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The Devolution of DBSI

Investors in DBSI Inc. are only now getting a clear idea of what was going on at the Idaho-based commercial real estate investment company. There was little indication to investors that financial issues existed at DBSI until a notice they received six weeks prior to the company filing for Chapter 11 bankruptcy proceedings. However, problems at DBSI appeared long this, and started becoming apparent to those within the company as early as 2004.

It was in 2004 that DBSI accountants first noted cash shortages. It was also around that time that DBSI began in earnest to operate like an elaborate ponzi-scheme. By 2005, DBSI was dependent on new investor funds in order to provide cash for operations and provide the guaranteed 7% dividend to prior investors. The company came up with two ways to keep new funds coming in to pay off old investors.

It appears that the first strategy involved the use of hidden markups. DBSI would buy a commercial property at a given price, and then sell it to new investors at a profit. The amount of the markup was not disclosed in many cases; a violation of securities law provided the properties were sold as a security. One disturbing characteristic of this practice was the amount of time between DBSI buying an investment property and selling it to investors; sometimes it was as short as one day.

The second strategy came from a seemingly benign concept known as, “accountable reserves.” Starting in 2005, every new project had an accountable reserves fund which set aside money for tenant improvements and repairs. Well, that was the stated goal anyways. In actuality, only 18% of the money in those funds went towards tenant improvements and repairs. The other 82% of the over $99 million dollars available in accountable reserves went towards other DBSI funds.

Even with hidden markups and diverted tenant funds, DBSI was not able to maintain a financially viable enterprise. By 2007, the company was losing $3 million a month on its properties. That number increased to $8 million by 2008. Unfortunately, investors were kept in the dark until six weeks before DBSI filed for bankruptcy.