San Diego, CAInvestors who put their money in TICs (Tenants In Common) investments may be wondering what happened to their money. Like many other people whose investments have lost value in recent times, people with TICs were told that their investments were safe, only to learn they were not. Part of the reason that TICs were pushed as a safe investment may have to do with the commissions associated with the TICs.
""There were billions and billions of dollars invested in TICs because brokers got huge commissions for recommending them," says Ron Marron, founder of Investors Advocates. "The commissions were probably the largest commission product the broker would have in his portfolio. There was both incentive and pressure to sell the TICs.
"People invested in 1031 TIC exchanges and those who invested in these TICs at the advice of their broker or advisor could be at a loss. A lot of these properties are now going to have higher vacancy rates, especially in the commercial arena. A lot of those properties will not be viable. Even with the properties that are residential, the cost to run them can be high. So people with TICs are in danger of losing their investment. The only person making money was the broker."
So, what are TICs? Well TICs are a way of holding a title to real estate. Essentially, the investor owns an undivided fractional interest in a property. Those who have 1031 TIC exchanges defer their capital gains and own real estate but do not have to manage the property. The investor gets to share in a portion of the income, tax shelters and growth of the property, as well as having a separate deed and title insurance for the TIC interest in the property. TICs are not for every investor. They have very limited liquidity and no active secondary market. They also come with long-term holding periods.
Finally, investors who cannot tolerate risk may not find TICs to be suitable investment options. How risky are TICs? Risky enough that DBSI, a real estate investment firm in Idaho, recently declared bankruptcy, despite having $2.6 billion in assets in 2008. The problem is that as the economy declined, income from rental properties failed to cover DBSI's debt. The company now faces at least 10 lawsuits from investors, some of whom invested millions of dollars in the company's properties.
Two companies that Marron is currently looking into are Triple Net NNN Realty and Linsco Private Ledger. Marron says those companies are major players in TICs.
"Investors were misled about what they were investing in and the risks were downplayed," Marron says. "Markets go up and go down, nothing seems risky when the markets are going up."