Lack of Transparency in Non-Traded REIT Valuations

The White Law Group continues to file FINRA arbitration claims to recover investment losses in non-traded REITs.  We have filed cases involving Behringer Harvard REIT, Behringer Harvard Short-term Opportunity REIT, Inland Western, Inland American, Desert Capital REIT, Cornerstone Healthcare REIT, CIP Leveraged Advisors, and KBS REIT, among many others.

The problems with these investments generally relates to 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).

One of the other main complaints we continually hear relates to the problems in the valuation of these investments.  Finra rules currently mandate that sponsors of nontraded 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 for years.

Also, the conflict of interest in having the sponsor of the nontraded 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 nontraded-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.

If you are a non-traded REIT investor interested in 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.  The firm exclusively represents investors in FINRA arbitration claims against their brokerage firm or financial professional.

For more information on The White Law Group, visit http://whitesecuritieslaw.com.