This site is designed to focus on public, non-traded REITs and limited partnerships. For the time being, we will not offer research or commentary on liquid REITs that trade on the exchanges – that info is available at REIT.com. Our primary purposes are to:
We were pitched an investment, in a non-traded REIT
We trusted the salesman, and thought it was sweet
The truth became evident, as time moved on
The sale to us, was sort of a con
We aren't the ones, who would really get rich
The planners the one, - that son of a bitch
We've watched as the yield, has become less
Boy, we are stuck, – we are in a mess
We decided to sell, there was no other way
We found "TheREITAdvisor", who saved the day.
You can reach us at TheREITAdvisor@gmail.com
I have been involved in evaluating and trading non-liquid assets since 1987. After completing a successful career in non-profit fundraising, I entered the financial industry as a broker for E.F.Hutton. Ironically, my first day on the floor coincided with the October 19th, 1987 crash – always wondered if my presence caused it. I soon was appointed First Vice President of Hutton which then evolved into the same position with Shearson Lehman and eventually Smith Barney.
Shortly after joining the firm, it became evident that many individual investors and pension plans had unknowingly purchased illiquid investments without understanding the consequences. Thousands had invested in limited partnerships in the 70’s and 80’s and after the turn of the century, many more bought positions in public, non-traded REITs. Most often they were not aware that once the purchase was final, they had no or very limited liquidity – no way to sell the units. Seldom did the selling broker point out that once purchased these units had to be held until the management decided to close out the program. Even if the investor’s investment objectives change, they are often locked into owning a product they prefer to sell.
Many of these investors had cash needs caused by divorce, probate, bankruptcy, or a need to liquidate a pension plan or IRA. Some wanted out since their investment objects changed. My practice soon focused on providing these investors an outlet to sell their units and reposition their portfolio. While I am no longer working within the confines of a large brokerage house, I am still often asked how to sell illiquid assets. In the earlier days questions revolved around limited partnership while today most questions come from owners of non-listed REITs.
Because of the rapid growth of non-traded REITS and the downturn in commercial real estate, there are many investors who need more knowledge. They need to understand what they own and to decide if it is still appropriate for their portfolio. If they wish to sell, they need a way to begin the process.
This site is only intended to introduce me to you and to offer broad overviews of the non-traded REIT market and some of the larger non-traded REITs. I will also refer you to sites for more current and specific information including how to begin the process of selling your position or buying more.
Inland American is the largest, active non-traded REIT with assets of over $11 billion.
Inland Western, a $7 billion REIT, had planned to liquidate several years ago.
Wells Real Estate II is heavily invested in office buildings with more than half east of the Mississippi River.
CPA has four active REITs with combined assets of over $8 billion. These include CPA 14, CPA 15, CPA 16 Global, and CPA 17 Global
Cole Credit II is a REIT that focuses on freestanding, single-tenant retail properties.
We will provide these current owners of non-traded REITs or limited partnership with an idea of the market value of their holdings. Most often we can help you find another investor that may wish to buy your units. We can explain the process for transferring units. We charge no commission to the seller but institutional purchasers help pay for the costs of this site.
We offer consultative services to high net worth investors and entities who may wish to add a unique real estate component to their portfolio. They can buy quality non-traded REITs comparable to publically traded entities at substantial discounts. The discounts are related to the non-liquid nature of the investment. For all the reasons that buying and owning non-traded REITs are problematic for individual investors, we see opportunities for more sophisticated investors. When you buy on the secondary market you first transfer all selling and marketing costs to the original buyer and then buy at a discount to the net asset value. If you have room for a small piece of your portfolio to be placed in potentially high yield, real estate purchased at a major discount to value, you might want to explore this opportunity.
We are qualified to provide expert witness testimony in suitability and other cases. Our position is generally that most investors were not explained the risks of this product in the first place and often should not have been sold these products. They should have been sold comparable products that generate much less commission and selling costs and that offer instant liquidity.
