Sinners and Saints

Billions of dollars of investors’ monies have been lost and more are at risk!

Roughly $185 billion in Internal Revenue Code 1031 Exchange money for real estate was processed in 2008 in the U. S.  Although, Federal Law mandates that each exchange must be executed with the services of a Qualified Intermediary, the QI’s are not audited or otherwise monitored by any federal regulatory body.

The risk of loss is great, but unnecessary if our Arizona legislature takes action.  Currently only four states have provided the leadership to regulate this process; Nevada, California, Washington State and Colorado. Colorado passed their law January 25, 2010.  See http://www.1031.org/ for information from the Federation of Exchange Accommodators.

We should move without delay to establish standards for QI’s.  Bank deposits in Arizona as of June 30, 2009 (last figures available) were in excess of $82 billion.  I believe this legislation alone, properly marketed across the U. S., can bring $12 billion to $15 billion more to Arizona in deposits by becoming a safe haven.

The defense of the QI that lost their clients $120 million dollars in Nevada by comingling personal and company monies with clients’ funds was, “There was no regulation of what could be done with the funds.”The Nevada legislature did not act to protect its citizens until after this loss.

The added tragedy is that those who have lost their funds are required to pay income tax because of noncompliance with the tax code.

Losses in Arizona have happened and more are inevitable! I personally know of a bank that was approached with an offer to use client money as collateral for personal loans for the owners of a QI.  Absolute power over money corrupts.  We don’t need to wait until after the fact to regulate.

In December 2008 the QI of LandAmerica filed bankruptcy with over $400 million of consumer funds. The monies are now in limbo and may never be seen again due to commingling and improper investment under LandAmerica’s control.

Arizona consumers, inundated with a flood of downward economic trends, should not have to include real estate entrusted to Qualified Intermediaries that due to a lack of both federal and state legislation are riddled with intentional and unintentional fraud. QI’s are not required to be bonded, insured, or even licensed. This regulatory void has left unscrupulous and incompetent QI’s with doors wide open for malpractice or outright fraud. Your money becomes their money to do with as they wish!

Arizona must move quickly to become the fifth state in the nation to bring regulation to this important business function. Our state could be seen as a safe haven and a home to billions of dollars of 1031 exchanges bringing relocations, assets, tax revenues and jobs to Arizona.  Funding will be needed for the Arizona Department of Financial Institutions to oversee this industry.