Once a booming industry, tenant-in-commons (TICs) have become mangled in controversy – not to mention litigation as more investors come forth with allegations of misrepresentation and fraud.
TICs are complex investments to begin with, and their private-placement memorandums do little to make them less confusing. Too often, the information on a TIC is so mired in hard-to-understand jargon that investors unknowingly set themselves up for potential problems down the road.
A tenant in common, or 1031 exchange, enables investors to own a fraction of a single real estate property. In return, tenant in common investors receive a monthly income, plus the ability to defer capital gains on real estate transactions involving the exchange of properties. The TIC industry experienced a significant boost in popularity during the years of 2002 to 2007. Investors bought $13 billion worth of TICs between 2004 and 2008, according to OMNI Real Estate Services of Salt Lake City.
Then, in late 2008, things began to unravel for the TIC world with the burst of the real estate bubble. TIC investors quickly saw the value of their properties plummet, and two leading TIC players – DBSI and Sunwest Management – sought bankruptcy protection after several of their deals went south. Investors in those deals were left with plenty of questions and, for some, the loss of their life savings. Many investors have gone on to file complaints with the Financial Industry Regulatory Authority (FINRA).
As reported Feb. 19 by Investment News, investors have, in fact, filed arbitration claims with FINRA for $12.6 million in cases involving direct broker/dealer sales of TIC deals from DBSI. Since June 2010, arbitration panels have awarded investors $4.8 million in those cases.
LPL Financial LLC also has had to face the music regarding TIC deals gone bad. On Feb. 10, a FINRA arbitration panel awarded an elderly California couple $1.4 million in a case involving two LPL real estate deals.
Investor complaints over TICs focus on a number of issues, including allegations that they were misinformed from the start by their broker/dealer about their TIC investment. Many TIC investors had no previous investment experience before getting into a TIC. Moreover, several contend they repeatedly told their financial advisor that their appetite for risk was in the “conservative” range and that their investment objective was to “generate income.”
Those characteristics do not describe a TIC. Unfortunately a few unscrupulous brokers used their clients’ lack of investing sophistication for their own personal gain.