Investors are beginning to discover some downsides to a special type of real-estate investment trust (REIT). These are not publicly traded and small investors are starting to find out that these REITs are being valued a lot lower than they were expected to be.
Recently, Retail Properties of America Inc., which is one of the largest owners of U.S. strip malls and shopping centers, became aware that their shares were valued at $3.20 in April 2012 when they were valued at $6.95 in June 2011. Investors became aware of this information when the REIT went on the New York Stock Exchange. In addition, Cornerstone Core Properties REIT Inc. also disclosed their value when it went public. Its stock was actually valued at $2.09 when it was sold to investors at $8 in 2008. In a shareholder letter in March 2012, shareholders were notified of this devaluation of the stock.
In turn, investors filed grievances at the Financial Industry Regulatory Authority (FINRA) against the investment advisers who recommended these non-traded REITs to them. This isn't the first time FINRA has been notified of these valuation issues with non-traded REITs. Back in 2011 the Securities and Exchange Commission and FINRA began to crack down on investment advisors to provide their customers with better disclosures on the non-traded REITs share valuations. FINRA has also proposed new rules that would set guidelines for non-traded REITs disclosures with financial-advisers.
Also, in 2011, FINRA initiated suit against David Lerner Associates Inc., (David Lerner) which is a New York brokerage firm. David Lerner targeted elderly and unsophisticated investors and sold Apple REITs that were unsuitable for them. Advocates of the non-traded REITs, however, still state that the share prices have the potential to rise if conditions become better. As of now, property prices are still low and subsequently the non-traded REITs have lost value.