Real Estate Investment Trusts REIT Fraud

Real estate investment trusts (REITs) are a popular way for investors to earn revenue from real estate and diversify their portfolios without the work of buying real property themselves. However, while these investment vehicles can generate steady dividends, they can also be used to defraud investors. Brokers can misrepresent the stability and dividend potential of REITs or fail to conduct proper due diligence, which can cost investors substantial losses.

If you believe you have been the victim of REIT fraud, contact an investment fraud attorney with Erez Law, PLLC today. Our legal team has recovered over $175 million for clients impacted by securities and investment fraud, and because we work on a contingency basis, we don’t earn a fee unless we recover money for you. Don’t wait another moment to demand the justice you deserve. Contact our offices today to discuss the details of your case with our investment lawyers in Miami. 

What Are Real Estate Investment Trusts?

A real estate investment trust, or REIT, is a company that owns or operates an income-generating real estate property. Essentially, REITs allow individuals to invest in portfolios of real estate assets in the same way that people invest in another company with pooled assets, like a mutual fund. A REIT stockholder can earn a portion of the income produced by the company that owns, operates, or finances the real estate property without having to take on the risk and burden of buying and managing the property themselves.

Most REITs work by leasing out properties and collecting the rent as a source of revenue. Income-generating real estate properties can include shopping malls, office buildings, apartments, and hotels. Often, people choose to invest in REITs because they are known to deliver competitive results and steady appreciation to stockholders.

The Role of Brokerage Firms with REITs

Brokerages and investment firms sell various investments, potentially including REITs. However, before they recommend any particular investment, they should carefully assess whether the specific investment is appropriate for their client, based on their individual needs and risk aversion. REITs are complex, necessitating a deep knowledge of this asset class before recommending them to investors. Financial advisors who work for a brokerage firm owe clients a fiduciary duty to conduct due diligence to make suitable recommendations and required disclosures. Brokers are responsible for determining whether a particular REIT is an appropriate investment and can do so by:

  • Examining the sales structure and basis for exemption for private REITs
  • Reviewing the private placement memorandum, description of the security, and the terms of the REIT 
  • Explaining the potential risks in acquiring the security to the prospective investor 
  • Reviewing offering documents, Form D, and other available filings
  • Making appropriate risk disclosures 

Investors who are victims of REIT fraud need a securities litigation lawyer who has comprehensive knowledge about this type of asset class. Erez Law, PLLC sues brokerage firms that sell unsuitable investments, including REITs. When a brokerage firm or financial advisor violates their duty to investors they represent, you need an aggressive advocate in your corner who can demand the accountability you deserve. Our seasoned securities litigation attorneys can evaluate all possible legal claims on your behalf. Contact us today to learn more about your rights and legal options. 

Risks of Private REITs

Brokerage firms often market private REITs as secure and stable investments with high-yield dividends. However, these investments often charge large upfront costs and ongoing fees. Most disturbingly, they are not traded on a public exchange, which can create an entirely new set of risks.

Generally, before a security can be sold in the United States, it must be registered with the Securities and Exchange Commission. Registration is a time-consuming process and requires securities to provide ample information about their product. One way that some offerings avoid the requirement for registration is to qualify for an exemption under Regulation D of the Securities Act. This provides a number of exemptions from registration requirements, including for private placement. With private placement, the issuer raises a limited amount of capital and sells to a limited number of investors. 

A private-placement REIT can carry additional risk to investors because it is not required to provide investors with the same types of disclosures as registered REITs. It can also be difficult for an investor to sell if the investment does not work out. 

If you are interested in REITs, consider some of the risks and drawbacks associated with them, which may include:

  • Fees – Non-traded REITs typically charge an upfront fee. Most fees are between 9 and 10 percent. However, some REIT fees can be as high as 15 percent. Some non-traded REITs also charge external manager fees, which can cut into investor returns.
  • Lack of Liquidity – Non-traded REITs typically cannot be sold readily on the open market. In some cases, a non-traded REIT cannot be sold for a minimum of seven years, making them an illiquid investment.
  • Share Value – Another potential drawback to non-traded REITs is that, because they are not publicly traded, you have limited information when evaluating performance. This can make it challenging to determine the true value of the REIT and harder to spot fraud.
  • Distributions – Sometimes, non-traded REITs pool money to buy and manage properties. When money is pooled this way, dividends can be paid through other investors’ money as opposed to income generated by the property. This can limit cash flow and diminish the value of the investment.

Brokerage and investment firms might provide misleading or dishonest disclosures about non-traded REITs to entice investors. Depending on the circumstances, these actions may constitute REIT fraud.

REIT Fraud

When the people who own and manage a REIT commit fraud, individual investors’ financial stability and future are put at risk. Most REIT fraud involves non-traded investments because of the limited amount of information and disclosure available on these properties.

How does REIT fraud occur? The property-managing company might sell an investor a REIT with the express intent to commit fraud. A manager can falsify or hide information from an investor, presenting the REIT as a solid investment opportunity, knowing that the investment is a poor one. Another common REIT fraud occurs through mismanagement. A REIT manager may have every intention of offering a legitimate investment opportunity but eventually mishandles funds or misrepresents earning information, which causes investors to lose their money. Often, REIT fraud occurs when brokers promise high returns with low risk. 

Some of the REITs that have been named in legal claims or are under investigation include:

  • Northstar Healthcare Income REIT 
  • Healthcare Trust Inc REIT
  • Hospitality Investors Trust REIT
  • The Parking REIT
  • New York City REIT
  • Cole Credit Property Trust 
  • Phillips Edison REIT
  • Benefit Street Partners Realty Trust REIT

If you purchased shares of a REIT and are concerned your broker gave you inaccurate information about it, charged excessive fees, or wrongfully withheld distributions, Erez Law, PLLC can help. We have significant experience representing investors who have been defrauded or fallen victim to abuses by REIT managers and have successfully sued many brokerage firms for abuses they have orchestrated on investors. Contact us today so we can help determine if you have a viable claim to recover your investment losses.

For All Investment Fraud Cases, Call Erez Law Today 

Investment fraud can cost you more than money. It can cost you your financial future and sense of security. If you believe you have been the victim of REIT fraud, contact a real estate investment trust fraud attorney immediately.

At Erez Law, PLLC, our legal team wants to help you protect your future. Contact our Miami office to speak directly to an experienced investment fraud lawyer about your case. We are prepared to take the time to review your situation thoroughly and determine if you have a fraud claim.