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Archive for the 'Commercial Lending Lawsuits' Category
TIC-tenant in common
There have been many articles recently on TICs. First, what is a tenant in common (TIC)? A TIC is a tax structure that allows investors to pool their funds with other investors to purchase real estate. For example if I had 20k that I got from selling a commercial property. I could take these funds to a TIC and purchase a share of a commercial property. For example 35 or 40 investors might purchase a shopping center in Phoenix. By rolling your money into another like property (1031 exchange), the investor can avoid paying capital gains taxes. This all sounds nice and like a great idea except there are major risks that are not fully apparent.
According to a WSJ article (www.wsj.com ) DBSI (http://blog.dbsi.com/ ) recently filed for bankruptcy protection. DBSI was one of the largest TIC providers in the country. My theory for what brought DBSI down is as follows. The theory is true for most TICs that I have evaluated. Most small individual real estate investors are fairly unsophisticated. They have little experience in valuing large commercial properties (cap rates, average vacancy rates, leas-up rates, etc…) and therefore they relied on the expertise of the TICs for valuation and management of their investment. About six months ago we were approached to finance a TIC investment on a shopping center in Georgia. The fundamental assumptions were flawed. The TIC provider sold partial interests to investors all over the country. The property was valued on a 6% cap for a class A/B retail in a nice area of Atlanta. The trouble occurs because the property was purchased on a 6 cap, as opposed to a 7.5 or 8% cap. This cap rate continues rising which means the value of the property is less than what the investors originally paid for it.
As the economy shrinks, tenants begin to renegotiate their leases (or move out like circuit city did of many locations). This further deteriorates the value of the property. At the same time the small TIC investors get restless, the property is managed by a consensus vote of all 35-40 investors in that particular transaction. Imagine trying to get 35+ people who all have different motives, risk tolerance, etc… on the same page to make a unanimous decision. This decision making further deteriorates the value of the property since decisions are very slow and can seem erratic.
It will be interesting to see how other TICs fare in this economy. If I were investing my money in real-estate, I would think twice about utilizing a TIC.
For more information on commercial lending valuation,
please see: http://www.fairviewlending.com/underwriting.htm#4 as well as my recent blog on cap rates:
http://fairviewlending.com/blog/?p=23
Every time I pick up a newspaper it seems yet another lender is about to go under or has somehow gotten into legal trouble. The most recent victims appear to have been swindled by WexTrust Capital. From the complaint filed by the SEC and local law enforcement agencies (http://www.wextrustreceiver.com/) , it appears that WexTrust had established a ponzi scheme where funds from new investors are used to pay off prior investors. In this scheme there is not substantial collateral from the present loan pool. Money is moved (like a shell game) between various entities to conceal losses. The Wall Street Journal (www.wsj.com) broke the story 8/15/08.
As a result of this scheme investors and borrowers have likely lost over $200 million (according to the various complaints filed by the SEC and local law enforcement. WexTrust is just one of many hard money lenders accused of fraud (see my last blog entry on this topic: http://fairviewlending.com/blog/?p=6#more-6 ). With all the fraud out there how do borrowers, brokers and investors protect themselves?
There are multiple ways to protect yourself from fraud as a result of hard money lenders. Below is a list of tips and links to other resources.
1. Ensure you know the lender with whom you are working. Google the company to see what other folks have said about the company and if there are any pending lawsuits.
2. Contact the BBB (www.bbb.org) to see if there are any complaints against the company
3. Be wary of anyone requesting funds prior to issuing a commitment. On a similar note, never send funds to a PO Box or location out of the country (you would be amazed at how many folks still fall for this scam everyday)
4. Before proceeding with a loan, make sure you understand the loan structure. The following are two good resources:
a. Hard Money Frequently Asked Questions: http://fairviewlending.com/faq.htm
b. Understanding the total cost of a loan: http://www.fairviewlending.com/resources_prepayment.htm
5. Finally, utilize your common sense: If it looks too good to be true, it likely is. Always err on the side of caution when approaching any financial transaction.
As I’ve mentioned in several articles on our Hard Money Commercial Lending Resources Page, there are a number of items that brokers/borrowers need to be mindful of before engaging in a commercial lending transaction. The number one tip is: Be wary of large upfront fees. A recent article in the Wall Street Journal further highlighted this advice. The article titled: U.S., States probe real estate loan broker (www.wsj.com 6/25/08 p:A3) discusses how “the advance fee plan has cost borrowers millions”. This article highlights an all too common problem within the commercial lending arena.
Two firms are being probed by the FBI and SEC (Bluestone Capital and Remington Financial Group). The California department of corporations is also investigating Landbridge equity. These firms are accused of taking large upfront fees with the intention of “not seriously pursuing financing”. Unfortunately a substantial number of borrowers have likely lost millions as a result of the “advance fee” plan that these three companies have utilized.