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Tenancies in Common

     Tenancies in common were originally designed to allow unrelated people to purchase an interest in otherwise unaffordable real property, such as homes in the San Francisco Bay Area, which they would hold in common with others. These traditional tenancies in common pose many problems. For example, if any one tenant in common fails to pay the mortgage, or property taxes, the others must make up the difference, or risk going into default. In addition, all decisions affecting the property, including repairs, must be agreed upon by all of the tenants in common.  

      In 2002, the Internal Revenue Service issued a ruling which indicated that tenancy in common interests in commercial property could qualify as a direct interest in real property, for purposes of Section 1031 tax-deferred exchanges. A Section 1031 tax-deferred exchange allows a seller of real property which is used for business purposes to avoid paying capital gains taxes, if the proceeds from the sale are used to purchase other commercial real property. After this IRS ruling was made, the flood-gates opened. Investors were solicited to use section 1031 tax-deferred exchanges to purchase tenancy in common interests in commercial properties, such as office buildings and shopping centers, which are professionally managed. These tenancy in common interests create numerous potential pitfalls, in addition to the problems associated with traditional tenancies in common. For example, the tenancy in common interests are illiquid. That means that if an investor wants to sell that interest, for any reason, they cannot do so. Another problem with these tenancy in common interests is that they are very high risk investments. Many of the commercial properties for which these interests were sold have large mortgages and/or other extensive debt. They are dependent upon rental income to service their debt. As the commercial real estate market has collapsed, so have many of the tenancy in common investments. They are unable to pay their creditors, and the buildings have gone into foreclosure. Many people have lost their entire investment. To make matters worse, the potential losses are not limited to the amount invested. Instead, each tenant in common is responsible for paying his or her proportionate share of the debt. The foreclosures may also have significant adverse tax implications for the investors.

     A tenancy in common interest in commercial property, such as the ones described above, is an investment. The person who solicits that investment has a duty to disclose all material information, to ensure that you understand the investment, and to only recommend it to you if it is appropriate for your age, income, risk tolerance, needs and investment goals. If you were sold a tenancy in common investment, which you believe was not appropriate for you, you may wish to contact an attorney. The Law Office of Melinda Jane Steuer offers free consultations.  

​​TOPIC 2:
Variable Annuities

Variable annuities are a hybrid of an insurance product and an investment, that are issued by insurance companies. They offer tax deferral, and certain insurance features, but their value is tied to the performance of the underlying investment portfolios.  

There are numerous potential drawbacks to variable annuities.  

 When you buy a variable annuity, you cannot withdraw more than 10 percent of your money each year, without paying severe penalties. This is particularly problematic for seniors and retirees who are on a fixed income and may require access to their invested funds in the event of an emergency.  

Variable annuities are very expensive. The annual fees and charges for a variable annuity are at least 2-3% a year and often more, depending on the product. This is about twice the amount of fees and charges for mutual funds. If you buy variable annuity “guarantees” such as a guaranteed death benefit or a minimum income benefit, additional fees of .5%-1% each year will be imposed. A 2-4 % annual fee may not sound like much, but that is deceptive. A well managed account will only grow at an average rate of 6% a year. That level of growth does not come every month nor even every year. The fees and charges of a variable annuity will severely eat into your returns over time.  

A variable annuity carries all of the risks of investing in the market. The value of the variable annuity fluctuates depending upon the performance of the underlying sub-accounts. Sub-accounts are private accounts of the variable annuity issuer which invest in different baskets of investments, much like mutual funds. Sub-accounts will often attempt to mirror certain designated mutual funds. Statistically, sub-accounts often under-perform the mutual funds they are designed to track.

If you purchase a variable annuity, you may end up paying more in taxes than you would with a mutual fund. This is because withdrawals from variable annuities are taxed at ordinary income tax rates rather than at the lower capital gains rate which applies to investments in mutual funds.

Variable annuities are very profitable for the insurers who issue them and the financial advisors who sell them. Commissions on variable annuities are significantly higher than what the advisors would receive for selling mutual funds or traditional insurance products. This has caused variable annuities to become a very popular recommendation. A financial advisor may tell you that a variable annuity will offer you a secure retirement, an income stream that you cannot outlive, a guaranteed death benefit for your heirs, tax-deferral, and/or professional management. Such promises may be false and misleading. At best, the touted benefits of a variable annuity are often attainable for far less money than you will pay by purchasing a variable annuity.

If you were sold a variable annuity which you believe may not have been appropriate for you, you may have the right to consider legal action.  

Life Insurance Settlements (aka)

"Stranger Originated
Life Insurance"

During the last few years, some life insurance agents have promoted high value universal life insurance policies (with a death benefit of one million or more) as a form of investment which may be purchased by an insurable individual, and then re-sold for a profit. Purchasers of such policies are often surprised when the policy premiums rise to an astronomical rate after a couple of years, and the policies cannot be re-sold as promised. In such instances, the purchasers are forced to either relinquish the policy, or deplete their assets by paying unsustainable premiums. Many believe that the promotion and sale of such policies is a form of fraud upon both the purchaser, and the insurance companies, who may be unaware that the policies are not being purchased to provide life insurance for the insured. The problems caused by the sale of such policies has resulted in legislation to ban the practice of promoting and selling life insurance policies as an investment to be re-sold to another.  

If you were sold such a policy, you may have legal rights. 

Mortgage Backed Securities

At the height of the housing bubble, mortgage backed securities were marketed as being a safe cash alternative, that was appropriate for customers who were seeking a stable income from their investments. Many of these mortgage backed securities were backed by high risk sub-prime and Alt - A mortgages, that were issued to borrowers who were not credit worthy. The complexity of these investments, and the lack of disclosure as to the riskiness of the loans which backed them caused many customers to be unaware of what they had been sold. Millions were lost when the housing market crashed, and the securities lost all or most of their value.

If you lost money on mortgage backed securities, you may have the right to recover your losses. You may contact the Law Office of Melinda Jane Steuer.