Mark Heuerman, registration chief counsel for the Ohio Division of Securities and chair of NASAA's direct participation products group, reviews SEC-registered non-traded REITs. But the National Securities Market Improvement Act has severely limited each state's ability to review private offerings, he says.
Heuerman expects the same problems with public non-traded REITs to surface in the private non-traded REITs area, but perhaps on a grander scale. One thing that troubles him about registered, non-traded REITs is the trend toward longer offering documents-which already run up to 200 pages. They're becoming, he says, tougher to read and understand.
While some public non-traded REITs offer redemptions, these come at the discretion of the advisor. And Heuerman says many REITs have shut down these redemption privileges in the depressed market in order to conserve cash.
Heuerman provides written comments when public non-traded REITs are submitted for review. He looks for conflicts of interest and ensures that any transactions involving a sponsor's affiliates are fair. "We look at fees and expenses. We look at certain investor democracy voting rights. There are some suitability standards applicable to the program.
"There have been programs that have appeared to disclose increased incentive fees payable to advisors-but after the advisors have received a return of invested capital in a stated percentage," he says. NASAA guidelines, he notes, limit incentive fees on public non-traded REITs to 15% on net sale proceeds.
Nevertheless, even if a non-traded REIT gets a state's clearance to go public, that doesn't mean the offering is clear of risks, Heuerman says. Often, it is up to financial advisors to determine whether the investment is appropriate for clients.
Some of the public non-traded REITs, he warns, have paid distributions from the offering proceeds or borrowings. Advisors must beware this signal that the REIT might be short on cash.
Federal regulators have already been acting on these controversial deals. In July 2009, Minneapolis-based Ameriprise Financial Services Inc. agreed to pay $17.3 million to settle SEC charges that it received millions of dollars in undisclosed compensation as a condition for offering and selling REITs to its brokerage customers. These offerings included $100 million of unregistered REIT shares.FINRA last year began reviewing broker-dealers' sale and promotion of non-traded REITs-both public and private placements-in a targeted examination request. "The inquiry to the firms has led to a number of investigations, although I cannot provide further detail," FINRA spokesman Brendan Intindola says.
FINRA member notice 09-09 issued in February 2009 clarified the rules on public and private placement non-traded REITs. Member firms, FINRA says, may not use par value in a customer account statement for more than 18 months after the conclusion of an offering. Plus, before participating in a public offering, they must determine whether all the material facts have been adequately and accurately disclosed-including whether the promised dividend distributions are sustainable.
Vernon says the high commissions on private REITs provide a built-in incentive for them to be oversold. The salespeople are "suggesting that the fact that they don't have to tell you daily what you can sell a portfolio for somehow makes it less volatile," Vernon says. "It's a great sell! That's what bothers me."