TICs & Investor Losses

Investments in Tenant-in-Common (TIC) 1031 Exchanges have turned sour for more investors, many of whom are retirees who purchased their TIC investments based on the recommendation and advice of their broker/dealer.

Following the 2008 crash of the real estate market, many investors have learned that the high dividends they expected with a TIC are a thing of the past. A number of these investors were unsophisticated investors, who did not understand the complicated structure of a TIC.  Instead, they relied on the good faith and due diligence of their broker/dealer.

TIC investments, or 1031 exchanges, are a form of real estate ownership in which two or more parties own fractional interests in a property. In 2002, TIC investments became increasingly popular following a 2002 tax-code change that allowed investors to defer capital gains on real estate transactions involving an exchange of properties.

At the same time, TICs are highly risky, speculative investments. Because they do not trade on a traditional stock exchange, they are considered illiquid investments. What they do offer, however, are high commissions – which may explain a broker’s motivation to recommend TICs to investors.

In 2012, one of the biggest distributors of TICs, DBSI, Inc., filed for bankruptcy protection. Prior to becoming insolvent, investors in all 50 states had put approximately $1 billion into DBSI’s TICs.

An investigation by the Securities and Exchange Commission (SEC) into DBSI’s financial health revealed that the company initially began to experience major liquidity issues as early as 2004. By 2006, the cash shortages had only worsened. Later, the shortages would allegedly lead DBSI to create fraudulent investment and tax structures as part of a $500 million fund to buy new properties and attract new investors.

Eventually, DBSI failed to pay investors their dividends out of legitimate rents from the new properties; instead, it allegedly issued payments from profits made by marking up various properties and then selling them at inflated prices to unsuspecting investors. Many of these investors were introduced to DBSI by their broker/dealer.

DBSI is only one of several TIC investments gone bad. In March of this year, an arbitration panel of the Financial Industry Regulatory Authority (FINRA) ordered LPL Financial LLC to pay an elderly couple $1.4 million over losses they suffered in two TIC investments, one in 2007 and another in 2008, from former LPL broker David Glenn. The investments were sponsored by Direct Invest LLC.

If you’ve experienced financial losses in a TIC investment because of bad advice or misrepresentation from a broker/dealer, contact us to tell your story.