Brokers typically sell these products for two reasons. The first and simplest is the exorbitant commissions. Fees, commissions, and selling costs often exceed 14% of the offering. This means that for every one hundred dollars invested on the offering, the REIT purchases and the investors own eighty-six dollars of real estate.
The second reason is a little more complicated. It is very difficult for the investors to know the value of their investment. If you purchase a traded REIT, the exchanges publish the trading price throughout the day. Non-traded REITs appear on investment company statements at the purchase price rather than at market value throughout the offering phase and for an additional eighteen months. Prospectuses sometimes state that this not the actual value but it is used nevertheless. Liquidation value can approximate 85% of the offering immediately after acquisitions. Market value can easily run between forty and sixty percent of cost. It is difficult to place an accurate value on units but they show as the offering price on investor’s statements for up to eighteen months after the completion of the offering – see the evaluation section in the REIT Overview. Clients do not know if they are making money or losing money until the programs are completed.
A REIT or Real Estate Investment Trust is a security that invests in real estate properties or mortgages usually with a multitude of owners. While some definitions, such as the one shown on http://www.investopedia.com/terms/r/reit.asp, incorrectly state that they trade like a stock, actually there are publically traded REITs, non-traded public REITs, and private REITs. To qualify as a REIT, the IRS requires that the company must invest at least 75% of its assets in real estate, derive at least 75% of its income from rent or mortgage interest, and must distribute at least 90% of its taxable income to shareholders.
NAREIT, the National Associate of Real Estate Investment Trusts, clarifies the characteristics of the various types of REITs in a brochure you can find at http://www.reit.com/Portals/0/PDF/2009%20REITTypesNewCovers.pdf . They show the major differences between a traded and non-traded REIT to be 1. Liquidity: Traded REITS trade on national exchanges and allow daily exit while non-traded REITs do not trade on exchanges, have ineffective redemption programs, and the individual’s exit strategy is often linked to the liquidation of the REIT. 2. Transaction costs: Traded REITs trade at the same cost of any other share of stock while non-traded REITs have offering commissions of over 10%, as well as, ongoing management fees and possible back end charges. 3. Performance Measurement: Unlike non-traded REITs, traded REITs have numerous trackable, performance benchmarks and analyst’s reports which allow investor to measure the performance of their investment, while non-traded REITS are difficult to follow.
Because traded REITs have liquidity, much lower transaction costs, and are measurable, we encourage investors to consider this method of investing in real estate. You may wish to explore a fund of REITs such as the one managed by Viawest Properties, a most reliable firm – www.viawestprop.com. We also recommend investments in non-traded REITs if you are able to buy them on the very limited, secondary market at substantial discounts to their offering price (see www.REITSECONDARYEXCHANGE.COM ). Large pension plans like CALPERS, real estate mutual funds, and sophisticated money managers never invest in retail offerings of non-traded REITs – why should individual investors?
Since private REITs are unregulated and their financials are not public, we will not devote any space to them on this site. Since we are aware of several buyers of private REITs, you ought to contact us if you wish to liquidate your position in a private REIT. Information on traded REITs is readily available from numerous sites (we suggest www.Reit.com as a start), therefore, this site’s focus will be only on non-traded equity REITS.
Non-traded REITs are similar to the old limited partnerships of the 70’s and 80’s with the exception that their financials are public and filed with the SEC. You can visit http://www.sec.gov/edgar/searchedgar/webusers.htm to review the quarterly and annual reports of your REITs. The reports you will see are presented by the REITs and are not guaranteed or endorsed by the SEC.
