How Fund Failed Them : Teachers’ Reliance on Colleagues Cost Dearly When Land Deals Soured
The teachers’ lounge at Commonwealth Elementary School in Fullerton was an unlikely place for financial wheeling and dealing. Visitors were more likely to find teachers Louise Carmichael) and Norma Elgas) swapping stories about wayward students as they shared their brown-bag lunches.
But Carmichael was eager to listen one afternoon in 1972 when Elgas, a popular sixth-grade teacher, mentioned a Newport Beach investment company with the motto “Teachers Helping Teachers.” Elgas talked enthusiastically about Teachers Management & Investment Corp., a small company that was giving hundreds of Southern California educators access to the booming California real estate market by putting up as little as $1,000.
As many as 300 schoolteachers across California were moonlighting as part-timers for TMI, as it was called, using low-key but effective sales pitches. Though Elgas was not an official salesperson, she did not hesitate to talk about her successful investing with the company.
“She just told me about TMI like you would tell someone, ‘Oh, Mervyn’s has some real pretty T-shirts,’ ” Carmichael said.
Carmichael, now 62, and her husband, Elmer, eventually invested $195,000 of their retirement money through real estate partnerships marketed by TMI. And, as California’s real estate market thrived, the investments paid solid dividends.
But, as real estate prices soured in recent years, the returns have dwindled--or disappeared.
Even 67-year-old Elgas, now a retiree living in Arroyo Grande near San Luis Obispo, said she has no hope of recovering $10,000 of her funds, as several of her TMI investments in raw land sit stagnant, with no ready buyers for the properties.
Carmichael, also now retired, says she wonders whether the company’s motto should have been “Teachers Using Teachers.” In August, Carmichael and three other investors, Jean M. Sweeney of Fullerton, Katherine B. Seibert of Anaheim Hills and Stanley T. Clough filed a lawsuit against 27-year-old TMI alleging that the company is insolvent and has lost $100 million through fraud by its original and current owners. The suit, filed in Orange County Superior Court, has prompted an investigation by the state Department of Real Estate. TMI’s owners deny any wrongdoing, blaming the troubled real estate market.
This week, a judge may decide whether to take control of TMI from its current owners and appoint a receiver who would act to preserve any remaining TMI assets.
Carmichael regrets her role in steering peers toward TMI. “Teachers are so tired of making decisions for kids all day,” she says, “so sometimes we want to leave other decisions up to someone else, someone we trust. I feel badly because I recommended TMI to a lot of teachers. I wish I’d kept my mouth shut.”
Regardless of the outcome of the investors’ suit against the company, the story of TMI offers lessons for those who covet seemingly stunning returns enjoyed by friends or professional colleagues and who are prone to get in on the action. It also offers yet another reminder that real estate is riskier than it seems and that investments du jour can be a road to ruin.
For years, teachers had excellent reasons to talk up the company, which grew from an informal investing group led by Woodland Hills resident Donald J. Shroyer, now 73, who spent 31 years as a teacher and principal in San Fernando Valley elementary schools.
During the 1960s, the USC graduate and a handful of other teachers augmented their salaries by dabbling in real estate. But when the group made its bids on houses and small tracts of land, it often lost out to better-financed real estate syndicates.
In 1967, a real estate expert at UCLA recommended that the Shroyer group press state regulators to lower minimum income and net worth requirements that effectively prohibited modestly paid professionals from real estate syndication.
When a top official in the state Department of Corporations balked, Shroyer recalls, he countered that regulators were “knocking us out of the box simply because we don’t make $25,000 a year. All I see are syndications with doctors and lawyers, people likethat.”
Shroyer brought along executives from the Los Angeles Teachers Credit Union when he lobbied state Department of Corporations officials to modify regulations governing real estate syndicates. State regulators eventually relented, but only if investments were made in $1,000 increments and if offerings were limited to teachers, administrators and retirees with degrees. Teachers had to prove they had a net worth of at least $35,000 and $13,500 in annual income.
“I told him we’re well-educated people who happen to be in a low-paying occupation,” Shroyer said. “I told him that if anyone needed the group buying power and expert guidance (available through syndication) it was teachers.”
TMI incorporated in 1967 with $250,000 invested by nearly 200 teachers. The fund took a conservative approach, buying tracts of land that could be resold easily and shying away from riskier properties.
For nearly two decades, TMI surpassed its investors’ expectations.
During the go-go 1980s when real estate was king in California, TMI had no trouble assembling groups of profit-seeking teachers in hotel ballrooms, where the company would show slides, videos and charts promoting its various real estate opportunities. And, not unlike the big, moneyed investors, teachers would gather in homes to have drinks, nibble cheese and talk about the latest investment--in this case a TMI-backed real estate deal being offered. At one small party in Fullerton, investors sipped Parducci wine as TMI touted a partnership for the Parducci winery in Northern California.
