In the first quarter of 2010, equity REITs returned 10.02%, a figure that dwarfed the relatively miniscule 5.39% gain for the S&P 500 index during that period, according to the National Association of Real Estate Investment Trusts.

Such numbers might delight real estate investors, but at the same time they're giving pause to the industry's watchdogs, those who think that the excitement over REITs may attract unsophisticated investors into troublesome securities in which they have little protection and might be ripe for abuses.

Denise Voigt Crawford, president of the North American Securities Administrators Association, is one of those people who worry about the explosion of real estate investment trusts (REITs) in the depressed real estate market, though it's the private placement REITs that worry her the most.

"I'm less concerned about the registered offerings because they have gone through a process whereby the regulators have actually looked at them," says Crawford, who doubles as the Texas securities commissioner.

Take one case involving Naples, Fla., law firm Vernon Healy, which recently filed a FINRA arbitration claim charging that a stockbroker with CapWest Securities Inc. of Lakewood, Colo., negligently urged a retired couple to plunge more than $1 million of their nest egg into income-producing "alternative investments." Those investments, according to the law firm, included non-traded (or private) REITs. Since then, those REITs have largely suspended distributions and forbidden redemptions, depriving the couple access to their retirement savings, according to attorney Chris Vernon.

CapWest denies that its broker acted recklessly, as the lawyers contend. "The self-released press release of the attorney is ... pumped up and inaccurate," says Edward Price, a vice president with CapWest Securities. "It will be addressed in arbitration based on the facts."

REITs may own or invest in real estate, real estate-related loans or both. Though all REITs must meet a set of IRS conditions to qualify as REITs, they fall into three broad regulatory categories. One of these is a "public listed" REIT, which is registered, generally with the SEC, and publicly traded. The second is a "public unlisted" REIT, which is registered, but not listed or traded on an exchange. The third is a private placement REIT that is neither registered nor traded on an exchange. Private placement REITs often file an SEC "Reg D" form that exempts them from most disclosure documents, and thus their marketing is largely limited to wealthy or "accredited" investors.

Crawford is concerned about private placement non-traded REITs because regulators don't scrutinize them that closely. Some private non-traded REITs may be in an advantageous position at present if they have lots of cash because they can buy properties at attractive prices, but it's unlikely investors are capable of conducting the necessary research to find out.

The market doesn't have a ton of information to base decisions on. "There are many more private REITs than there are publicly traded or non-traded REITs," says Michael Grupe, NAREIT's executive vice president. "But they're private. There's no filing requirement-no disclosure documents." The last records on them Grupe says he can recall were pulled from the IRS in 2007, and showed something like 1,200 private REITs.
One concern is that non-traded REITs-both public and private, which many lump together-may be finding their way into the portfolios of those retirees desperately seeking higher dividends. Such investors may be unaware that non-traded REIT prices might not accurately reflect the price fluctuations in the underlying portfolios. Nor may investors realize that these securities can be illiquid.

The prices of non-traded REITs are set by the REIT sponsor rather than a national exchange. The funds typically run about ten years, after which investors generally cash out in one of three ways: The fund can go public, it can be sold or the underlying investments can be liquidated. Redemptions may otherwise be limited until then. And non-traded REITs lack the daily market-set prices of REITs that trade publicly.

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