According to a recent Investment News report, real estate investment trusts that buy mortgage debt slumped recently after a better-than-forecast employment report stoked speculation that the Federal Reserve may begin to reduce the size of its asset purchases and/or allow for interest rates to rise.
A Bloomberg index of shares in the REITs tumbled 3.9 percent at the end of trading day on Friday, the biggest drop since October 2011. Likewise, a devaluation in share value of non-traded Reits, who's current value is often unknown for lack of a secondary market, are possible.
Moreover, the Federal Reserve's announcement may be of particular concern for investors in KBS non-Traded REITs, many of which invest in mortgage backed securities and other real-estate related debt securities (in addition to real estate assets).
KBS Real Estate Trust Inc. (KBS REIT I), for example, according to an investor presentation the company filed in March 2012 with the Securities and Exchange Commission (SEC), raised $1.7 billion in equity in its initial offering, and holds loans and other debt of $2.3 billion. Within the same SEC filing, KBS REIT I estimated a current per share value of $5.16, nearly 50% decrease from the initial purchase price of $10.00 per share.
In May 2012, following the notice of devaluation in per share value, a number of investors lead by plaintiff George Stewart filed a class action suite against KBS REIT I, alleging that KBS made misrepresentations about the REIT, including its investment objectives, the dividend payment policy and the value of the REIT's investments.
Unfortunately, these allegations are not uncommon among investors in non-traded REITs. These investments were often portrayed to investors as low risk investments suitable for retirees seeking long term investments. The trouble with most non-traded REITs is that they are illiquid, and because their is no secondary market, investors are unable to access their money quickly if unforeseen circumstances arise, such as medical expenses. In addition, the portfolio of some investors may have been over concentrated in risky non-traded REITS.
Although the class action against KBS has been withdrawn, the brokerage firms that sold KBS REITs may be liable for investment losses. Brokerage firms have a fiduciary duty to perform adequate due diligence on any investment before offering it for sale to its clients. Investment recommendations should be inline with the clients age, risk tolerance, and financial objections, in addition to net worth and investment experience.
Certainly, the extremely high commission offered by many non-traded REITs to brokerage firms for selling their product may explain the brokerage firms' motivation in approving an investment with so many issues. Upon information and belief, Brokerage firms selling KBS REIT I earned 6.5% in sales commissions.
When brokerage firms overlook suitability requirements and misrepresent investments or fail to adequately disclose risks, they may be liable for investment losses. The White Law Group continues to investigate suitability claims and others involving KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust II, KBS Real Estate Investment Trust III, KBS Strategic Opportunity REIT, and KBS Legacy Partners Apartment REIT.
If you invested in a KBS non-traded REIT and would like to discuss your litigation options, please call the securities attorneys of The White Law Group at 312-238-9650 for a free consultation.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For more information on The White Law Group, visit http://whitesecuritieslaw.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.