In 2006, the real estate firm DBSI paid $27 million for three buildings in the Allison Pointe Park at Allisonville Road and Interstate 465.
Then, the Idaho firm quickly sold fractional ownership of the office complex to 27 individual investors scattered across the country. DBSI signed a master-lease that promised the investors an annual return that would rise each year. The company, in turn, agreed to sublease and manage the properties.
The Allison Pointe deal was part of a nationwide buying binge for DBSI, which amassed a 250-property portfolio worth $2 billion and a staff of hundreds. In the Indianapolis area, the portfolio also includes a south-side retail building, an office building on the northeast side, and a couple of distribution and industrial buildings.
But as sales of investment real estate slowed, new cash from these so-called tenant-in-common deals stopped streaming into DBSI.
Now the privately held company is in trouble. It stopped paying dividends to investors in October. It laid off most of its staff and has forwarded its Web site to a blog that provides updates to investors. Some expect a bankruptcy filing in the coming days.
A class-action lawsuit brought by investors in Idaho describes the company as an illegal scheme to defraud them. The suit alleges DBSI made more than $500 million in illegal profits by reselling properties to investors at markups up to 30 percent above its purchase prices.
Company officials did not return IBJ phone messages. A recording on the company's phone line says DBSI has been inundated with calls and e-mails from 12,000 investors and cannot respond to all of them.
Companies such as DBSI market themselves as opportunities for mid-market investors to own a piece of revenue-producing real estate without the same hassle or risk of buying property on their own.
The complicated deals, which can involve up to 35 investors each, also have tax advantages. They often are used as a 1031 exchange, an investment strategy named for the section of IRS code that allows owners of revenue-producing real estate to defer taxes if they immediately apply sale proceeds into another property.
Tenant-in-common groups such as DBSI carry the same kind of risks as other real estate investments, said Patricia DelRosso, president of the Tenant-In-Common Association, an Indianapolis-based national advocacy group that has DBSI as a member.
She compared the uncertainty surrounding DBSI to the stock market.
"We've got the same rumors, innuendo and speculation regarding this sponsor, DBSI," DelRosso said. "It's very premature to say investors will lose money."
The company decided to take a "timeout" from paying investors, so it can assess its portfolio and negotiate new deals with lenders, DelRosso said.
But local observers aren't as optimistic.
For years, DBSI had more customers than it had real estate to sell them, said G. Ross Reller, vice president of locally based Meridian Real Estate. That relentless appetite for investment real estate drove prices to unsustainable levels, and now investors are paying the price.
"It's like musical chairs," Reller said. "When the market dried up and there were no longer properties being sold, that's when the music stopped."
Not all bad
Tenant-in-common arrangements typically work fine if the transactions are arm's length and based on reasonable comparable sales. But that's not the case with DBSI, which would buy properties at $110 per square foot, then syndicate them for $150 per square foot, Reller said.
He expects the situation to get worse for investors, who were driven in part by their own greed. The biggest problem for DBSI was, it was never about good real estate fundamentals.
"DBSI came into markets like Indianapolis and started paying prices for office buildings that we had never seen before," Reller said. "I believe in every single case they paid significantly more than our market had ever seen for investment real estate sales. It was simply driven by their tremendous appetite to grow their portfolio and serve the needs of people who had capital gain they wanted to defer."
The DBSI deals promised an initial return of 7 percent and a roughly 2 percent increase each year, said Paul R. Mangiantini, the Idaho lawyer who is bringing a class-action lawsuit against DBSI.
"That's a security under the law, not a real estate transaction, and that type of offering requires various disclosures, namely what DBSI paid for the property the week or month before it resold it to the tenant-in-common investors," Mangiantini said. "We have evidence they were marking up the properties 20 [percent] to 30 percent on average."
The firm bought one building for $14.5 million and immediately resold it to investors for $19.5 million, he said, making it hard for DBSI to blame the economy or credit markets when the building's revenue failed to support its valuation.
The credit-market troubles and economic mess simply provide a convenient excuse for a company that was headed for trouble already, he said. Another concern: whether DBSI, which also charged investors fees for management, maintained adequate reserves.
"It was fundamentally unsound to start with," Mangiantini said. "Their investment plan was doomed to failure. If it looks too good, it is."
Mangiantini already has won an order barring DBSI from commingling funds from the various buildings it manages.
DelRosso, of the Tenant-In-Common Association, said it isn't unusual or illegal for real estate firms to flip properties for a quick profit. She defended DBSI and described Mangiantini as an "ambulance-chaser" attorney.
Many of the buildings in DBSI's portfolio are generating enough revenue to pay the bills, meaning investors will get something even if it's not the high returns the firm had promised, observers said. Others will be lucky to walk away without owing more than they invested in cash.
The impact on tenants will vary, as they could get a new landlord. It wasn't clear whether the troubles with DBSI have slowed maintenance of its properties.
Owners of Allison Pointe in Indianapolis include investors in California, Utah, Missouri, Hawaii, Minnesota and Nevada, but it doesn't appear any local investors have a stake, corporation records show.
None of the investors could be reached since each entity is registered anonymously with the Secretary of State's Office. Sale prices vary. For example, Reyes-Allison Pointe LLC paid $759,695 for an ownership interest, while Craig-Allison Pointe LLC paid $1.9 million. Buyers typically borrowed a portion of the purchase price.