2 August 2011

A Closer, and Skeptical, Look at Nontraded REITs

A Closer, and Skeptical, Look at Nontraded REITs 
By TERRY PRISTIN 
Last year, Cole Real Estate Investments of Phoenix, a sponsor of nontraded real estate investment trusts, refunded $3 million to the West Warwick, R.I., pension board, which had bought shares in one of its REITs despite strenuous objections from its investment adviser, who resigned in protest. 
Cole took this unusual step after the Townsend Group of Cleveland, an adviser to the state pension board, reviewed the investment at the request of public officials and said it was unsuitable for a pension fund. Townsend’s long list of reasons included the excessive fees paid by investors and the company’s lack of liquidity and “appropriate policies for investment valuation,” public documents show. 
The events in West Warwick brought unwanted attention to a relatively small and little-known sector of the real estate industry that has been around for more than a decade but has grown rapidly in recent years. Nontraded REITs are securities that are not listed on any exchange and are sold through financial advisers, which receive generous fees. Recently, this sector has been receiving heightened scrutiny from both the Securities and Exchange Commission and the Financial Industry Regulatory Authority, or Finra…..