Eileen is involved in the firm’s securities practice and has over a decade of experience in the legal world. She received her law degree from American University in 2005.
Real estate investment trust (REIT) fraud is not uncommon. Companies, stock brokers, financial advisors, and fraudsters often manipulate individuals into investing in risky REITs with the promise of low-risks and high returns. While these investments may seem great at first, many investors have reported being stuck in uncertain investments and losing a significant portion of their investment value in certain REITs.
Particular REITs that investors have lost money in include Steadfast Apartments REIT, Healthcare Trust Inc. REIT, New York City REIT, Northstar Healthcare Income REIT, Hospitality Investors Trust, FS Energy and Power REIT, and Benefit Street Partners REIT.
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Non-Traded REIT Fraud Lawsuits and Investigations
Our FINRA arbitration lawyers are currently taking cases on behalf of investors with money in a number of different REITs, including:
New York City REIT: This REIT stopped cash distributions to investors and suspended its repurchase program indefinitely. The investment was originally offered at $25 per share, but had an estimated net asset value of $20.26 as of June 2018.
Steadfast Apartment and Income REITs: Steadfast Income REIT has announced that it will acquire Steadfast Apartment REIT III and Steadfast Income REIT, leaving shareholders with Steadfast Apartment common stock valued at less than their original investment. Many investors report being stuck in these uncertain investments.
Healthcare Trust Inc REIT: The HTI REIT was originally offered at $25 per share, but now has an estimated net asset value of only $17.50 per share as of December 31, 2018. The company has also lowered its annual distribution rate, and shares on the secondary market have sold for as low as $9.50 per share.
Northstar Healthcare Income REIT: The Northstar REIT was originally offered in 2013 for $10.20 per share, but the REIT had lost 30% of its value by 2018, and cut its monthly distributions in 2019.
Hospitality Investors Trust REIT: The HIT REIT conducted its initial public offering at $25 per share, but estimated its net asset value (nav) at $9.21 per share as of December 31, 2018. Further, the company suspended distributions in 2017, causing significant harm to investors.
Benefit Street Partners Realty Trust REIT: This investment was originally offered at $25 per share. The REIT’s share price has significantly decreased since then, reporting an estimated nav of $18.75 per share as of September 30, 2018.
FS Credit Real Estate Income Trust–I: FS Investments has suspended quarterly tender offers on many of its funds due to mergers involving these funds. Some investors have reported being unable to redeem their shares and feeling stuck in their FS investments.
The Parking REIT: This investment was originally valued at $25 per share, but tender offers for purchase of these shares have since ranged as low as 48% below the original price.
Cole Credit Property Trust: Some Cole Capital Property Trust REITs have been under investigation for the risks associated with these sometime unsuitable investments. For example, Cole Credit Property Trust IV reported an estimated $8.65 per share net asset value as of December 31, 2018.
While many REITs boast high returns and high annual dividends, some REITs have recently suspended their monthly distributions and admitted decreases in their current share value. If you invested in any of these REITs, or others, we may be able to help. Speak with a lawyer to learn more about recovering your losses.
Stock Brokers and Investment Advisors REIT Fraud
Our REIT fraud attorneys have received a number of claims regarding investment advisors and stock brokers placing investors in unsuitable REITs, and claiming high commissions as a result.
Our team is currently investigating Cetera and East West Bank on allegations that their financial advisors were placing conservative investors into risky private placements and non-traded REITs, such as Hospitality Investors Trust, Northstar Healthcare Income, and Arc Realty Finance.
Other financial firms our lawyers are investigating include:
- Kalos Capital
- First Allied Securities
- Royal Alliance
- SagePoint Financial
- Woodbury Financial Services
- Madison Avenue Securities
- Capital Wealth Management
- Coastal Equity
Investment advisor misconduct should be taken very seriously. If your broker or advisor placed you in an unsuitable investment, you may be eligible for monetary recovery. Contact our securities lawyers to learn more.
REIT Fraud: What REIT Scams Look Like
While scams can occur with any type of REIT, REIT fraud is most likely to occur with non-traded REITs due to the limited disclosures required for these investments. Non-traded REIT investors can be subjected to fraud in many different ways. Investors can be defrauded by the REIT manager or company itself or the stock brokers and financial advisors recommending the REIT.
Stock Broker and Investment Advisor REIT Fraud
Stock brokers and financial advisors often receive extremely high commissions from non-traded REIT investments; giving these financial professionals the incentive to recommend non-traded REITs to investors. While REITs may be good investments for some investors, non-traded REIT investments can be extremely unsuitable for others. For example, there have been many reports of brokers and advisors placing conservative and amateur investors in volatile and risky REITs.
You advisor may place you in a REIT with the intent of committing advisor fraud, or may have good intentions, but simply be a negligent advisor. Either way, if you feel as though you weren’t provided sufficient information, or your REIT investment was unsuitable for your age, risk tolerance, experience, or investment goals, you may be eligible to recover your losses. Contact an attorney to learn more about your potential claim.
REIT Manager Fraud
There are two main ways that non-traded REIT managers can commit fraud. First, the managing company can sell the REIT with the intention of committing fraud. Some non-traded REITs are able to provide only limited information to investors before they invest, which allows managers to easily hide aspects of fraud when selling the REIT. Other managers may offer the REIT with legitimate intentions, but begin to mishandle funds or misrepresent earnings information later on.
If you believe that the REIT manager or company misrepresented your REIT investment, you may have a claim. Contact us today to learn more about your recovery options.
Non-Traded REIT Fraud and Market Volatility
Increased market volatility has led many investors to look for products that offer more stability. Some non-traded REITs have claimed that they can do exactly that; marketing themselves as a stable investment in the volatile real estate investment market. According to industry watchdog organizations like FINRA and the SEC, however, this may not be the case.
