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KBS Capital Markets: Non-Traded REITs Have Significant Risks

KBS Capital Markets Group is a Newport Beach, California-based real estate investment firm known, among other things, for offering three non-traded real estate investment trusts (REITs): KBS Growth & Income REIT, KBS REIT II, and KBS REIT III. Formed in 2006, KBS has more than $7 billion in assets under management as of June 30th, 2022, according to its website. The firm describes itself as “one of the nation’s largest buyers of commercial real estate.” 

Investments in non-traded REITs come with substantial risks, and unfortunately the non-traded REITs offered by KBS Capital Markets Group are no exception. If your financial advisor failed to fully or accurately present these risks—for instance, the investments’ illiquid nature, or the possibility that you might lose your entire principal—then you may be entitled to recover damages. Contact our attorneys as soon as possible to discuss your KBS REIT case.

KBS Growth & Income REIT

KBS Growth & Income REIT launched in January 2015 “and raised a combined $84.7 million in its private and public offerings,” according to The DI Wire. Its public offering began in April 2016 and closed in June 2017, after which an online private offering began. “As of the first quarter 2018,” the REIT states, “the company owned four properties with an investment cost of $185 million.” 

According to KBS’s website, the REIT’s assets include properties in Portland, Oregon; Houston, Texas; and Chicago, Illinois. 

In August 2020, KBS Growth & Income REIT terminated its distribution reinvestment plan and announced its intent to seek a liquidation strategy. According to a report by The DI Wire, the REIT’s board “decided that it is in the best interests of the company and its stockholders to pursue a liquidation strategy through asset sales. The board noted that potential future market conditions, such as the impact of the Covid-19 pandemic, “could impact the process and influence the REIT to either accelerate or delay the liquidation plan.” 

This move followed a change to the REIT’s distribution policy in response to the Covid-19 pandemic, The DI Wire reported. Under that change, the REIT said it planned to “consider and declare distributions based on a single quarterly record date,” as opposed to a monthly record date under the previous plan. 

In January 2021, KBS Growth & Income REIT announced the delay of its liquidation strategy. The company informed shareholders that due to a “significant decrease” in its net asset value per share, it would hold off on the strategy “until market conditions improve,” according to The DI Wire. It added that this decrease “was primarily due to the decrease in the appraised values of the real estate properties owned by the REIT which were significantly impacted by the civil unrest in certain markets where some of our properties are located and the ongoing COVID-19 pandemic.”

KBS REIT II

KBS REIT II closed its primary offering in December 2010 after raising $1.8 billion, according to its website, which describes the REIT’s “hybrid” investment strategy: “acting as both an owner of real property and as a lender.” Under this strategy, the REIT “a diversified blend of Class A office and industrial properties in major metropolitan markets, as well as real estate-related loans.”

In May 2016 KBS REIT II announced its plan to market one or more of its assets and potentially adopt a plan to liquidate the rest. Shareholders reportedly approved a liquidation plan in March 2020. 

This plan has seen some hiccups. In May 2022, Harbor Associates LLC agreed to purchase Union Bank Plaza for $165 million. According to The DI Wire, Union Bank Plaza, a 40-story commercial building in Los Angeles, was “the last property remaining in the REIT’s portfolio.” After the due diligence period, Harbor Associates LLC reportedly did not inform KBS REIT II of its intent to move forward with the purchase, which was terminated. 

This followed a previous deal to sell the tower to RC Acquisition for $280 million in 2017, which was also canceled.  In July 2022, KBS REIT II reportedly reached a new deal to sell Union Bank Plaza to “an affiliate of Waterbridge Capital” for $155 million, according to The DI Wire. 

KBS REIT III

KBS REIT III terminated its offering in July 2019 after raising $1.7 billion, according to KBS’s website, which states that the REIT “has invested in and intends to invest in a diverse portfolio of real estate investments across the United States,” and that it “has employed a more value-creating core strategy, focusing on investing in a portfolio of core office properties, though KBS REIT III may also invest in other types of properties.”

The REIT’s assets include office buildings in Plano, Texas; Franklin, Tennessee; Salt Lake City, Utah; and Minneapolis, Minnesota.

In July 2019 KBS REIT III informed shareholders that it was exploring methods of providing liquidity to them, according to a report by The DI Wire. One option under its consideration included converting the REIT into a NAV REIT, “where shares are valued as often as daily, but at least quarterly, on a net asset value basis.” In theory, this conversion stood to “provide increased capacity to repurchase shares through the company’s share redemption program,” according to the report. The REIT moved forward with this option, registering for a $2 billion NAV REIT offering in January 2020.

In August 2022, however, KBS REIT III reportedly withdrew its pre-effective registration statement for the NAV REIT conversion. “Given changing market conditions, the company continues to evaluate various alternatives available to it, including whether or not to convert to a perpetual-life NAV REIT,” it explained in an SEC filing cited by The DI Wire. “In order to avoid additional legal, accounting and other offering costs while the company makes this determination, the company is submitting this request for the withdrawal of its registration statement.”

Why Are Non-Traded REITs Risky?

FINRA has warned investors about the risks of investing in non-traded REITs. The regulator explained in a 2016 investor alert that these products are “generally illiquid, often for periods of eight years or more,” and that they often have few early redemption opportunities, while imposing substantial fees and costs. FINRA ultimately concluded that non-traded REITs are “rarely, if ever, suitable for short-term investors.” 

The KBS REITs echo FINRA’s warning in their own offering materials. For instance, KBS Growth & Income REIT’s prospectus states the following: “The shares we are offering through this prospectus are suitable only as a long-term investment for persons of adequate financial means and who have no need for liquidity in this investment. Because there is no public market for our shares, our stockholders will have difficulty selling their shares.” The document notes further that investments in the REIT’s common stock come with “a high degree of risk.” 

KBS REIT Losses? Call Carlson Law for a Free Consultation

Carlson Law represents investors involved in claims against financial advisors and investment firms throughout the United States. If you or a loved one have suffered losses investing in KBS Growth & Income REIT, KBS REIT II, or KBS REIT III, please call us at 888-976-6111 or complete our contact form for a free and confidential consultation.

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