According to a November 3, 2011, Investment News article by Bruce Kelly, Morningstar, Inc., has announced that it will begin covering non-traded REITs by the end of the first quarter of 2012. According to the article, Morningstar has hired Phillip J. Martin to lead Morningstar’s non-traded REIT coverage. The article includes a quote from a note written by Mr. Martin concerning non-traded REITs, as follows: “Presently, Morningstar does not believe a significant investment in non-listed REITs makes sense for most investors as there are still too many drawbacks and unresolved issues. We believe listed REITs to be the most appropriate option, from the standpoint of both the alignment of shareholder interest and long-term risk/return potential.”
While Morningstar’s coverage of non-traded REITs may improve the availability of information concerning non-traded REITs, that coverage will have no effect on the sales practice issues associated with the sale of non-traded REITs to retail investors or the numerous structural problems with non-traded REITs. The two primary selling points for non-traded REITs are (1) by purchasing non-traded REIT shares a retail investor may avoid the volatility of the stock market, and (2) retail investors will obtain an above-market yield on their investment. Both selling points are bogus.
Non-traded REIT share prices do not change because there is no market for the shares. The lack of a market for non-traded REIT shares does not equate to lack of volatility. Sponsors do not want them to change, i.e., lower, share prices during the offering period because of the adverse impact that would have on sales of non-traded REIT shares.
As the May, 2011, FINRA enforcement complaint against David Lerner & Associates, Inc. (“Lerner”), reveals, Apple REITs Six through Nine maintained a 7-8% distribution to retail investors on Apple REIT shares by borrowing money to pay those distributions and by returning investor capital to retail investors. According to the FINRA enforcement complaint, the annual aggregate amount of distributions for Apple REITs Six through Nine exceeded by a significant margin funds from operations, effectively, net income, for the years 2008 through 2010. What that means is that Apple REITs Six through Nine were paying out more in distributions than their net income for the years 2008 through 2010, eroding the value of retail investors’ shares in those REITs. The so-called “above-market yield” used as a selling point with retail investors for non-traded REIT shares is a fiction, at best.
Johnson, Pope, Bokor, Ruppel & Burns, LLP, the law firm with which Scott Ilgenfritz has been affiliated for 27 years, has offices in Tampa and Clearwater, Florida. The firm’s attorneys have in excess of 60 years experience representing institutional and individual investors nationwide seeking to recover losses suffered by retail investors as the result of the negligence or fraud of financial professionals and their firms.