Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Non-Traded REITs: What's The Problem?

|Includes:Retail Properties of America (RPAI)

According to a recent April 2012 article in Forbes magazine, REITs have become mainstream investment alternatives due to the requirement that they distribute at least 90% of their income annually to shareholders.

There is a distinction, however that many investors are not aware of between publicly-listed REITs, which comprise the majority of the REIT trade and the smaller group of publicly sold, but non-traded REITs. According to the article, publicly traded REITs have around $478 billion in market capitalization (12/31/2012) and there are 126 publicly listed companies.

The non-traded REIT segment of the market consists of 35 companies that manage about 69 different products. It has a market capitalization of about $84 billion and it is anticipated to raise around $9 billion in 2012 compared to $8.2 billion raised in 2011.

Forbes points out that unlike publicly listed REITs, non-traded REITs are products that are more often "sold" than they are "bought" by investors. This is due to the fact that non-traded REITs pay very generous commissions ,ranging from 7-10%, putting these products at the top of the list of the selling broker, who cares more about his personal finances than those of his oftentimes unsuspecting and unsuspecting customer.

The broker is able to sell non-traded REITs by ignoring or minimizing the bad aspects of the investment (like large front end charges, conflicts of interest, illiquidity, high overhead, lack of ability to value and inability to maintain distributions).

According to Blue Vault Partners the non-traded REIT market is controlled by five companies who have about 70% of the market, including the following (amounts in billions):

Inland Securities Corp $18.1
W.P. Carey & Co. LLC $9.3
Cole Capital Advisors $8.7
KBS $7.0
Wells Real Estate Funds $6.4
Behringer Harvard $6.2
Apple Companies (David Lerner) $4.8
Hines $4.2

Only recently did regulators require the non-traded REIT companies to provide estimated valuations of the shares. Prior to this, monthly statements reported values at the original purchase price. As a result many investors have only recently learned that their investment may be worth only a fraction of what they paid. This is insult after injury, since many non-traded REITs ceased making distributions some time ago.

Compare the purchase price of $10 to the recent estimated value of these non-traded REITs:

Behringer Harvard Opportunity 1 $4.12
Behringer Harvard REIT 1 $4.64
Behringer Harvard Short-Term Opp $.40
Inland Western Retail Real Estate $6.95
KBS Real Estate $5.16

These estimated values understate the loss to the investor since the only market is the secondary market, which yields only about 70% or so of the estimated value upon sale. See my prior post on that topic. Inland Western has reverse merged and gone public as Western Retail Real Estate, more on that in this prior blog post.

If you have questions about non-traded REITs or other issues with your brokerage account, contact us at 561 391 1900. Nationwide representation. Free consultation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: RPAI