To join TMI, a teacher would pay $1,000 for each unit stake in a partnership that would in turn pool investors’ funds to buy a real estate project--either a hotel, raw land, a shopping center or agricultural parcels--on the hope that the values would increase or even skyrocket.
Investors could pick which of many partnerships they wanted to join. To keep the property maintained, investors would pay an additional fee of about $75 every three months. When the land was sold, investors would get their principal back, plus hoped-for double-digit returns.
In those early years, TMI hired expert accountants, lawyers and administrators to run the business, including real estate broker Robert W. Fitzpatrick, who became president in 1968. It hired hundreds of teachers to sell its partnerships. About 200 still sell annuities and other types of retirement investments for TMI Lifeplans, a company affiliate.
Fresno resident Dee Marlin, a 68-year-old retiree, was one of those early salespeople. Between 1978 and 1991, when Marlin served as TMI’s regional manager in the Central Valley, all but one of his 42-person staff were educators.
“I had five doctors of education working for me,” Marlin said. “One time I sat down and counted: Those teachers had 115 degrees among them.”
Though the moonlighting teachers rang up a $60 commission on every $1,000 partnership unit they sold, Shroyer was confident that the sales force wouldn’t oversell: “I thought that, if you’re going to be having coffee with the teachers the next day, you’d better not be putting them into anything bad.”
That connection--a company founded by teachers that employed teachers to sell exclusively to teachers--was the key to the young company’s growth.
In 1987, Fitzpatrick said in a press release that loyalty remained strong: “We still make house calls, as our teachers know each other. If a client can’t attend a symposium to see a video presentation of a new offering, we will bring it to your family room in your own home.”
That familial approach, though, sometimes lulls investors into a false sense of security, said Sanford Goodkin, a San Diego-based real estate consultant.
“Teachers, God bless them, are here to educate the brains of our children, and doctors are wonderful in healing, but they are both lousy investors,” Goodkin said. “Some of the most successful people in the world have gotten screwed in real estate.”
Joe Cotchett, a Bay Area lawyer who has represented thousands of disgruntled investors in lawsuits filed against their advisers, said it’s only natural, though, to follow the lead of acquaintances who have been successful.
“We call it the herd syndrome,” Cotchett said. “It comes in all walks of life, and it’s not just the uninformed that march down the path. Quite to the contrary, it’s the very informed--or those who think that they’re very informed.”
One of the early investors who profited was Jim McDonald( of Laguna Beach, a professor at Saddleback Community College in Mission Viejo, who still has $100,000 invested with TMI. The 60-year-old educator said he reaped returns of 300% on two of the more than 20 partnerships he joined.
He and others say that the only fair way to gauge TMI’s performance is to track how all of its various investments have performed over the years, rather than focus on the recent troubles of some of its partnerships. That the company had a successful track record, in fact, was the main reason its part-time sales force was able to recruit so many other investors.
By the mid-1980s, though, cracks began to appear in TMI’s foundation and its management.
After a 350-page complaint from former TMI employees and sales agents, the Department of Corporations in 1984 began a two-year investigation into TMI’s real estate fees, travel expenses and accusations that TMI’s former management made profits on land sales, which should have gone instead to TMI investors. Officials concluded the investigation by ruling that there was no evidence of wrongdoing.
Today, the department has turned down requests by angry investors to investigate the present owners of TMI, though the current allegations are different and are aimed only at TMI’s latest owners.
About the same time as the earlier investigation, two TMI directors decided they wanted to sell their 75% stake. So TMI President Fitzpatrick arranged for Centennial Savings & Loan in Santa Rosa to buy it.
Within a year, though, Centennial was in financial trouble, and federal regulators took it over, then offered to sell the stake in TMI back to Fitzpatrick. Not having the funds, he turned to James R. Martin, a longtime Peat Marwick accountant who had been auditing TMI’s books, and Maurice B. Shuman, an accountant turned entrepreneur.
The two businessmen combined a $4-million bank loan and $3 million in cash from Brentwood Associates, a Los Angeles venture capital group, to buy TMI in 1987.
Because they did not think Fitzpatrick was in touch with the rapidly changing real estate market or familiar with new tax laws, Shuman and Martin said in a recent interview, they asked him to leave the company after the sale.
Fitzpatrick declined to be interviewed for this story.
*
Shuman, Martin and Brentwood Associates all had high hopes for TMI and the real estate, hotel and other commercial properties they inherited.
“It was very exciting,” Martin said recently, because TMI “had the portfolio and the track record.”
