The allure has rapidly faded for once-hot real estate investments known as TICs, or tenant-in-common exchanges. Between 2004 and 2008, investors bought $13 billion worth of TICs, according to OMNI Real Estate Services. But TICs, also called 1031 exchanges, are complex, high-fee deals and, as in many deals orchestrated by Wall Street, the products have increasingly left countless investors high and dry.
Case in point: Mary Boston, 70, of Dunlap, Tennessee. In 2007, Boston and her husband sold their local theater for $1.2 million, net of debt, according to an Oct. 29 article by the Wall Street Journal. Their tax preparer suggested a financial adviser might be able to help them arrange a 1031 exchange.
After paying the advisor, who was from ING Financial Partners, a 7% commission fee, the couple ended up putting $1.2 million – their entire liquid net worth – into two TICs. In return, they received a stake in two apartment complexes, the Sequoia at Stonebriar in Texas and The Retreat at Stonecrest in Georgia. The offering documents projected an annual yield of 6.5%.
But the Bostons had zero prior investing experience; Mrs. Boston says she told the advisor that she and her husband had a “conservative and moderate” risk tolerance, and that income was their primary investment objective.
After the deals closed, the Bostons had to come up with more money when one of the properties became involved in various lawsuits. Between the capital added and legal fees, the couple has sunk roughly $70,000 more into the property, the Wall Street Journal said.
Meanwhile, the monthly income on the Boston’s investment has plummeted from about $5,000 to $300 – and is projected by the property manager to dry up altogether this month.
The bottom line: TICs are considered a private placement, which is a highly complex and risky investment. The products, in fact, are listed as one of the top 2011 Investor Traps by the North American Securities Administrators Association.