Protecting investors from risk and fraud in connection with real estate “private placements” and non-traded REITs

By Bradd Milove

Readers of this column will already be aware that, over the last few months, FINRA has issued regulatory warnings on behalf of investors in an attempt to rein in fraudulent activity on the part of

non-traded REIT

promoters. But despite these warnings, a recent report concerning non-traded real estate investment trusts suggests that the potentially lucrative investments are nevertheless here to stay. According to the

Wall Street Journal

, promoters have raised over $73 billion from non-traded REIT investments since 2001, even amidst the crippling effects of the economic crisis; and as long as individuals remain drawn to the promise of higher dividends and frequent distributions associated with such investments, continued coverage of this issue will be necessary in order to ensure effective protection against real estate investment fraud.

Unlike publicly traded REITs, non-traded REITS and other forms of real estate “private placement” investments do not trade on the national stock exchange – a critical difference that renders the latter investments not only illiquid, but also subject to high start-up fees, limited transparency and reduced regulatory oversight. This in turn makes it possible for unscrupulous promoters to mislead or manipulate investors when it comes to distributions and earnings – and to even go so far as to present clients with supposed dividends that are in fact drawn directly from their initial investment capital. While many investors are attracted to private placements and non-traded REITs in the hopes of earning larger and more frequent returns, the fact remains that only some people succeed in achieving this aim – while many also find themselves the victims of real estate investment fraud. Now, the U.S. Securities and Exchange Commission and FINRA have responded by issuing warnings to investors, brokers and promoters.

Navigating real estate private placements and non-traded REITs: guidelines for avoiding fraudulent sales

In a SEC-issued

Corporate Finance Disclosure Guidance report

published in December 2011, government officials put forth a list of considerations for real estate investment market participants. Pursuant to law and recent regulatory pronouncements, promoters are required to provide the following information:

  • A balanced discussion of risk and reward associated with the investment at hand
  • Sales materials that are consistent with the prospectus
  • Details concerning both the frequency and primary source of distributions, in addition to historical data showing whether or not earnings have sufficed to cover those distributions in the past
  • Confirmation of property ownership, information regarding redemption programs, market data to back-up promotion claims and disclosure concerning the pros and cons of non-traded real estate investments.

As experienced
San Diego investment attorneys

, we at the law offices of Miller & Milove recommend that investors avoid risky private placements – and, if they do choose to consider such investments, that they request all of the above information before making a decision. To learn more about SEC and FINRA recommendations and legal advice pertaining to investor safety, private placements and non-traded REITs, visit us online: