Nontraded REITs, unlike those that trade on an exchange have no conventional market where investors can redeem them for cash. These non exchange traded REITs ,which were sold primarily by independent broker-dealers, were sold to investors at $10 per share with the promise of dependable and steady distributions of income, assurances that the value would be maintained or would increase, and no warnings related to the dangers of the illiquidity issue.
On December 12, 2012, William Galvin, the head securities regulator for Massachusetts charged LPL Financial, LLC of San Diego with a failure to supervise brokers who sold non-exchange traded real estate investment trusts (REITs) in violation of state limitations and company rules. Massachusetts also charged LPL with dishonest and unethical business practices. For more on that, follow this link.
Now many retirees having purchased these investments for the income they were to produce find themselves in a dilemma , since income has stopped and the investor, who needs income for daily living & healthcare expenses may be learning for the first time that the investments are not easily converted to cash.
According to the recent financial press, eight of the largest nontraded REITs have lost over $11 billion (37%) of their equity value.
The largest nontraded REIT, Inland American Real Estate Trust recently decreased its estimated value to $6.93. Behringer Harvard REIT I dropped its estimated value to $4.01 and Hines REIT announced an estimated value of $7.61. KBS REIT 1 increased its estimated value by a whopping 2 cents to $5.18.
ESTIMATED VALUE DOES NOT EQUAL FAIR MARKET VALUE
You can't buy groceries or pay your health care provider with "estimated value currency".
There is no such thing.
You will have to use U.S. Dollars.
This term estimated value stems from a regulatory requirement that companies come up with such a calculation periodically. This is so investors supposedly will have an idea of what the investment, which no longer makes distributions, is supposedly worth. The problem is that this estimated value is a far cry from fair market value ( ie; the amount of dollars you can get this week if you need to sell) for many of these nontraded REITs.
As a very recent example, this week we resolved with a brokerage firm for an elderly retiree involving a block of KBS REIT I. In preparation for the settlement conference, we spoke with a number of secondary market makers (the only market there is for these nontraded REITs) seeking a fair market value for KBS REIT I in order to evaluate any settlement opportunities. The best offer we received for a 10,000 share block was $2.50, which is less than half of the company's published estimated value of $5.18 .
REITs own real estate.
Whether the US real estate market will ever return to its former glory days remains to be seen. For retirees needing $$ now, what might happen in five years is of little consequence.
If you have losses in nontraded REITs that you were convinced to buy based upon misrepresentations, you may be able to recover all or a part of those losses through FINRA arbitration. Call us for a no charge consultation.
561 391 1900
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.