Non-traded REITs have been getting a lot of bad press lately, as valuations for some have dropped dramatically. Some stakeholders say the entire non-traded REIT industry is going to be turned on its head in the next year, and many current players who can’t adapt will disappear.

Non-traded REITs have been raising red flags in the advisory community for a while now because of issues around transparency, liquidity and pricing. In 2009, FINRA issued a regulatory notice requiring REITs to publish their valuations no later than 18 months after the conclusion of the offering. In October, FINRA issued an investor warning about non-traded REITs, saying that these investments can be heavily subsidized by borrowed funds, early redemption is often limited, and fees can be high.

And now FINRA is working on a new proposal to shorten the amount of time REIT providers would have to share valuations. They’d also have to include the up-front fees and expenses in the valuations. The comment period ends Wednesday.

Some of the firms who have seen their valuations plummet include Inland, Cornerstone, KBS Capital Markets Group and Behringer Harvard Holdings.

Mark Quam, CEO of Versus Capital, which just launched a private equity real estate mutual fund, said REIT providers are going to have to show their real yield on cash flow. The days of listing their valuations at ‘par,’ or the price it was originally sold for, are over, and many of the sponsors can’t support the yields they offer. Only the better asset managers, those that can prove their value to investors, will survive, Quam said.

Legacy assets

Quam knows how difficult it is to make money in the non-traded REIT space. He co-founded Dividend Capital, a REIT sponsor, and was with the firm from 2003 to 2006. The firm did actually make money during that time, however, as it was the height of the real estate market.

But some of the troubled REITs raised capital during the market meltdown of 2008 and 2009, not a particularly good time for the real estate market. For many, those market conditions are finally being priced into their offerings. Because they’re not traded, they don’t mark to market on a daily basis, and net asset value is determined very infrequently. So the REIT’s pricing often doesn’t reflect the wild market swings.

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