Product Spotlight: AR GLOBAL REITs

visions-from-im-5-1466265-225x300Malecki Law’s team of investment attorneys are interested in speaking with those who invested in AR Global REITs. Industry analysts and consultants believe that investors in a number of AR Global-sponsored real estate investment trusts (REITs) are in danger of having their distributions cut, per InvestmentNews.

Specifically, investors in American Realty Capital Global Trust II, American Realty Capital New York City REIT, American Finance Trust, American Realty Capital Hospitality Trust, American Realty Capital Retail Centers of America, Healthcare Trust, and Realty Finance Trust may be at risk, according to the report.

The problem is said to stem from the MFFO (modified funds from operations a/k/a cash flow) at seven of AR Global’s REITs. The MFFO of these seven funds reportedly failed to match or exceed their distributions. In simple terms, this would mean that the funds failed to take in as much as they were distributing. Such a situation has the potential to mean big trouble for investors including distribution cuts and rapid decline in asset value – i.e., less income and large losses to the principal.

A non-traded real estate investment trust, commonly known as a REIT, is a type of investment that is typically sold to those investors seeking income. Typically, nontraded REITs overpay distributions in the beginning, until the fund’s underlying operations get going – such as find tenants to fill their buildings and begin collecting rent on leases – but are supposed to eventually even out.

Unscrupulous brokers lure investors in the beginning with promises of income distributions of 6%, 7% or higher. Unfortunately, situations such as the one reportedly facing AR Global threaten those distributions and value of the principal.

Non-traded REITs differ from their publically traded brethren in that, in general, they cannot be easily sold on the open market – hence, “non-traded.” This can make them illiquid, meaning that they cannot be quickly sold and the cash taken out of the position. For investors who need ready access to their savings, this can be a problem.

Another issue with non-traded REITs, such as AR Global, is that they can be difficult to value since there is no “market value” for them, as there would be for a more traditional stock or bond investment. For investors, this can mean that losses may be hidden from view for some time. These may continue to show market values of $10 per unit or $25 per unit, but the actual value could be significantly less. Investors may find themselves trying to sell units of a struggling non-traded REIT on a secondary market for only pennies on the dollar.

For these reasons, non-traded REITs are not for every investor. Before recommending them to a customer, a broker should ensure that they are a suitable investment for that customer and that the customer understands the product. Unfortunately, many brokers do not. Brokers may be lured by the relatively higher commissions non-traded REITs and recommend them to customers to whom they are not appropriate and have not been fully informed. In such a case, that customer may be entitled to recover any losses resulting from the unsuitable REIT investment.

The attorneys at Malecki Law are regularly contacted by and regularly represent individuals who have lost money in connection with inappropriate securities transactions and outside business activities of financial advisors/stockbrokers. We have handled numerous cases involving REITs, unsuitable investment recommendations and other types of broker misconduct.