Articles for Financial Advisors

Non-traded REITs

Non-traded REITs

For the past few years, nontraded REITs have been on FINRA’s annual list of products that could be too risky for many investors. During May 2013, FINRA came out with new standards to be used when marketing and describing nontraded REITs to clients and prospects. Roughly $62 billion is invested in nontraded REITs that are publicly registered. The dollar amount invested in nontraded REITs that are not publicly registered is unknown.

 

A major concern of FINRA is distributions and share redemption. FINRA now requires advisors and brokers to disclose the breakdown of distributions—what amount comes from earnings and what comes from borrowing or principal. Brokerage firms can no longer use terms such as “yield” or “current yield” to describe a nontraded REITs distributions. FINRA believes (rightfully) that “yield” can wrongly suggest the investment is similar to a note or bond. Redemption rules must also detail whether the process of redeeming shares has changed, halted, and whether or not shareholder redemption requests have been fully satisfied in the past.

 

FINRA will now require nontraded REIT sales materials showing pictures of purchased properties to disclose whether or not the pictures are of actual properties or simply an example of something the REIT bought or sold in the past.

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