06/24/2013 03:22 pm ET Updated Aug 24, 2013

The Secret Financial Tragedy Costing Thousands of Seniors Millions of Dollars

There is a largely unknown tragedy happening to seniors nationwide. Tenant-in-common (TIC) investments became popular among seniors starting in 2001 - 2002. But now many of these seniors have lost their investments - often entire life savings - because they were misled or victims of fraud. In fact, a quick Google search for 'TIC' and 'elderly' brings up the word 'fraud' several times.

Consider Loretta.

She worked hard all her life - often 12-hour days - and was diligent about saving and investing. She invested her entire life savings in a TIC property but she wasn't told that it was part of the Val Southwick Ponzi scheme. As the property's tainted past started to unravel, the owners stopped receiving distributions in 2011 and Loretta and her husband, who are of retirement age, had to take on odd jobs to make ends meet. The TIC owners soon realized that they were in danger of losing their investment to foreclosure. For Loretta and her husband, a foreclosure on the property would mean losing their entire life savings and any stable income for their retirement. But Loretta is just one example of thousands.

What are TIC investments?

A TIC ownership structure allows a group of up to 35 individual investors to pool resources and purchase a commercial property together. These investments gained popularity (especially among the elderly) in 2002 after the IRS ruled that investors could defer capital gains from the sale of real estate involving an "exchange" of properties. In the years that followed, the collapse of real estate markets across the country exposed fraud and deception in connection with TIC investments.

Why are seniors losing their money?

Many of the TIC investments made between 2001-2007 have been lost to foreclosure. Commercial real estate loans are made with 5- or 10-year loans. When the loan matures, the property either needs to be sold or refinanced. Because most of these properties were purchased at the height of the market, they are underwater when the loan matures. The lender won't refinance a property that is worth less than the loan amount. Losing the property to foreclosure causes the TIC owners to lose their entire investment, and because the deferred gains are now due, they may have a hefty tax bill.

Additionally, TIC investments are especially vulnerable, because the owners are strangers scattered across the country. It is quite difficult to get up to 35 strangers to mobilize and bring the asset back to a performing status. Many of the sponsors refuse to provide the names and contact information of the other owners, in an effort to prevent them from organizing.

Some sponsors, now bankrupt and charged with fraud, added a 15 to 28 percent load to the purchase price of the real estate. That means for every dollar a TIC invested, only 72 - 85 cents actually went to the investment. This fee structure basically set up the investment for failure from the start. To top it all off, many TICs were misled at the time of purchase. Sponsors preyed upon unsavvy investors, often elderly. In extreme cases, the TICs thought that they were purchasing a bond and were unaware that they owned commercial real estate. In many of the deals, the TIC owners had not seen the property and were not even familiar with the area where the property was located.

For the most part, there is no one to defend or protect these investors. Essentially all of the parties involved in these deals have a conflict of interest with the TIC investors. Even the TIC groups themselves are often fractured and unable to help themselves.

It may seem like a good choice for TICs to hire a lawyer; however, a lawyer could be incented to take as long as possible to resolve a distressed asset. The longer it takes, the more money he makes. It's a simple yet oft-missed reality in the way lawyers work. We've seen dozens of cases where TICs have spent well over $1 million on lawyers who did not understand the complexities of TIC investments, which is absolutely crucial in resolving the distressed asset. Additionally, while lawyers may be well-meaning, they are often not experts in financial modeling or real estate. And they are almost never able to bring capital to a deal or sign guarantees for the new loan. It really takes a multidisciplinary team to put together a realistic strategy for TIC properties. There are many variables, such as the real estate market and the litigation claims of a property that need to be expertly reviewed. A comprehensive strategy gives the owners the best chance for success. If you or someone you know is already invested in a TIC property, then a professional workout firm is your best option. However, the bottom line is that seniors should stay away from these risky investments.

Jack Rose, Chief Strategist at Breakwater Equity Partners also contributed to this post.