninth consecutive month. Other battered non-traded REITs include, but are not limited to, Starwood and KKR.
These battered REITs are now only sought after by troubled asset investors who liquidate the assets at a discount.
Your financial advisor is obligated to act in your best interests for investments sold in June 2020 or later. The financial advisor’s duty is to recommend investments that are suitable for your objectives and risk tolerance for earlier investments. Both standards are likely violated if you are sold a REIT and were a conservative or moderate investor. A Colorado REIT loss lawyer can tell you if this standard has been violated in your case.
Rising interest rates often spell trouble for REITS. The fact that your advisor does not control interest rates does not change the fact that a rise in rates is always possible and should be considered as part of the investment’s risk when recommending the REIT investment.
A lawyer actually licensed in Colorado offers Colorado investors with the best chance for recovery. An attorney need only be licensed in some US federal court to arbitrate in Colorado, but that does not mean an attorney from outside of Colorado understands Colorado law. Further, being licensed in Colorado allows your attorney to pursue defendants that are not bound by an arbitration agreement.