Investors in Certain Resource Real Estate REITs May Have FINRA Arbitration Claims for Losses
Investors in certain REITs sponsored by Resource Real Estate, LLC (Resource), including Resource Realty Opportunity REIT, Inc. (Resource REIT I) and Resource Realty Opportunity REIT II, Inc. (Resource REIT II), may have FINRA arbitration claims in the event the investment was recommended by a financial advisor without a reasonable basis, or if the investor was otherwise misled into making an investment. Headquartered in Philadelphia, Resource is structured as an asset management company that specializes in real estate investments, with a primary focus on suburban apartment communities in targeted markets. As of June 30, 2020, the Resource family of REITs collectively owned approximately $3 billion of multifamily assets across 16 states.
As publicly registered non-traded REITs, Resource REIT I and Resource REIT II were sold nationwide to the investing public at large. With respect to Resource REIT I, this offering raised approximately $645 million in investor capital before closing in December 2013. Resource REIT I is focused on owning and operating multifamily assets, including a portfolio of multifamily rental properties. As recently disclosed in Resource REIT I’s quarterly report for the period ending September 30, 2020, rental operating expenses for the 28 properties owned increased by approximately $1.2 million as compared to the third quarter of 2019. Notably, the REIT has acknowledged that “many of our tenants may be the recipients of unemployment benefits or other economic stimulus under the CARES Act. . . .”
With respect to Resource REIT II, this offering also raised approximately $645 million in investor capital before closing in February 2016. As of September 30, 2020, Resource REIT II’s real estate portfolio included investments primarily located in Texas, Illinois, Colorado, Oregon, and Georgia. Resource REIT II’s targeted portfolio consists of underperforming multifamily rental properties subject to renovation, and to a lesser extent, real estate-related debt. As of September 30, 2020, Resource REIT II owned 17 multifamily properties. Operating expenses on these 17 properties increased by $1.3 million during the nine months ended September 30, 2020, as compared to the same period in 2019. As disclosed in its third quarter report, Resource REIT II recorded $263,000 as provisions for bad debts, due to anticipated collectibility issues arising from the pandemic.
Non-traded REITs like Resource REIT I and Resource REIT II pose many risks that are not always apparent to retail investors, or adequately explained by some of the financial advisors who might recommend these complex investments. One significant risk associated with non-traded REITs has to do with their high up-front commissions, typically between 7-10% of the initial capital invested. In addition, non-traded REITs generally charge investors for certain due diligence and administrative fees, ranging anywhere from 1-3%. Such high commissions and fees act as an immediate drag on investment performance.
Moreover, non-traded REITs are very illiquid investments. Unlike stocks and mutual funds, non-traded REITs like Resource REIT I and Resource REIT II do not trade on a national securities exchange. Unfortunately, many uninitiated investors in non-traded REITs have come to learn too late that their ability to exit their investment is limited. Typically, investors in non-traded REITs may only exit their investment through a redemption directly with the sponsor, and even then, on a very limited basis at the discretion of the sponsor.
Such is the case with Resource REIT I and Resource REIT II. Specifically, in February 2020, these REITs each announced the partial suspension of their share redemption programs. Therefore, investors seeking liquidity have very limited, disadvantageous options, including trying to sell shares through a fragmented and inefficient secondary market. For example, recent transactions for Resource REIT I were priced at between $6.50 and $6.66 per share, and recent transactions for Resource REIT II were priced at between $4.50 and $5.00 per share. Because Resource REIT I and Resource REIT II have reported NAVs of $11.10 a share and $9.08 a share, respectively, investors who sold their shares through a limited secondary market may have suffered substantial losses.
The attorneys at Giarrusso Law Group LLC have extensive experience in handling claims on behalf of investors in non-traded REITs, as well as other complex and illiquid investment products. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.