A Sleight of Hand: Why Non-Traded Real Estate Investment Trusts are Becoming an Increasingly Frequent Subject of Securities Litigation and Arbitration

Abstract

The sharp housing market decline leading up to the 2008 Great Recession highlighted the significant risks associated with subprime debt instruments. What began in 2006 as a disruption in the mortgage-backed security (“MBS”) and collateralized debt obligation (“CDO”) markets quickly developed into the worst global financial crisis since the Great Depression. The questionable practices employed by many financial institutions to create, market, and sell the risk-laden MBS and CDO investment instruments to purchasers aggressively seeking greater returns led to a wave of regulatory inquiries, securities litigation, and legislative and regulatory action by federal and state authorities. Despite efforts to mitigate the risks posed by these sub-prime investments, similarly marketed and utilized investment vehicles now pose comparable risks for investors on an individual level and for the U.S. financial system in the aggregate. The most notable of these risky investments are non-exchange traded real estate investment trusts (“Non-Traded REITs”). With many financial experts predicting an economic downturn in 2020, the exposure created by high-risk, illiquid Non-Traded REITs and other similar investments are likely to be realized in the form of significant financial losses. This article explains the nature of Non-Traded REITs; the risk characteristics of Non- Traded REITs that increase the likelihood of losses and securities litigation; the likely targets of Non-Traded REIT-related securities actions; and the claims for relief most likely to be asserted.