A confluence of factors makes tenant-in-common (TIC) investors ideal targets for some savvy real estate executives’ fraudulent schemes. TIC investors are vulnerable targets, because they generally are given relatively little information about potential investments and have a very limited time period to close section 1031 exchanges to defer taxable gain. Once they make their investments, TIC owners do not know each other and are in a difficult position to try to formulate a coordinated plan of action for their property. Many TIC investors are not even savvy real estate investors in their own right. Often, they are retirees who sold homes or other assets to downsize and entered into TIC transactions through tax or investment advisors.
Most TIC purchases took place during the height of the real estate market, between 2005 and 2008. Executives who facilitated the deals often capitalized on investors’ expectations by charging exorbitant fees for their work and by, in some cases, colluding with banks and other lenders to inflate property values. Because TIC owners paid hefty fees for properties at peak and sometimes inflated values, they find themselves in the current real estate market with assets that cannot cover their debt or generate even a fraction of the returns they were originally promised.
DBSI is one of many syndicators that offered TIC investments when they were popular in the middle of the last decade. In April 2013, federal prosecutors charged DBSI executives with fraud, including the running of a Ponzi scheme, relating to TIC transactions.
According to the indictment, DBSI executives sold TIC properties and rented them back through master leases, which were supposed to guarantee returns for TIC investors. Prosecutors allege that DBSI executives misrepresented the company’s sources of income, overstated the company’s net worth, misrepresented the collectability of DBSI’s receivables, and misused money from TIC investors’ property reserves. DBSI executives allegedly knew that their investment offerings were unprofitable and used funds from new investors to pay existing investors.
It can be daunting for TIC owners to try to evaluate how to deal with the aftermath of a fraudulent investment scheme, especially in a still recovering real estate market. Although civil litigation may be a legitimate option, it carries its own risks. “For struggling properties, time is essential; litigation can be a lengthy, not to mention costly, process,” said Jack Rose, Chief Strategist at Breakwater Equity Partners. “Litigation also can be pointless if the defendants are uncollectible.”
Rose advises TIC investors to seek professional guidance to determine their best course of action. “Sometimes another approach, either in conjunction with or in lieu of litigation, may be more effective in helping to stabilize a property. For example, refinancing or recapitalizing can reduce cash outflow from a property and enable investors to generate some return from an investment that otherwise would be underwater and lost to foreclosure.”
Warning: This information is not intended to constitute legal, financial, or tax advice and should not be used in lieu of any professional's advice.
This Guest Blog courtesy of Breakwater Equity Partners.