Non-Traded Real Estate Investment Trust Fraud


Brokers sell numerous types of complex securities to investors. Some may have higher fees and not be liquid. These features do not make the securities unsuitable for all investors, but they do for many. Not only can the broker commit fraud, but the issuer itself could also deceive investors.

There are many minefields for customers who invest in a non-traded REIT. If you have lost money because of REIT fraud, there are several ways that you can get your money back.

Contact an experienced non-traded REIT fraud lawyer at Rikard & Protopapas today.

What Is a REIT?

REITs are an acronym that stands for real estate investment trusts. These are pooled investment vehicles that have interests in various real estate projects. They either own the property outright or are involved in financing. Most REITs buy and lease properties, making money from rent payments.

REITs may invest in the following:

  • Apartment buildings
  • Commercial office space
  • Retail and shopping malls
  • Cell phone towers
  • Hotels
  • Infrastructure

Why Investors Purchase REITs for Their Portfolios

The purpose of a REIT is to earn and produce income for the owners. REITs are known for paying a high dividend, as the income is distributed to investors. In general, REIT owners make more money from the dividend than they do from the price appreciation of a REIT. The goal is for the REIT to keep up with dividend payments by generating the necessary income. Over time, the hope is that the REIT will raise dividend payments as it makes more money.

REITs are supposed to be viewed as a stable investment for people who want to earn a steady income. Usually, your biggest risk as an investor is that the REIT cannot keep paying the dividend, and is forced to cut it.

REITs are often priced based on the multiple to the dividend, since you usually cannot expect a large price appreciation. Many investors prefer REITs because they must pay 90% of their income in dividends, so there will be a higher yield than they would get from other securities.

Many REITs are traded on the open market. Publicly-traded REITs allow for more transparency and liquidity for investors. They have greater price discovery and receive regular reports on the REITs financial situation. These securities are subject to the requirements of the stock exchange on which they are listed. Not only do investors have more information, but there is also a ready market for their securities.

What Are Non-Public REITs?

Non-public REITs do not trade on an exchange. You would need to buy and sell it in a private transaction. Two types of REITs are not publicly traded:

  • Private REITs, which are practically completely exempt from SEC registration and reporting requirements under Regulation D
  • Public non-traded REITs are registered with the SEC, but they do not trade on an exchange, so they do not have the same liquidity as a publicly traded REIT.

Possible Benefits of a Non-Public REIT

There are reasons why investors may want to place their money in a non-traded REIT that can include:

  • You get greater access to previously inaccessible real estate investments
  • There may be higher returns than there are on a publicly traded REIT
  • There could be tax advantages that come from owning a non-public REIT
  • You can diversify your investment portfolio and gain some shelter from volatile financial markets

The Risks of a Non-Public REIT

There are cases when investing in a non-public REIT could make sense for you. While a non-public REIT is not listed on a stock exchange, it still is a security, and, as such, it must be registered with the SEC.

However, there are also some natural drawbacks that are associated with a non-public REIT that include:

  • You can face high fees on the front end of your purchase which can be as high as 15%.
  • Early redemption of a REIT can mean a significant financial penalty.
  • There is no liquid market when you want to close your position in the non-public REIT.
  • Your valuation could be dependent on how securities are marked, and the marked price may not accurately reflect reality.
  • You may have little idea of the exact type of securities in which the non-public REIT is investing before you get reports.
  • Your distributions could be a return of capital that you have invested instead of money that the non-public REIT has earned.

The Lack of Transparency Could Mean a Higher Risk of Fraud

As former Supreme Court Justice Felix Brandeis once said, “sunlight is the best disinfectant.” What Justice Brandeis meant was that transparency can root out potential fraud. The flip side is that transparency makes fraud more likely, and non-public REITs are no exception to the rule.

Some non-public REITs are worthwhile and profitable investments for those who are looking for a diversified portfolio. However, not every company in this space is credible.

Unfortunately, REIT fraud is too common, and it is even more so when the security is not publicly traded. There have been numerous REIT scams that have cost investors money.

In general, private REITs may be facing a reckoning, especially as the commercial office market takes a continued drubbing. Remote work threatens the stability of many REIT investments, and the non-public securities may be the first domino to fall.

The non-public REITs that are nothing more than Ponzi schemes may soon be exposed as new investors hesitate to put cash into this unstable market.

What to Do As a Victim of Non-Public REIT Fraud

If you have lost money in a non-public REIT scam, you have several legal options. Your first option is a securities fraud lawsuit against the issuer of the security. Here, you can file a lawsuit directly or join in one that has been filed by shareholders. There is nothing that restricts you to arbitration only because you are not in a customer relationship with the issuer. Here, you would file a class action lawsuit against the issuer to recoup your losses.

You may also take legal action against your broker that recommended or sold you the REIT. Instead of filing a lawsuit, you would need to file an arbitration claim. There is a mandatory arbitration clause that requires you to proceed through a FINRA arbitration panel.

Grounds for Arbitration Against a Registered Representative

There is a chance that a non-public REIT may never have been suitable for you in the first place, based on your own investment profile. There are numerous reasons why you could file an arbitration claim against your broker for your losses in a non-public REIT, including:

  • The broker was negligent by not doing reasonable due diligence on the security before they recommended it to you (this can be a breach of fiduciary duty for an investment advisor or negligence on the part of the broker).
  • The non-public REIT had excessively high fees that made it a non-suitable investment in the first place.
  • A non-public REIT may not have suited your own investment profile by being too risky.
  • The lack of liquidity for the REIT may have been quantitatively unsuitable for your investment profile.
  • The broker may have made false representations about the REIT, or they may have failed to disclose material information about the security.
  • The broker may have had an incentive to steer you to shares in a security with very high fees because they were receiving undisclosed payments for recommending and selling the non-public REIT.

If you have been the victim of a REIT scam, you have the right to take action. First, you should contact an experienced attorney to determine the most effective legal action that you can take. Securities class action lawsuits and FINRA arbitrations can be complex. You may not even know exactly what happened to cause your loss.

How Our Investment Loss Lawyers Can Help You

When you call one of our experienced investment loss lawyers about REIT fraud, we can help you do the following:

  • Perform an investigation of what the issuer and your broker did in connection with your losses.
  • Recommend a legal course of action to recover what you lost.
  • Build your case for a successful lawsuit against the issuer or FINRA arbitration against the broker.
  • Negotiate a potential settlement that can help you get your money back.
  • Argue your case in court or to the arbitrators to show why you deserve a financial recovery.

Call a REIT Fraud Lawyer Today

The attorneys at Rikard & Protopapas have experience in broker and securities fraud cases involving complex investment schemes. We are able to figure out how and why you lost money and who you can take action against to get it back.

Your first step is to call us to schedule a free initial consultation. You can send us a message online, or you can call us today at (803)-805-7546 to speak to a lawyer. You owe us nothing unless you win your case.



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