TICs

Their name conjures ominous images of those less-than-desirable arachnids. And while these TICs are tenancies-in-common financial investments, they're nonetheless causing destruction to countless investors.

Between 2004 and 2008, investors bought $13 billion worth of TICs, according to OMNI Real Estate Services. TICs are a real estate investment in which two or more parties own a fractional interest in a select property. TICs became popular in 2002 after the Internal Revenue Service ruled that investors could defer capital gains on real estate transactions involving the exchange of properties.

Critics of TICs say the products are ripe for a real-estate bubble. As reported Nov. 3 by the Wall Street Journal, TIC investments are structured as privately placed securities that don't trade; up to 35 investors can own stakes in a TIC, while a newer format can be held by up to 499 investors. Buyers receive a stake in the rental income and potential sale of one or more commercial, retail or residential properties.

When properly structured, TICs let investors shelter real-estate sales from capital-gains taxes, obtain regular income and leave the asset to their heirs in a tax-efficient way.

But in many cases, that isn't how it plays out.

Take the case of Mary Boston, 70. According to the WSJ story, when she and her husband sold their local theater for $1.2 million in 2007 their tax preparer suggested that a financial adviser might be able to help them arrange a 1031 exchange.

The couple put the $1.2 million – essentially their entire liquid net worth – into two TICs. For their investment they received a stake in two apartment complexes in Georgia and in Texas. The offering documents projected an annual yield of 6.5%.

Boston and her husband had no previous investment experience. From the onset, they told their financial advisor they had a "conservative and moderate" appetite for risk, and that "income" was their primary investing objective.

After entering into the TICs, the Bostons, along with other investors, had to come up with more money when one of the properties became involved in lawsuits. Between the capital they had to add, as well as legal fees, the couple has sunk roughly $70,000 more into the property.

Meanwhile, the monthly income on their investment has fallen from about $5,000 to $300 and is projected by the property manager to dry up entirely this month. Vacancy rates have spiked, in part because of negative publicity following a double homicide at one of the apartment complexes, according to the Wall Street Journal article.

And it's not just small TICs like the one the Bostons invested in that are facing trouble. Two leading TIC sponsors, DBSI and Sunwest Management, raised nearly $1 billion, only to seek bankruptcy protection in 2008 and 2009 when their deals went sour.