Introduction to the hazards of nontraded REITs as a real estate proxy

Nontraded REIT (real estate investment trusts (REITs))

Nontraded real estate investment trust are having difficulty based primarily on debt load and poor occupancy. A sharp decline in tenant occupancy has hammered this REIT: Tenant occupancy of the REIT’s retail properties was 69% at the end of last year, compared with 92% at the end of 2008. Investors in this Cornerstone Core Properties REIT Inc. were told this month by the company that the shares, once valued at $8, are now worth $2.25 – plunging nearly 72%.

The Cornerstone REIT raised only $172.7 million between 2006 and 2009, making it a relatively small player in a marketplace in which the largest players have raised and deployed billions of dollars. Still, other nontraded REITs or real estate funds sold by REIT sponsors recently have seen dramatic declines in value, eating away at investors’ portfolios and making life difficult for the brokers who sold the products.

Another example at the end of December, when investors in the Behringer Harvard Short-Term Opportunity Fund I LP, which had about $130 million in total assets, saw its valuation drop to 40 cents a share, down drastically from $6.48 a share Dec. 31, 2010. And the Behringer Harvard Opportunity REIT I Inc. saw its estimated value decline to $4.12 a share at the end of last year, from $7.66 a year earlier.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com