Ameriprise loses arbitration over 'high-risk' investment

An arbitration panel has ordered Ameriprise Financial Services to pay $1.165 million to a Redwood City couple who lost money in a type of real estate investment that gained popularity just before the property market collapsed.

It is one of the largest awards for a tenancy in common investment.

Kalju Nekvasil, a Florida attorney who represented the couple, alleged that the investments "were misrepresented as being low risk when they were really high risk," and were unsuitable for the retired schoolteachers, who owned rental properties but had never previously purchased securities.

A TIC agreement is a way small investors can share ownership of a large property. In San Francisco, it's often used to buy a unit in a residential property, but it is more commonly used to buy fractional interests in shopping centers, office buildings or other commercial properties.

When investors sell an investment property, they can often defer tax on the sale if they reinvest the proceeds in another investment property under section 1031 of the tax code. This is known as a 1031 or "like-kind" exchange.

In 2002, the Internal Revenue Service published a revenue procedure explaining how an investment in TICs could qualify for tax deferral as a like-kind exchange. Afterward, many brokerage firms began peddling TIC securities to clients.

In 2007, Albertus and Andrea Niehuis wanted to sell two rentals, a house in San Mateo and a condo in Redwood City. The couple, who are now 82 and 68 respectively, had rehabbed, maintained and managed the properties themselves. The properties "were doing well," Andrea says, "but we figured we worked hard all our lives, it's time to start enjoying it."

Their financial adviser, Brett Macauley of Ameriprise in Palo Alto, recommended they put the proceeds from the sales into three TICs. One owned an office complex near Detroit; the others own hotels near Pittsburgh and in Portland, Maine.

He also recommended that they take out a loan on their primary residence, so they could invest even more, Andrea Niehuis says.

She says Macauley told her the TICs would generate $6,000 a month, more than twice what they were getting from the two rentals after expenses.

Myriad problems

In early 2008, the couple put a total of $1.034 million into the three TICs, which included proceeds from the sales plus $280,000 they had borrowed on their primary house.

Nekvasil says there were myriad problems with the investment.

The investors paid excessive fees to brokers and property managers, he says, and two of the three TICs borrowed money, which increased the risk.

He says his clients did not realize that decisions had to be made by unanimous consent of the owners, nor that owners could be hit up for more money for repairs and other capital expenses.

In 2011, the office complex near Detroit went into foreclosure and investors in the TIC refused to put in another $1.5 million, Nekvasil says. The other two, he says, are worth a fraction of what investors put in. In total, his clients lost about $590,000, he says.

Andrea Niehuis says she and her husband are getting only $1,000 per month from the remaining properties.

"Because these are complicated investments, somebody from the (Ameriprise) compliance department was required to call the client and review the risks with them," Nekvasil says. That call was never made, he alleges.

Andrea Niehuis says she didn't find out until the arbitration hearing that Ameriprise and Macauley earned about $84,000 in commissions and fees on the sale of the three TICs.

"We were paying (Macauley) $3,000 a year" for financial advice, she says. "We went to him thinking he would write a long-time retirement plan for us. We had no idea he was selling these and making a commission."

Macauley did not respond to a request for comment. In a statement, Ameriprise said, "We strongly disagree with the decision and stand behind the recommendations the advisor made as being appropriate and suitable. Our due diligence process and the training we provide advisors for these types of products is robust."

An Ameriprise spokesman points out that an arbitration panel dismissed a separate claim against his firm involving TIC securities.

The $1.165 million award on Friday by a Financial Industry Regulatory Authority panel in the Niehuis case included almost $900,000 in damages, but the Niehuises must turn over their interest in the two remaining TICs to Ameriprise, so their net recovery will be less. Nekvasil estimates the two are worth $291,000.

Covering costs

The award also includes $240,000 in attorney's fees and $30,000 in costs, which won't fully cover their attorney's 40 percent contingency fee or hearing costs. Arbitration is supposed to be quick and cheap, but the hearings stretched over 19 days between July 2013 and March 2014 in San Francisco. The session fees alone totaled almost $50,000.

Before 2011, arbitration claims involving TICs were rare. But between May 2011 and April 2013, investors won 36 awards in arbitration claims in securities cases, according to a report by Investment News.

TICs "are still selling but they are not as hot as they used to be," says Christine Tour-Sarkissian, a San Francisco real estate attorney who recently won almost $500,000 for a client in a TIC arbitration. She said the $1 million-plus award "is substantial" for that kind of case.

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