The bottling company went bankrupt, leaving 35 real-estate investors in a bind. To come up with a solution, all 35 of them had to agree -- no dissenters. None of them could be in charge while they discussed what to do. And, for most of them, their life savings were at stake.

The 35 investors were part of a tenant-in-common real-estate venture, a structure in which multiple investors buy fractional ownership in a commercial property, in this case a Phoenix bottling plant. But the bottler -- the building's lone tenant -- was forced into bankruptcy in November 2006 amid allegations of accounting fraud. Then, the investors found themselves in largely uncharted waters.

CB Richard Ellis The Phoenix building that formerly housed a Le-Nature's bottling company.

"It was a roller-coaster ride for 19 months," says one of the investors, Rozanne Moretti, who earlier had sold a retail center she owned and invested the proceeds in the bottler's building.

While the loss of a tenant can prove disastrous for a sole landlord in a simple real-estate deal, the experience of the investors in the bottling plant shows that the headaches can be magnified if something goes awry in a tenant-in-common structure. Here, there are multiple owners -- all of whom have veto power over each other even as their interests may not be aligned.

While many TIC investments do just fine, the Phoenix transaction is one of the largest of such deals to have been forced into a renegotiation of loan terms with lenders. But it likely won't be the only such workout as the commercial market weakens from a slumping economy and fallout from the credit crunch.

During the commercial sales frenzy, TICs grew exponentially, as more people sold properties in a rising market and then sought tax deferrals. In all, TIC investments grew from less than $1 billion in annual sales in 2002 to a peak of more than $7 billion in 2005, according to Real Capital Analytics.

They are attractive to landlords who sell their small commercial properties, such as duplexes or shopping centers, and want to defer capital-gains taxes. The IRS allows this deferment if the owner invests the proceeds into another property investment within 180 days. This is known as a "like-kind" or 1031 exchange, referring to the pertinent part of the U.S. tax code. But with the clock ticking on the 180 days to make a like-kind exchange, investors who choose a TIC property might be so desperate to be the winning bidders that they pay too much.

In fact, some real-estate experts had long believed that tenant-in-common structures created during the commercial frenzy of 2004 to early 2007 would be among the first to take a hit when rental rates begin to fall. That's because in a rising market, investors likely sold their properties for a profit and needed a quick and easy place to put it for a like-kind transactions.

"The structure is one that is particularly attractive in an environment of price appreciation, but one that presents risks to investors as prices ultimately begin to weaken," says Sam Chandan, chief economist at Reis, a real-estate research firm.

TICs were supposed to ease a landlord's burden, not create a new one. While TICs are not the only way to effect a like-kind exchange, they do offer relief to those weary of managing their own properties. With TICs, investors could put their sales proceeds into a pool with other investors, jointly buy a much bigger property and leave the day-to-day tasks to a hired management company.

Investors usually find properties -- and each other -- through TIC sponsors, who market these investments as securities. In the case of the bottling plant, the TIC sponsor was CB Richard Ellis/U.S. Advisor LLC, a joint venture of CB Richard Ellis Investors and U.S. Advisors, a brokerage firm. The investors, who contributed an average of $750,000, put in $32,616,000 and financed $62,300,000 in debt to purchase the plant near Phoenix Sky Harbor International Airport in February 2006.

Facing Foreclosure

But within six months, the beverage maker, Le-Nature's, was forced into bankruptcy and its lease was terminated. Suddenly, the investors found that in addition to no longer receiving their portion of the rent -- a 6.5% yield -- they would be responsible for the mortgage payments after interest reserves ran out. Foreclosure became a real possibility. All but one of the investors was over age 65, and many stood to see the bulk of their retirement wiped out.

That's when the investors got a lesson in TIC structures. Many of the critical decisions they faced had to be decided unanimously and they could not even give someone authority to act on their behalf without unanimous approval -- all per IRS guidelines. When CBRE/USA brought the group a possible new tenant, the group couldn't agree to the lease terms, and the prospect signed elsewhere.

"They were in this position where CBRE would make suggestions on how to deal with the problem, but you would have one or two or three investors who wouldn't go along with that and they were stymied," says Stephen Burr, an attorney with Foley & Lardner who was hired to advise the investors.

In November 2007, CBRE/USA offered to buy the plant back from the investors for $20 million, or about 60% of the money they put in, and then CBRE/USA would try to renegotiate the loan with the servicer, LNR Property Corp. In addition, the TIC adviser offered the investors an opportunity to benefit from any potential upside if the building was resold, and it paid the investors' attorneys fees, said Steven Iaco, a spokesman for CB Richard Ellis. "We really went the extra mile for these folks," he said.

But getting everyone to sign on took six weeks. "There were 35 of us on the conference call. And they were very long and wherever you were, you stopped everything you are doing and made that call. And then there were the emails back and forth. It was very heated sometimes," says Ms. Moretti, who had contributed $940,000 to the transaction.

Finally, the group agreed to sell the property for $20 million, and CBRE/USA turned to renegotiating the loan. But after a deal was worked out and the TIC investors were told to prepare for a closing, things fell apart, Mr. Burr said. In April of this year, executives at the corporate headquarters of CB Richard Ellis got concerned over the deteriorating Phoenix commercial market and the unlikelihood of finding a new tenant in a short period of time, Mr. Burr told the investors.

A 100% Loss Possible

Mr. Burr broke the news to his clients that the deal was off and they would likely lose 100% of their investment. "To be honest, I'm glad none of them committed suicide -- the blow was that hard on them at that point," Mr. Burr said.

In the end, the loan was renegotiated once again, giving CBRE/USA a longer period to lease the property. And the investors got their money -- even though it still was a loss of 40% -- with the hope that if CBRE/USA is able to resell the building, they may recoup some of their losses. Because of a legal technicality, they couldn't use the loss to offset their original capital-gains liability. Now, many of them are looking, once again, for another like-kind exchange to invest in for tax protection -- this at a time in which fewer deals are getting done and financing is harder to acquire.

Not Ms. Moretti, though. She has decided to pay the capital gains on the sale of her original property and move on. "I didn't breathe easy until the check was in the bank. It was wired and I said, 'Now, it's over.'"

Write to Jennifer S. Forsyth at jennifer.forsyth@wsj.com

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