Cornerstone Real Estate Investment Funds sold through Pacific Cornerstone Capital Inc. have joined other REITs in experiencing a drastic drop in value in recent months.

Cornerstone REIT investors received a letter from Cornerstone earlier this month that Cornerstone shares dropped to $2.25 from $8. The drop was caused by the global economic downturn that negatively impacted the small business tenant base, investors were told.

Cornerstone is a relatively small player in the nontraded REIT market, according to those familiar with the category, but it exemplifies some of the problems with nontraded REITs, which are illiquid and have high commissions that range up to 10%.

The White Law Firm in Chicago is investigating the broker-dealers who sold the Cornerstone shares. The firm has received numerous calls from investors who have lost substantial portions of their portfolios because of the drop, says Dax White, managing partner.

"The problem is a lot of these nontraded REITS are sold to retirees just looking for a steady stream of income and they do not realize the risks they are taking," White says. The law firm is investigating whether the broker/dealers who sold the shares did their due diligence to determine whether the sale was in the best interests of their clients.

Cornerstone's problems and the inherent problems of the fluctuating valuations in the real estate market should not affect the ability to sell REITs, White says.

Cornerstone is not the only one to experience problems recently. Behringer Harvard Short-Term Opportunity Fund I LP and Behringer Harvard Opportunity REIT I also experienced drastic drops in share value.

The drop in share price for Cornerstone's REITs should not affect other REITs but others may still see drops in share value, according to sources close to the situation. As other REITs come up for remarking of share prices, they may reflect the downturn in the market that happened previously.

Each REIT change in share value will depend on the type of commercial real estate they are invested in with long-term lease property holding its value more than commercial property such as hotels or apartments, say the sources.

-Karen DeMasters