by Brian Mahany
Tenant in Common (TIC for short) is a real estate investment that allows multiple parties to purchase a fractional interest in a property. TICs became very popular in 2002 after the IRS ruled that investors could defer capital gains from the sale of real estate involving an “exchange” of properties. (These are sometimes called 1031 exchanges based on the Internal Revenue Code section.)
Although TIC projects can be worthwhile investments, a number of Wall Street promoters flooded the marketplace with overpriced and poorly structured projects. Compounding the problem, greedy stockbrokers often jumped on the bandwagon since many promoters offered commission structures well above the industry norm. A broker who might only make 1 or 2% on conventional investments could earn as much as 7% by selling TIC interests.
Many of the larger promoters and projects turned out to be Ponzi schemes or scams. Cabot Properties and DBSI are examples of bad tenant in common projects.
If losing your entire investment sounds like a terrible outcome, this story gets worse. Many of these projects contained hidden personal guarantees and “joint and several” liability provisions. Although the promoter and stockbrokers touted these investments as nonrecourse, there is a ticking time bomb buried inside some of these deals. Some projects allow lenders to pursue the TIC owners investors if the project goes south. That means some could lose their entire investment and still owe money!
Several senior executives from DBSI were indicted last week on criminal charges and Carlton Cabot is now under investigation. Whether or not anyone goes to jail is only part of the problem.
For investors who lost everything, there can be no justice until they are made whole. With undercapitalized projects and a weak real estate market, getting money from promoters is unlikely. However, there is often the ability to recover from the stockbrokers who sold these investments.
Brokers and investment advisers have a legal duty to only recommend suitable investments to their clients. Tenant in Common interests are not suitable for most people. They are illiquid meaning it is difficult to sell if one needs quick cash. They also carry a large amount of risk making them particularly unsuitable for those relying on the investment for retirement purposes.
Brokers also have a duty to conduct meaningful due diligence on the investments they recommend to clients. It doesn’t take too much digging to see that many of these deals were overpriced and were quite dangerous. Unfortunately, many brokers simply relied on the slick marketing materials from the promoters and did not read the fine print; details that contained “springing guaranties” and other ugly surprises.
Many of these deals were constructed so that everyone made instant profit – brokers, promoters, banks and property managers. The only ones not profiting were the TIC owners themselves.
Some of the broker dealers selling these Tenant in Common interests have filed for bankruptcy protection or simply closed their doors. The individual stockbrokers themselves often have no money to satisfy millions of dollars in claims. Fortunately, many brokerage firms that Tenant in Common interests are still in business.
If you have invested in a TIC and believe you have a case against your broker, you must act immediately. Federal law limits how much time you have to seek a relief. Often we can handle these claims on a contingent or success fee basis meaning no legal fees and do not get compensation unless we recover money for you.
If you are being sued or threatened by a lender because of a personal guarantee, we can also help. We currently represent investors across the United States facing foreclosure, loss of their TIC interests and sometimes, personal liability. Remember, if there is language saying all TIC owners are jointly liable, you could even be on the hook for someone else share. (There are defenses to these springing guaranties.)
Mahany & Ertl – America’s Fraud Lawyers. Offices in Milwaukee, WI. Services available in many jurisdictions.
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