TIC awards show brokers still grappling with real estate bubble fallout

Arbitration awards flat for two years running but two big ones looming on the horizon

Jun 7, 2013 @ 1:54 pm

By Bruce Kelly

The number of arbitration awards won by investors against brokerage firms stemming from the sale of tenant-in-common investments has held steady over the past two years, but with the potential for two large awards looming on the horizon, independent broker-dealers clearly are still dealing with the fallout of real estate securities that went south during the collapse of the real estate bubble.

In the 12-month period from May 2012 through April, investors won 17 arbitration awards involving tenant-in-common sales, according to the Securities Arbitration Commentator, which tracks Financial Industry Regulatory Authority Inc. arbitration claims. That's down slightly from the 19 similar awards that investors won over the comparable period a year earlier.

And that steady number of investor awards over a two-year period comes after investors won only three awards from May 2010 to April 2001, noted Harry Jacobowitz, database manager at Securities Arbitration Commentator. Finra does not make the number of such specific claims available.

TIC exchanges were a popular investment, sold primarily through independent broker-dealers, before and during the run-up to the credit crisis and involved tax-deferred swaps of property ownership interests, with the promise to investors of income generated from the ownership stake in the new property.

After the real estate bubble burst in 2007-08, many TIC investors saw their properties fall in value. Many investors' current claims stem from the days of the collapse but are only now coming to arbitration because of a combination of factors, attorneys and experts said. Those include a drawn-out process of the decline in value of a commercial property, including the potential for foreclosure, as well as investors' hopes for a rebound in the value of some properties.

“Many TICs have been in protracted foreclosures, and the results have not been clear,” said Tim Husson, senior financial economist at Securities Litigation & Consulting Group, which does expert-witness testimony in securities arbitration claims.

“It's been a struggle for some investors for years,” he said. “Investors have been delayed in becoming aware of the extent of their losses. We've been seeing a lot of these cases and have more in the pipeline.”

Investors continue to win awards over TIC claims. In May, ProEquities Inc. lost a $450,000 arbitration award, plus interest, dating back to February 2003 to a TIC investor who alleged negligence, unfair sales practices and other allegations, according to the Finra arbitration award. The arbitration panel did not explain the reasons for the award, which is customary.

“The arbitration decision was an unfortunate result,” said Eva Robertson, spokeswoman with ProEquities' parent company, Protective Life Corp.

This month, a representative, Victor Cassone, and a defunct broker-dealer, Pacific West Securities Inc., were found liable for $5.1 million to a claimant that alleged breach of contract, negligence and other assertions involving a TIC investment, according to the award. Mr. Cassone and Pacific West could not be reached to comment.

The strongest investor claims for TICs stem from 2007 “because the world was going to hell, in terms of TIC financing,” said Brian Miller, a partner at Miller & Milove, the attorneys for both the plaintiffs who won the recent TIC claims.

“It was a real credit crisis, particularly as it related to TIC financing and commercial-mortgage lending,” he said. “Because of high commissions [to the brokers] and a compressed cap rate, these deals already didn't generate yield. In August 2007, interest rates shot up, the TICs were highly leveraged. The TIC sponsors were doing everything to hold these deals together.”

Mr. Miller added that he has other large, multimillion-dollar arbitration claims against independent broker-dealers involving TIC near completion.


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