It is a common misconception that non-traded REITs are stable despite stock market volatility. In fact, non-traded REITs are still subjected to the ups and downs of the market. The only substantial difference between non-traded REITs and traded REITs is that the values of non-traded REITs are not often readily available, meaning that investors don’t see the volatility firsthand. Speaking to the New York Times about non-traded REITs, SEC attorney Michael McTiernan was quoted as saying:
One common sales tactic we object to is the suggestion that they are eliminating volatility simply because they don’t tell you what the value is… It’s not that it’s not volatile. It’s just that you don’t know.
Since non-traded REITs are often illiquid, investors may not be able to get their money out even when the value of their investment is declining. These types of investments are long-term and, therefore, are not suitable for many investors. If you were placed in a REIT, and were told told that your investment was going to be stable or liquid, you may be able to recover your losses.
To learn more about selling your illiquid investment, visit our Getting out of a Non-Traded REIT page.
Non-Traded REIT Fees: High On-The-Dollar, Ongoing, and Commission Fees
A lack of honest disclosure may not be the only potentially fraudulent aspect of some non-traded REITs. Other ways investors may be deceived into purchasing shares of non-traded REITs is through unrealistic expectations for returns on their investments.
While brokers may promise high annual dividends on non-traded REITs, analysts who have studied REITs in general have concluded that in some cases non-traded REITs may in fact offer no return on an investment at all due to high up-front fees amounting to as much as 16%. These fees, including on-the-dollar, ongoing, and commission fees, often go towards paying brokers who sell the products and the directors and officers that oversee the funds. This can leave as little as 85% of the original investment to go towards real estate investing.
In addition, distributions and dividends may be paid almost entirely by borrowing money. This can dilute the value of the investment and put the company at risk of suspending distributions.
REIT Scam Red Flags: REIT Values Plummet; Distributions Suspended
There are many warning signs to be aware of when considering a REIT investment. Red Flags for REIT scams include:
- The REIT does not have readily available information, or the information provided is hidden or confusing.
- The stock broker or advisor selling you the REIT has limited information available about him or her, or has a record of financial advisor complaints or disciplinary actions.
- The REIT seems great when you first invest, but later provides new information that is cause for concern. If this new information seems inconsistent with what you were originally told, you may be the victim of a REIT scam.
- Your financial advisor or stock broker guarantees high returns or stability, tells you you must act quickly, or pushes you to invest the majority of your portfolio in REITs. Investment over-concentration is typically not in the best interest of the investor, and may mean that the advisor has underlying incentives to recommend certain REITs.
- Your broker or advisor did not explain the risks associated with investing in non-traded REITs.
It is important that investors considering REIT investments be aware of the risks associated with REITs, and keep an eye out for any investment red flags. For more on REIT risks, visit our Real Estate Investment Trusts and REIT Lawsuits pages.
How to Avoid REIT Scams
There are many simple steps investors can take to help ensure their REIT investments are safe, including:
- Check with the SEC to ensure that the REIT is actually registered.
- Use FINRA’s brokercheck tool to ensure that the broker selling you the REIT has no complaints or regulatory actions against them.
- Ask your advisor or broker for as much information as possible. The more information you have, the better equipped you will be to make an informed investment decision. If you or your broker can’t find detailed information about your investment, this should be cause for concern.
- Find out how the REIT is paying investor dividends. If dividends are being paid with borrowed money, this may dilute the share value and decrease the funds available for the company to re-invest in new assets. While not always the case, this can put the REIT at risk of suspending dividends.
- Make sure you understand the fee structure of the REIT in order to avoid paying high or excessive fees.
- Know the time frame of the investment before you commit. Some REITs can lock you in for as long as 10 years, which may not be ideal for certain investors.
REITs are often complex investments. It is important that you cover all your bases to ensure you are choosing an investment that is right for your age, risk tolerance, and investment experience. If you have any concerns about your investment choice, our securities lawyers are here to help. Contact us today for a free and confidential consultation.
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Our Featured REIT Fraud Attorneys
Scott focuses his law practice on securities arbitration and litigation and plaintiff-side class action litigation, representing individual investors and institutions in claims against brokerage firms, investment advisors, commodities firms, hedge funds and others.
David’s advocacy has generated major recoveries for consumers impacted by financial fraud. He was named to the Top 40 Under 40 by Daily Journal and a “Rising Star in Class Actions” by Law360.
Amanda is spearheading a securities lawsuit against NantHealth concerning fraudulent statements to investors about the success of its key product.
Our Financial Fraud Experience
Gibbs Law Group
Gibbs Law Group’s financial fraud and securities lawyers have more than two decades of experience prosecuting fraud. The firm has successfully litigated against some of the largest companies in the United States, and has recovered more than a billion dollars on clients’ behalf.
Gibbs Law Group attorneys have fought some of the most complex cases brought under federal and state laws nationwide, and have been recognized with numerous awards and honors for their accomplishments, including Top 100 Super Lawyers in Northern California, Top Plaintiff Lawyers in California, The Best Lawyers in America, and rated AV Preeminent (among the highest class of attorneys for professional ethics and legal skills).
Silver Law Group
Silver Law Group is a team of securities lawyers, forensic accountants, and support staff who are dedicated to helping investors recover losses through securities arbitration and litigation.
The firm is led by Scott Silver, a former Wall Street defense attorney who has been representing customers in securities and investment fraud cases since 2002. Scott is admitted to practice in New York and Florida and the firm’s FINRA arbitration attorneys represents investors nationwide.