TICs, or tenancies-in-common, are complicated deals which allow real estate sellers to avoid capital gains tax by rolling their proceeds into other properties. TICs are also known as 1031 exchanges and, according to Jason Zweig, author of “In Real Estate, Simple Wins,” in a recent article in The Wall Street Journal, “were tailor-made for a real estate bubble.” From 2004 to 2008, $13 billion was spent by investors on TICs. These investments were untraded, privately-placed securities and stakes in each TIC could be sold to as many as 35 investors. Each investor would receive a stake in the potential sale and rental income of the property, which could be residential, retail or commercial.
The positive side of TICs is that investors are able to avoid capital gains taxes, receive a regular income from the investment and, in the event of the investor’s death, the asset can be bequeathed to heirs. However, while TICs are suitable for some specialized clients, they are not appropriate for many investors. Regardless, these investments have been sold — with some disastrous results — as such.
“When there’s a simple way and a complicated way to solve a problem, the middleman will almost always make more money off the complicated solution — but you might not,” Zweig notes.
One such disastrous TIC investment was the case of Mary Boston and her husband. In 2007, the couple received $1.2 million from the sale of their theater, which they then rolled over into two TICs. These investments gave them a piece of two apartment complexes which, according to the offering documents, had a projected yield of 6.5 percent annually. Once the deals were closed, the investors had to put in additional money because of lawsuit entanglements related to one of the properties. As a result, the Bostons put another $70,000 into the property. Since their investment, vacancy rates have risen, in no small part due to the negative publicity associated with a double homicide in one of the properties, and the monthly income they had been receiving fell from around $5,000 to $300. Furthermore, the property manager expects that $300 to fall even more, possibly down to nothing. Mary Boston and her husband are pursuing the matter with their financial adviser through arbitration.
If you have invested in a TIC at the recommendation of your broker-dealer or investment adviser, despite the fact that TICs are unsuitable for your portfolio, you may have a valid claim for securities arbitration. For more information, contact an investment attorney at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.