Private Placement Real Estate Investments, Tenant In Common (TIC),REIT and Non-Traded REITs


As reported by securities regulators, turbulence in the stock market and an extended period of low interest rates have contributed to investors seeking products offering attractive yields. Tenant In Common (TIC) investments sold as part of 1031 Exchanges in private placement offerings have become notorious for fraud, as more and more deals implode leaving investors with huge losses and tax implications. Another such product is the non-exchange traded real estate investment trust (REIT) or “Non-traded REIT” for short. While non-traded REITs and exchange-traded REITs share many features in common, they differ in several key respects. Most significantly, shares of non-traded REITs do not trade on a national stock exchange. For this and other reasons, non-traded REITs are generally illiquid. Early redemption of shares is often very limited, and fees associated with the sale of these products can be high and erode total return. Furthermore, the periodic distributions that help make these products so appealing can, in some cases, be nothing more than a return of investor principal. This is in contrast to the dividends investors receive from large corporations that trade on national exchanges or income which is generated by operations of real estate.



There is another type of REIT—a private REIT, or “Private-Placement REIT”—that also does not trade on an exchange. Private REITS carry significant risk to investors. Private REITs are not subject to the same public disclosure requirements as public non-traded REITs. The lack of appropriate disclosures makes it extremely difficult for investors to make an informed decision about investment risks and several Private Placement real estate investments offered during the past six years have been misrepresented and proven fraudulent. Private REITS generally can be sold only to accredited investors, for instance those with a net worth in excess of $1 million. However accredited and non-accredited real estate investors who have been misled are entitled to the protections of the anti-fraud provisions of the Federal and State securities laws. One of the largest sponsors of non-traded REITs, AMERICAN REALTY CAPITAL, has disclosed the intentional manipulation of accounting and financial information. Regulatory and criminal investigations have been reported. Brokers registered with LPL Financial, National Planning Corp., INVEST, SII, AIG Financial, Sagepoint, Royal Alliance and others sold hundreds of millions of dollars of American Realty sponsored products.

As with any private investment, it is a good idea to have the investment reviewed by an investment professional who understands the product and can offer impartial advice prior to investing. Private Placement investors suffering losses arising from misrepresentations and omissions of material information in the offering documents should consult with qualified Counsel immediately, as the passage of time can and will affect your legal rights.

*FINRA has issued other warnings similar to this alert to inform investors and the securities industry of the features and risks of tenant in common real estate offerings, publicly registered non-exchange traded REITs and other “non-conventional investments”.

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