Anton Troianovski’s WSJ article, “Ruling Offers a Peek Into Boom’s Fallout,” shows how individual investors, many of them retired and seeking safe income, were victim’s of both the commercial real estate bubble and, more particularly, promoters and sellers of tenant-in-common (or TIC) interests in commercial real estate. One of the big promoters was a company named NNN Realty Advisers, which merged with well-known Grubb and Ellis, a publicly traded company that, according to its website, “is one of the largest and most respected commercial real estate services and investment companies in the world.”
Companies like NNN Realty Advisers typically use small broker-dealers and accounting firms to market deals to investors. Grubb and Ellis, on the other hand, has the cache and sales force to do its own marketing and selling. After merging with NNN, Grubb became one of the largest TIC managers in the industry, according to the article.
But the problems are the same no matter who does the selling. TIC deals are illiquid investments whose risks and inner-workings are often poorly explained and not well understood by investors. Understanding the risks and obligations that come with a TIC investment requires the background and experience of not just a lawyer, but one who is familiar with the lengthy and multiple transaction documents that make up the TIC deal.
For example, each investor is typically not only responsible for his or her pro rata share of the purchase loan, but is also subject to additional payments to make up for investors who don’t pay their pro rata share for some reason. Further, if an investor decides he wants out of a TIC deal, not only can it be difficult to find a buyer, but the transaction typically has to be approved by the manager and a certain percentage of the other TIC investors. In addition, not only is there a risk that problems in the property were not disclosed or misrepresented, but when such problems come to light, they can lead to monetary assessments on the investors to put up more money, and a technical default leading to foreclosure by the lender and the loss of the investors’ entire investment.
The article features the story of a 64-year-old retired lawyer who sold his farm and invested the proceeds in a TIC deal managed by Grubb and Ellis. He was looking for safe income ? income not dependent on the price of corn or the weather or a farmer’s ability to pay. What he got was a fractional interest in an office building that sits on a moving slab which causes the walls to crack. The investors filed an arbitration claim against Grubb and the arbitrator ruled that Grubb failed to properly disclose this flaw, which has prevented refinancing, according to the article. The investors also contend that Grubb failed to tell them that it was negotiating an insurance settlement related to the flaw, and that it spent about 1/6 of the settlement on other properties.
Grubb contends everything was disclosed, and is appealing the arbitrator’s ruling, according to the article.
Anyone considering a TIC investment, or any private placement, should first consult with an attorney with experience in the private placement investment.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.