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TIC CLAIMS ON THE RISE VERSUS BROKERAGE FIRMS

Tenant in Common (TIC) claims against the brokerage firms that sold them have recently resulted in multiple large FINRA arbitration awards, according to this this Investment News article

The use of Tenant-in-Common (TIC) real estate investments in conjunction with IRS 1031 exchanges greatly increased after the 2002 issuance of IRS Rev. Proc. 2002-22 which clarified issues related to the uses of TICs in like-kind exchanges.

TICs since that time have been typically sold as securities by securities salespersons registered with FINRA which is a self-regulatory organization overseeing the securities industry.  These salespersons (registered representatives) are required to be registered with a Broker-Dealer (brokerage firm) also regulated by FINRA.  The sale of TICs by Broker-Dealers and their representatives is very lucrative.  Selling commissions can be 7% or higher, and sponsors also would pay additional percentages to Broker-Dealers for “due diligence” expenses and marketing / selling expenses. 

The failure of securities salespersons and their firms to perform due diligence on the TIC deals they recommend, and on the sponsors of the TIC deals, can result in disastrous outcomes for their customers.  In addition, salespersons must engage in a suitability analysis prior to recommending TIC deals to their customers to ensure that these illiquid investments are suitable for the customer?s financial situation.  Federal and State Securities laws also prohibit the misrepresentation or omission of material facts in conjunction with the sale of a security.  Many state Acts provide for the recovery of losses, attorneys fees, and interest.

FINRA issued guidance to its members back in 2005 regarding the sale of TICs (NASD [now FINRA] Notice to Members 05-18).  The selling firm had duties with regard to obtaining a clear understanding of the customer?s investment goals and financial status for the purposes of making a suitability determination.  The firms’ representative also had to take into account the illiquid nature of the TIC interest, the risks from over-concentration, and the ?investment potential of the underlying real estate asset(s).?  In regard to overconcentration, FINRA warned:  “Concentration of an investor?s assets in a single asset class, however, is not suitable for many investors.”

The high sales fees of TICs, combined with the profits and expenses retained by the sponsors, could raise serious suitability concerns for salespersons recommending them as a tax deferral vehicle.  In fact, the Notice 05-18 above further warned: “As fees charged in connection with a TIC exchange increase, the money saved as a consequence of tax deferral will be offset. Accordingly, members should consider the effect of fees on each TIC exchange”

TICs are typically leveraged with a bank loan, and such leverage can unfortunately result in customers’ investments being wiped out should the bank foreclose on the property.  If you have lost monies in an illiquid or foreclosed upon TIC, and believe you may have a claim against the salesperson and firm, please contact one of the attorneys at Greco & Greco for a free consultation.  Greco & Greco regularly represents investors on a contingency basis.

Posted by Greco & Greco on 02/21 at 08:49 PM
ArbitrationBrokerage FirmsInvest FinancialLPL FinancialFINRAPrivate PlacementsSecurities FraudSuitabilityTIC

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