November 13, 2007

If you like to read about a giant corporation screwing old ladies and retired people who have worked all their lives just to see their life savings go up in smoke, keep reading. But first a disclaimer. I am not an investor and have never had any dealings with the people involved. The scandal was brought to my attention by a friend who was awarded two silver stars for bravery in Vietnam, who unfortunately trusted one of the biggest real estate companies in the world with most of his life’s savings. Here we go:


There is a growing real estate investment scandal that has fallen under the radar of the business press. The scandal involves what are called "1031 TIC investments." These are structures to take advantage of provisions of Section 1031 of the Internal Revenue Code to defer income taxes from sales of investment properties. In a 1031 transaction, an investor who sells property for a gain may defer income taxes by reinvesting the proceeds in a "like kind exchange" within 45 days.


Now, here comes the hook of the story. Section 1031 investments have historically been the exclusive province of high net worth and highly sophisticated investors to shelter income tax gains. However, certain real estate hucksters realized that the vast majority of income property in the U.S. was not owned by the Donald Trumps and Steve Wynns, but by regular, hard working and saving people. These include small apartment buildings, office buildings, vacation homes and stand-alone store buildings. The owners of these are TIC’s, or tenants in common. The "1031 TIC" business was born from the realization by slick real estate brokers of the enormous untapped collective assets of relatively unsophisticated (and less demanding) investors could be pooled together to buy high cost, high risk properties that had been passed over by the more discerning (and more financially secure) investors of high net worth. Under Section 1031, ownership is not limited to an individual or a single entity, or even a related group. Up to 35 utterly unconnected investors can own a property as a tenancy in common and still qualify for Section 1031 tax deferral.


This has fostered an industry of 1031 brokers who prey upon relatively unsophisticated, moderate worth people, generally the elderly, to join into cobbled-together (by the brokers) TIC groups of up to 35 investors who are spread across the U.S. Sellers of 1031 investments advertise in newspaper business sections, in the sports pages and on the internet, receiving huge rewards for small investors they’re able to reel in.


In 2006, some TIC investors were sold an undivided interest in a property known as 615 North 48th Street, Phoenix, AZ (the property) by CB Richard Ellis Investors,LLC,(CBREI"). Remember this name and never, but never go near it. The individual TIC investors paid a total of some $30 million for their interests. The TIC investors were comprised mostly of middle class people—for instance, a house maid, a civil servant, a retired army Captain (my friend) a retired Idaho farmer’s widow and other honest Americans. By contrast, CBREI, the corporation that pushed the risky investment upon these unsuspecting unsophisticated investors, is a subsidiary of C.B. Ellis, a global real estate investment management firm with over—get this—$28 billion in assets under management that sponsors investment programs across the globe.


To sell the property I am telling you about, CBREI portrayed it as a "sleep at night" investment, designed for preservation of capital with limited upside investment, plus the 1031 tax break. However, CBREI failed to perform the necessary diligence of the tenant occupying the single entity piece of property, and shortly after the investors paid the money the tenant defaulted on its lease. Of course, CBREI failed to disclose the inherent risk to the small investors of betting a disproportionate amount of their retirement savings on a property whose entire value depended upon the creditworthiness of a single obscure tenant. Even worse, the company lured the investors with the promise of a safe and secure investment hoping to defer some capital gains tax.


Now, I have many more details, but none more important than the fact that the head of the company which failed to do its due diligence is one Brett White CEO of CBRE, the largest real estate company in the world. This man has had puff pieces appear in the Wall Street Journal and the New York Times and has gone on record as saying, "We are committed in our clients’ welfare and our integrity." If Mr. White means what he says, then all he has to do is give back 30 million greenbacks to some little people, and unravel the problem himself. Instead, he wants an 80-year-old lady like Anna DiPiazza to wait 10 to 15 years while CBREI/USA deals with the miscreant tenant.


If you’d care to express your opinion of his company’s behavior to Mr. White, you can contact him at 310-405-8919 or


Pay back the money, White, and we will run much longer article thanking you. Hold out, and expect to hear from me again (and perhaps from my readers) about this outrage.


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