Tim Pennington, general partner with Brentwood Associates, said in a statement at the time of the sale, “We believe that there is much more market penetration available and waiting.”
But these days, Pennington admits that Brentwood’s 42% stake in TMI has not been a winner. Although the venture capital company, with $400 million in assets under management, takes a hands-on approach to its investments, that wasn’t the case with TMI.
“This very difficult real estate market had been tough on all the TMI investors, including Brentwood Associates,” Pennington said. “Can TMI turn around? That’s dependent on this real estate market.”
It’s also dependent on the skills of Shuman and Martin--former accountants turned investment bankers who met in Seattle during the 1960s. The two longtime associates are experienced investors, having held stakes in everything from oil and gas partnerships to a gold mine, in addition to fishing boats, cattle and a wine importing business.
Shuman once made headlines in the state of Washington, after officials forced him to pay $200,000 in restitution when a funeral home company he owned was charged in one of the state’s largest consumer fraud protection suits. Washington officials said Shuman had failed to abide by a state law requiring that his company set aside money in a trust fund for people who had prearranged purchase of cemetery plots.
Despite their lengthy investment history, Shuman and Martin said neither they, Brentwood nor the investors realized that the California real estate market was on the brink of a precipitous decline.
What happened to one particular parcel of TMI land illustrates how the company’s investments came under siege.
In 1982, a TMI limited partnership paid $5.7 million for 75 undeveloped acres near the U.S.-Mexico border. Glossy color brochures projected a holding period of “two to three years” before the property could be sold. And as late as 1989 a general partners’ report stated that “The stage is set. The players know their parts. . . . It is not whether we profit on Otay Mesa. It is only a question of when and how much. We like our chances.”
The partnership spent more money for permits to develop the land and later used the property as collateral for a $4-million loan. By 1993, the company acknowledged in a report to investors that a long-awaited industrial surge in the area has “subsequently ‘fizzled’ and died out.”
Unable to make payments on its debt and in an attempt to stave off foreclosure, the Otay Mesa partnership filed for bankruptcy protection in June, 1993. Today, because of plummeting land values, the tract is worth only $1.7 million, according to TMI’s own estimates.
It was more than just the real estate downturn, however, that led to the collapse of Otay Mesa International, disgruntled clients say.
The recent lawsuit said that Shuman and Martin refinanced the property’s debt three times, ending up with a higher interest rate that was unmanageable and also generating fees to consulting companies such as TMI Analysts Inc., BR Kensington and TMI Development--all firms wholly owned by TMI.
In addition, the suit alleges that the investor partnership agreement for Otay Mesa states that TMI cannot hire consultants affiliated with TMI to develop or construct that property. As a result, Martin and Shuman allegedly violated the agreement by paying development fees to those affiliated companies--charges the two men deny.
The company’s developed properties, too, have been hit hard.
TMI spent $45 million, for example, to build the Ramada Renaissance Hotel in Walnut Creek, which opened in 1987. Three years later, its value had fallen “by an astounding 67%,” according to TMI. The property eventually went into foreclosure and was sold for $15 million.
The Sheraton Sunrise Hotel in Sacramento, which TMI built at a cost of $24 million, filed for bankruptcy protection in 1988 and was subsequently sold for about $10 million.
Some investors say that more than the real estate downturn is behind the company’s financial woes. The four who filed suit in Orange County blame Shuman and Martin for their losses, saying that the owners illegally used money from profitable properties to prop up losers. The investors allege in their complaint that the men commingled funds and siphoned off millions of dollars of investors’ money.
But Maury DeWald, who is a partner with Irvine investment firm Verity Financial and served as volunteer chairman of the Los Angles County United Way campaign from 1991 to 1993, has nothing put praise for Martin and Shuman.
“Jim has always had a reputation as a resourceful, bright and knowledgeable guy,” DeWald said of Martin. “He’s advised any number of businesses in terms of operating and tax strategies.”
DeWald, who has known Martin since the 1970s, when both men worked for accounting giant Peat Marwick, said the suit “strikes me as disgruntled investors, and you have to question how many of them there really are.”
When Martin and Shuman bought TMI, DeWald said, “they went into it knowing that it was a long, tough road. . . . I think they simply wound up fighting fires they didn’t know existed.”
But Ron Rus, the attorney representing TMI investors in their lawsuit, thinks otherwise.
“They inherited these properties seven years ago, and they have had many opportunities to get out of the hot spots, which they decline,” he said. “But they continued TMI in order to collect quarterly assessments from the teachers and bleed the partnerships to perpetuate the scheme.”
Times librarian Sheila A. Kern contributed to the research for this report.
