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Problems Can Be Hidden In TIC Investments

The financial meltdown of several high-profile companies behind tenant-in-common (TIC) offerings raises new questions about the way TIC investments are marketed and sold to investors.

One of the largest real estate companies to file Chapter 11 bankruptcy over TIC-related issues is DBSI, Inc. Some 10,000 investors were left holding the bag when DBSI filed for bankruptcy protection in November 2008.

Idaho-based DBSI was founded in 1979 and quickly became a major player in the tenant-in-common industry. A court-appointed trustee in DBSI’s bankruptcy case concluded in a 200-plus-page report that DBSI executives ran “an elaborate shell game” – one that included improper and fraudulent use of “investor money to prop up the company, to spend on pet projects and to enrich themselves.”

Not all TIC investments go the way of DBSI, of course, but they do come with certain risks that investors may be unaware of until it’s too late. TICs, which provide a fractional ownership in a commercial property, gained newfound popularity in March 2002 after a tax law change gave investors the ability to avoid capital gains taxes by investing proceeds from a property sale into a TIC.

Following the amended tax law, TIC investments began to be sold in droves by financial brokers. And therein the problems began.

In 2005, the Financial Industry Regulatory Authority (FINRA) issued the first of several notices reminding brokerage firms that it was inappropriate to recommend a TIC transaction if the recommendation was based solely upon information and representations made by the sponsoring company in the TIC’s offering document.

Instead, brokerage firms were required to conduct a “reasonable investigation” of their own in order to ensure that the offering documents did not contain false or misleading information. Moreover, members needed to have a clear understanding of the investment goals and current financial status of the investor before recommending a TIC exchange.

Unfortunately that didn’t happen in a number of instances. Many brokers never lived up to their due diligence duties when it came to making recommendations to clients about TIC investments. Instead, they took their profit in fees and commissions, while investors were left with huge – and unforeseen – losses.

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