Merrill Lynch Becomes First Major Wirehouse to Offer Non-Traded REITs

Traditionally, non-traded real estate investment trusts (“REITs”) have been sold by independent broker-dealers who focus on retail clients and do not maintain large investment banking organizations. Recently, however, Bank of America Merrill Lynch began selling the Jones Lang LaSalle Income Property Trust, making Merrill Lynch the first major wirehouse to sell a non-traded REIT, reports Investment News.

“We believe there is significant demand for an attractive, direct core real estate investment product among mass-affluent investors,” said Keith Glenfield, head of alternative investments for Merrill Lynch, reported Investment News. The company had raised $50 million from clients interested in the REIT, according to Investment News.

“The primary investment objectives are designed to provide attractive current income, preserve and protect invested capital, achieve [net asset value] appreciation over time and enable stockholders to utilize real estate as a long-term portfolio diversifier,” Mr. Glenfield said, according to Investment News.

Time will tell whether sponsors of other non-traded REITs will be able to sell their products through wirehouses. Non-traded REITs can be attractive to brokerage firms and financial professionals, because these investments typically pay very high commissions, and are extremely profitable to those who sell them. Since the economic downturn, non-traded REITS have been the subject of regulatory scrutiny and investor dismay, because non-traded REITS often have turned out to be more risky and speculative than described to investors. Clearly, the drive to make money compelled brokerage firms and financial professionals to ignore fundamental duties to their clients, such as the duty to research and understand an investment, as well as evaluate whether the investment is suitable for a particular client given the client’s investment experience, net worth, risk tolerance, and investment objectives.

In response, FINRA issued an Investor Alert regarding investing on public non-traded REITS in October 2011. The Investor Alert was intended to help investors understand the benefits, risks, features and fees of public non-traded REITS, such as the product’s heavy use of borrowed funds, limited opportunities for early redemption, and fees associated with the sale of these investments – all factors which can jeopardize an investor’s anticipated income stream, as well as return of principal.

FINRA then re-issued the Investor Alert in April 2012 due to continued enforcement action with respect to REITs. In the re-issued Alert, FINRA included a new tip sheet for potential REIT investors with advice such as “Your initial investment in a non-traded REIT is not guaranteed and may increase or decrease in value” and “Redemption policies can change, making it extremely difficult to get money out of the non-traded REIT when you need it.”

Unfortunately, FINRA’s 2011 and 2012 Investor Alerts are too late for investors who purchased REIT shares in 2006 through 2008 when many financial advisors pushed such REITs as safe avenues for a steady income stream when, in fact, the products were speculative, high risk, and eminently unsuitable for conservative investors, particularly retirees.

Investors who have lost money in non-traded REITs can file FINRA arbitration claims against the brokerage firms who sold this high risk, unsuitable investment to them. Sonn Law Group specializes in representing investors (not brokerage firms) in securities arbitration and investor fraud cases throughout the country. Investors may be able to sue for damages, while keeping ownership of their illiquid investment. Sonn Law Group has represented numerous investors in FINRA arbitration claims against the brokerage firms who sold illiquid, high-commissioned, non-traded investments and REITS. Sonn Law Group continues to investigate REITS and non-traded funds, such as Wells REIT II, Inland Western Real Estate Investment Trust, Inland American Real Estate Trust, Cole REIT II, Cole Credit Property Trust II, Hines Real Estate Trust, Grubb & Ellis Apartment REIT, CNL Lifestyle Properties, Dividend Capital REIT, and KBS REIT I, and Behringer Harvard investments on behalf of defrauded investors. To learn more, including whether you may have a claim for non-traded REIT or other investment losses, please call us at 844-689-5754 or complete our “contact form.”