Equitec, Stifled by Tax Reform, Files Chapter 11

Equitec Financial Group, once a premier real estate syndication firm that has been hit hard by tax reform, announced Wednesday that it filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.

The Oakland-based company, which offers investors a broad range of financial services, said the bankruptcy filing resulted from “difficult times in the real estate industry” and the need to “safeguard” its remaining assets. The firm is nearly half owned by a subsidiary of PacifiCorp., a utility company in Portland, Ore.

Equitec is but one of several major property syndication firms to encounter tough times in recent years. At its peak in the late 1970s and early 1980s, Equitec syndicated the sale of office buildings in downtowns nationwide, including the World Trade Center in Los Angeles.

Equitec has been losing money heavily in recent years and is now in default on several of its bond obligations. The bankruptcy filing, which allows Equitec to reorganize and try to pay its debts, affects the parent company and “certain” of its subsidiaries, the firm said.

Susan H. Kopp, an Equitec spokeswoman, said the firm needs breathing room to reorganize. “We have had some lawsuits filed against us and certain other financial pressures that have made it difficult for us to do business and complete our reorganization,” she said.

In one lawsuit last year, a group of investors alleged that Equitec overcharged on fees on its real estate partnerships sold between 1980 and 1988. Kopp also noted that Equitec has rented far more office space than it needs at its headquarters near the Oakland airport.

“That’s a real drain,” she said.

Equitec is currently trying to sell 11 of its real estate partnerships--not included in the bankruptcy filing--to Hallwood Group, a financial services company in New York. If it goes through, the sale is expected to earn Equitec as much as $15 million.

Syndication firms typically acted as general partners on commercial buildings sold to private investors through limited partnerships. These syndications were wildly popular because they allowed wealthy investors to save taxes by writing off large paper losses from the partnerships against their income earned through work and investments.

But Congress plugged this loophole in the 1986 tax reform act, and the impact devastated companies like Equitec.