Evaluation: It is difficult to determine the value of a unit of a non-traded REIT. We must first define what value means. The liquidation value or net asset value (NAV) is the amount you would receive if all the properties in the REIT were sold, all the debt repaid, and all the fees finalized. Since this is not going to happen until the REIT’s conclusion, it is irrelevant. There is a statement value that appears on your the monthly statements from the broker houses that sold you the REIT. The offering price is used as the statement value until eighteen months after the completion of the offering even though the actual market value is considerably less. After the eighteen months, the REITs provide the brokerage houses with an estimated value. These are seldom accurate since the REITs have a disincentive to show you that the investment may actually be worth less than you invested. We believe the value of most assets is the amount of cash a knowledgeable investor would be willing to pay for your asset today. This is market value.
Caution to Pension Plans and IRA’s: Pension plans that do not mark their partnerships and REITs to market, may allow departing employees to take larger distributions than they are entitled to. For example, if a plan held a $100,000 initial position of a non-traded REIT and a departing employee held 10% of the plan, an administrator may distribute $10,000 cash to that employee. If the position was marked to market, the employee may only be entitled to $5,000. Likewise, individuals who use the inaccurate statement value of non-traded REITs in their IRAs when they make calculates for Roth conversions or minimum IRA distributions at age 70 ½ may benefit from marking those investments to market.
Like their ancestors the limited partnership syndicators, REIT originators raise hundreds of millions or billions of dollars for a blind pool to buy and manage real estate. Selling fees and commissions often run over the 10% range. There are other expenses such as loan origination fees, management fees, and acquisition fees that may quickly convert a $1000 investment into $850 of equity. The management of the assets is usually left to a management company often owned by the REIT originator. Many of the REIT’s functions such as leasing, acquisition, accounting, transfer services, and in some cases even banking are often outsourced to companies owned by the originator.
REITs tend to be yield driven since at least 90% of their taxable must be distributed. Most non-traded REITs were designed and attempt to deliver a 6% to 7% distribution based on the offering price. This is why buying REITs on the secondary market at discounts can produce exceptional yield, as well as, allowing you to buy an asset at less than its net asset value. Most REITs have been forced to cut their dividend because of increased vacancies, lower rents, and demands from lenders to pay down debt.
REITS that are still in their offering phase never reduce distributions. It would be a difficult task to raise new money with a decreased distribution rate. These REITs often use new money coming from the offering to subsidize unsustainable distributions. Some have likened this to the Ponzie concept – use new investor’s money to keep older investors happy.
In addition to excessive fees and an inability to monitor the value of your investment, the major problem with non-traded REITs is the lack of liquidity. They are designed to be held until the management decides to provide an exit strategy. When investing in more liquid securities, you may identify what you think is an opportunity such as gold, high tech, whatever, and buy a position which then appreciates and you then elect to take your profit by selling your position. If you own a non-traded REIT and the real estate appreciates, you can not take your profit but must remain an owner until the management decides to liquidate the REIT.
Most non-traded REITs have repurchase plans mentioned in the prospectuses. The problem is that the management may suspend them at any time. Most have suspended them in this down cycle. Nine of the ten largest non-traded REITs have suspended their repurchase programs by the fourth quarter of 2009. These plans are a win for the REIT but not the investors who want an exit. Often these plans are only operational when the repurchase price is lower than the net asset value or selling price of the REIT. If the REIT shares have appreciated, the exiting investor receives 95% of what he paid - leaving the growth on the table. If the shares are worth less than 95% of what the investor paid, the plans are often suspended. Very tough for the investor to win.
For up-to-date information on some of the non-traded REITs or information on how to sell your position or buy in the secondary market go to www.REITSecondaryExchange.com.
Share prices for non-traded REITs in the thinly traded, secondary market are discounted to reflect the inherent problems of these securities. While I would not purchase a non-traded REIT on an offering, I would be a buyer if the discount was appropriate. Since the offering phase for some REITs last several years, it is sometimes possible to purchase secondary shares during the offering phase at prices significantly less than the offering price. Because of these inequities, hedge funds, institutional investors and individual investors are turning to this arena.
Lawrence M. Cohen, through his company The REIT Advisor, is available to consult with larger investors who are considering this investment area. Individual investors can contact the company through www.REITSecondaryExchange.com.