FINRA issued an investor warning today about public non-traded real estate investment trusts, saying that these investments can be heavily subsidized by borrowed funds, early redemption is often limited, and fees can be high. According to FINRA's vice president of investor education Gerri Walsh:
Confronted with a volatile stock market and an extended period of low interest rates, many investors are looking for products that offer higher returns in turbulent times. However, investors should be wary of sales pitches that might play up non-traded REITs' high yields and stability, while glossing over the lack of liquidity, fees and other risks.
Anecdotally, there have definitely been rumblings in the industry and especially the IBD world that these investments are concerning. The space has become overcrowded, from what I hear, and many firms are backing away from them to avoid any problems. They don't want to see another Provident/MedCap debacle, and they already see what happened with David Lerner.
FINRA is also cracking down on this issue in other ways, working on a proposal to shorten the amount of time b/ds have to come up with estimated valuations for non-traded REITs.
Attorney Patrick J. Burns Jr. of Beverly Hills, Calif., told me these investments are fairly illiquid, and there's concern over what the broker/dealer's responsibility is regarding them. No doubt, this will be an area to watch, and stay tuned to our coverage here...