How One Tenant In Common Organization Fell Apart

Boise, IDIf you got into tenants in common investments thinking they were completely safe, you might be shaking your head right now. With recent news that DBSI, one of the largest TIC companies in the US, was filing for bankruptcy, you can be forgiven for wringing your hands with worry and calling your financial advisor to find out what is going on. After all, you probably purchased your tenant in common investment property specifically because you believed it was a safe investment. These days, however, it seems that nothing is safe.

According to the Wall Street Journal, 8,300 individual investors were left holding the bag when DBSI Inc., a company that arranged tenant in common investments for 237 office and retail properties, filed for bankruptcy in November 2008. In all, the value of those properties sat at more than $2.4 billion.

The Journal notes that DBSI differed from other TIC arrangers because its deals involved master-lease agreements in which DBSI guaranteed its investors would receive rental proceeds. The agreement said DBSI would make monthly payments over 20-year periods, with those payments ranging from 7 to 12 percent returns on the investment. Profits from sales and rent collection covered the monthly payments, operating expenses and debt service. However, DBSI was hit by massive declines in the real estate, credit and financial markets. Furthermore, it was crippled by lawsuits and increasing operating costs. The company stopped acquiring real estate and began laying off people in mid-2008.

In actuality, although only 18 of DBSI's 237 properties was not meeting its debt service, that loss was enough to stop DBSI from paying its investors. When property markets dropped and fees from new deals dried up, DBSI experienced problems. Those problems were compounded when rental income also dropped.

DBSI is now the defendant in a class action lawsuit alleging it made $500 million in illegal profits from securities, banking and tax fraud. The lawsuit was filed on behalf of TIC investors and further alleges that investors were induced to violate the federal tax code. The lawsuit seeks $2 billion for all TIC investors since October 2003. Meanwhile, some investors say they have not received their monthly check since October 2008. While that might not seem like a lot of money, or a long time, some investors have multiple TIC investments with DBSI, meaning they could be out a substantial amount of money.

One financial planner, quoted in Idaho Business Review, said that DBSI's cost structure deals were "horrible." Investors had to contend with high commissions, organizational costs and other fees—which could total 18 to 25 percent of the investments—and all major decisions had to be agreed to by other investors in the property.