You cannot and must not rely upon the valuation of non-traded REITs on your account statements. The FINRA rules currently mandate that sponsors of non-traded REITs establish an estimated per-share valuation within 18 months after the REIT stops raising money from investors. The problem with this language is that fund raising often lasts for years which results in the per-share valuation potentially remaining unchanged and consequently misrepresented for years.
And the problem with these investments is the financial advisor's failure to adequately disclose the risks and illiquidity of these investments (as well as the high commission he/she earned which was no doubt the real driving force in recommending the investments).
Also, the conflict of interest in having the sponsor of the non-traded REIT establish the valuation of the REIT is obvious. Notwithstanding this obvious conflict, certain non-traded REITs are still fighting the manner in which valuations will be done in the future.
The Investment News recently reported that the non-traded-REIT industry is deeply divided about valuations as regulators prepare to codify rules on creating an estimated share value for these products.
A key sticking point is whether REITs and other private investments should use an independent third party to conduct appraisals.
Apparently certain non-traded REIT sponsors argued that the wide variety of private-investment products makes mandatory third-party appraisals inappropriate. This position is ludicrous and touches on the main problems with these investments - transparency.
Is it not problematic enough for investors that the investment is illiquid, but the industry would like for these investors to also have no reasonable way of knowing what an independent valuation of the shares actually is?
It also appears that the proposed changes may be moving in the wrong direction. Under the new proposal, broker-dealers no longer would be required to provide a per-share estimated value, unless the issuer provided an estimate based upon an appraisal of assets and liabilities in a periodic or current report under the Securities and Exchange Act of 1934.
Instead, during the initial offering period, broker-dealers would have the option of using a modified net offering price or designating the securities as "not priced."
We have already seen at least one brokerage firms use the "not priced" method on its account statements and this allows for the possibility that the firm's advisors could misrepresent the price to assuage fears and concerns about the pricing of the non-traded REIT.
What the non-traded REIT industry needs is complete transparency - transparency regarding pricing, transparency regarding the commissions generated, and transparency regarding the secondary market prices available to those investors looking to sell.
The reason that the industry fights so hard to oppose these things is that if they existed, people would quickly discover that non-traded REITs are created to be sold and not bought.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Mr. Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. Our law firm is devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at email@example.com for answers to any of your questions about this blog post and/or any related matter.