ANSWERING THE ALLEGATIONS: TMI owners, who deny charges, have different visions of firm’s future. D7
Troubled TMI’s Investments
Teachers Management & Investment Corp., founded to guide real estate investments by California educators, is the target of a lawsuit alleging fraud and conspiracy. A look at the company and some of its current investments:
TMI at a Glance
Founded: 1967
Headquarters: Newport Beach
Owners: James R. Martin and Maurice B. Shuman
Business: Real estate investment syndicate formed to help teachers supplement their retirement incomes.
Lawsuit: A group of investors has filed suit alleging the company is insolvent. They seek the appointment of a receiver to take over management of TMI. Owners say company is victim of real estate downturn.
Top 10 Investments
Teachers Management & Investment’s largest current investments (in millions):
Development Location* Amount invested Marlboro Square Folsom $26.3 Park Mt. Vernon Colton 18.0 Valentine Concourse Fresno 14.9 Stockton Airport Industrial Stockton 12.6 Dublintown Dublin 12.5 Prado de las Posas Camarillo 12.4 Monarch Industrial Park Livermore 12.0 TMI Business Centre San Jose 9.9 Loma Rica Ranch Grass Valley 9.0 TMI Growth Properties ’80 ** 8.9
* All in California
** Lincoln Building in San Diego and Newtown Shopping Center in Los Gatos
Sources: Times reports, Teachers Management & Investment Inc.; Researched by JANICE L. JONES / Los Angeles Times
The TMI Portfolio
The value of Teachers Management & Investment Inc.’s assets has declined by millions of dollars. The company’s owners say TMI is a victim of the real estate downturn. An overview of the firm’s winning and losing investments:
Winners
Since 1968, TMI has sold 43 investments at a profit. Top 10 projects in terms of dollars returned to investors:
Property Location Edgemont Professional (offices) Sacramento Sunset Hills (open land) Oceanside Humboldt Green (student housing) Arcata Country Club Park (open land) Oceanside Mission Cuyamaca (open land) Santee Valley Financial (offices) Fresno, Sanger & Tulare Del Mar Highlands (open land) Del Mar Fountaingrove (mixed-use development) Santa Rosa San Jose Industrial (open land) San Jose Lake Calero (open land) San Jose
*
Property Investment Return % increase Edgemont Professional (offices) $525,000 $2,024,925 285.7% Sunset Hills (open land) 6,511,000 22,943,200 252.4% Humboldt Green (student housing) 650,000 2,078,700 219.8% Country Club Park (open land) 1,815,000 5,555,400 206.1% Mission Cuyamaca (open land) 925,000 2,806,450 203.4% Valley Financial (offices) 430,000 1,216,388 182.9% Del Mar Highlands (open land) 1,888,250 5,160,350 173.3% Fountaingrove 12,350,000 33,270,510 169.4% (mixed-use development) San Jose Industrial (open land) 585,000 1,503,450 157.0% Lake Calero (open land) 4,214,000 10,454,402 148.1%
Losers
Six investments were sold at a loss:
Property Location Investment Return Skypark Commercial Fresno $3,238,725 $1,832,875 Stockton Professional Stockton 430,000 288,100 Sunset Penthouse West Hollywood 165,000 121,537 Apartments TMI Growth Properties ’81 * 11,045,000 997,143 TMI Growth Properties ’83 ** 15,169,500 659,873 TMI Growth Properties ’88 *** 4,064,250 1,593,186 Total -- 34,112,475 5,492,714
Property % decrease Skypark Commercial 43% Stockton Professional 33% Sunset Penthouse 26% Apartments TMI Growth Properties ’81 91% TMI Growth Properties ’83 96% TMI Growth Properties ’88 61% Total 84%
* Newport Beach office complex, San Diego industrial complex, Oxnard retail center
** Two San Diego office complexes and a Redwood City retail center
*** Shopping center in Vista
Bankruptcies
Five investments have declared bankruptcy or are in the process of doing so. Dollar amounts in millions: Property: Otay Mesa International Plaza*
Investment: $11.6
Location: San Diego
*
Property: Sheraton Round Barn Inn
Investment: $14.5
Location: Sonoma
*
Property: Sheraton Sunrise Hotel
Investment: $19.5
Location: Sacramento
*
Property: TMI Group ‘85-’86
Investment: $27.4
Location: Ramada Renaissance Hotel, Contra Costa; St. Claire Hilton Hotel, Santa Clara
*
Property: TMI Group ’87
Investment: $10.8
Location: 400 Mercer St., King, Wash.; Autumn Ridge Apartments, King, Wash., Skyline Park Apartments, Snohomish, Wash.; Fountaingrove Corporate Center, Sonoma.
* Chapter 11 proceedings in progress
Source: Teachers Management & Investment Inc.; Researched by JANICE L. JONES / Los Angeles Times
