July 5th, 2011, By Dana Haugh
As of late, the SEC (Securities and Exchange Commission) has begun to crack down on lucrative REITs that aren’t being traded on the stock exchange. It’s been estimated that REITs have made over $73 billion for investors in the past 10 years, despite the recession and since 1990, SEC has approved around 90 nontraded REITs. However, things are starting to change as the SEC cracks down on these commercial real estate investments due to the recent debacle with the David Lerner Associates. In what was a startling discovery, David Lerner Associates was accused of giving their clients misleading information, taking advantage of “elderly and unsophisticated customers as it marketed a $2 billion real-estate fund.” These investors were “duped” into deals and marketed “unsuitable products.”
In light of this, other nontraded REIT firms are trying the best they can to distance themselves from companies such as David Lerners. SEC officials say they “want to know more about how nontraded REITs operate and what they disclose to investors after closing the fund”—and rightly so, if there’s a chance of
foul play. Educating the investors on their decisions will be a defense the SEC wants to arm clients with, if firms refuse to disclose their annual reports, SEC will investigate.
Essentially, investing in a nontraded REIT is a way to “profit from real estate without the volatility of publicly traded real-estate investment trusts. Many nontraded REITs promise to pay returns for five to seven years—and then return to investors their original capital, plus profits if property values appreciated.” As the Wall Street Journal goes on to report, many of the firms offering REITs fail to return the money to their investors—of the 90 launched since 1990, only 13 have been able to fulfill their promise of a return. So if you’re looking to invest in one of these REITs, be wary. Realize the risks associated with dumping money into something you’re not completely educated on and don’t just “take someone’s word for it.” For many clients, it meant losing hundreds of thousands of dollars. Educate yourself– learn from others’ mistakes.
All information gathered from the Wall Street Journal.