Regulators take a closer look at REITs

The Securities and Exchange Commission is taking a closer look at real estate investment trusts that aren’t traded on the stock exchange since David Lerner Associates was caught misleading investors, SEC officials said. According to the Wall Street Journal, the financial industry’s regulatory body wants to know more about how nontraded REITs operate, how they arrive at valuations and what they disclose to investors.

The SEC has approved about 90 nontraded REITs since 1990, according to Blue Vault Partners, a research firm in Cumming, Ga.

“We believe investors would benefit from more information about how [nontraded REITs] reach their valuations,” said Michael McTiernan, a lawyer with SEC. “We told the industry we would be reviewing the annual reports for this disclosure, and if it doesn’t appear, they should expect to hear from us.”

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Some nontraded REITs keep their share prices relatively constant despite the value of the underlying properties deteriorating, critics said.

In the last 10 years, nontraded REITs have raised more than $73 billion from investors compared with only $6 billion through 1999, according to investment banking firm Robert A. Stanger & Co. Investors are drawn to steady annual returns of around 7 percent despite initial fees that often are around 10 percent of their investment, the Journal said. [WSJ]