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Highlands REIT News: Did Your Broker Recommend This Risky, Non-Traded REIT?

Jul 14, 2021 Current Investigations

The Highlands REIT was a non-traded REIT that resulted in significant losses for investors. Some investors, however, may still be able to recover the money they lost on their investment.

Real Estate Investment Trusts (REITs) are investment companies that allow investors to buy shares of a diversified real estate portfolio. “Non-traded” means its shares are not traded on a public exchange and come with significant risk. These are risks brokers should have communicated to their investors. If your broker failed to inform you of the potential for losses, you may be able to recover money through FINRA arbitration.

The Highlands REIT website states that its portfolio consists of offices, industrial property, retail property, apartment assets, and an unused correctional facility. REITs took a massive financial hit in the wake of the Covid-19 pandemic. When tenants stopped being able to pay rent, many REITs lost a lot of money. Non-traded REITs can stop making payments if too many investors make requests for their funds at the same time. Unfortunately, this news comes as a shock to investors who want to know how to liquidate Highland REIT shares.

Highlands REIT History

Highlands REIT Inc. was formed to manage a portfolio of inherently difficult properties. Another non-traded REIT, InvenTrust REIT, created Highlands REIT in 2016 using its “non-core” assets. According to the 10-K SEC filing from 2016, Highlands REIT started out with properties that “are in undesirable locations or in weak markets or submarkets; are aging or functionally obsolete; and/or have sub-optimal leasing metrics.” Brokers who conducted due diligence should have known about the risks associated with investing in these types of properties.

In 2019, Chicago Business reported that investors expressed frustration when Highlands REIT management did not sell its low-value properties and began acquiring retail real estate instead. Allegedly, many investors believed that the management team had planned to sell the properties and use money from the sales to pay investors.

The risky nature of the Highlands REIT portfolio came up again in the 2020 10-K filing: “A number of our assets are retail properties…which are particularly susceptible to the negative trends affecting retail real estate, including the severe effects of the COVID-19 pandemic. As a result of these characteristics, such assets are difficult to lease, finance, and refinance and are relatively illiquid compared to other types of real estate assets.”  

Highlands REIT Value

Since it does not trade on a public exchange, it’s difficult to determine the Highlands REIT’s value. Their website has a notice from 2018 urging investors to reject solicitations from MacKenzie Realty Capital to purchase shares at $0.15 per share, and another from 2020 again urging investors to reject a Highland REIT tender offer of $0.05 per share.

Did Your Broker Mislead You When They Recommended Highlands REIT?

FINRA requires that brokers only recommend suitable investments. The definition of “suitability” includes factors like the investor’s age, risk tolerance, and financial goals. Brokers are also required to do their due diligence and explain the risks associated with an investment’s underlying assets. Aside from the risk for losses and illiquidity, brokers should also have told investors about the fees associated with non-traded REITs. High fees can subtract from the initial investment, which makes it harder for investors to earn a return.

It is possible that brokers had an ulterior motive when they recommended shares of Highlands REIT. Brokers often earn high commissions on sales of non-traded REITs, information that they may not share with investors.  

What Happens When Brokers Recommend Unsuitable, Non-Traded REITs?

In 2017, FINRA alleged that a broker made unsuitable recommendations to five investors to purchase speculative, non-traded REITs. The regulatory agency alleged that that the broker “failed to conduct reasonable due diligence.” According to FINRA, the investors’ profiles specifically stated that they did not want to invest in speculative, high-risk investments.

The broker was ordered to return the commissions he received from these recommendations.

What Should I Do Now?

Investors struggling with Highlands REIT redemptions can try to recover their investments through FINRA arbitration. An experienced securities attorney can help investors hold their broker responsible for unsuitable recommendations. Contact Jonathan Kurta for a free case assessment today. Call 212-658-1502 or email jkurta@kurtalawfirm.com.