Every time Dennis Parker thought about the $25,000 in limited partnerships a Merrill Lynch broker had sold him in the mid-1980s, he got heartburn.
“When you get into a bad investment, which this was, each statement is like a needle stuck into your ribs,” says Parker, 65, a retired engineer in Daleville, Va.
Finally, he had had enough. He sold his partnership units last year, netting less than 50 cents on the dollar. Despite the haircut, he’s glad he sold. “I cut my losses just to end the aggravation,” he says.
Parker’s unhappy experience is all too common. Almost 10 million Americans own units of publicly registered limited partnerships, most of them purchased in the 1980s. While some public partnerships did well, most did not. Investors have lost billions.
Partnerships tended to be bad investments because most were in commercial real estate or oil and gas-all of which plunged in value in the late 1980s. Moreover, many partnerships were marketed as much for their tax write-offs as for their economic value.
But the 1986 tax law eliminated many of those write-offs. And partnerships tended to have excessive upfront costs to investors. In many instances, 25 percent or more went for brokerage commissions and other fees.
Anyone who had the misfortune to buy a bad limited partnership knows what a mess it turned into. Many investors today ask, “What should I do now?” In most cases, it may be best to do nothing.
But there are two other options: Sell your partnership units, or, in some instances, take legal action against the people who got you into the deal in the first place.
If you sell, you’ll suffer financial pain. “I call the secondary market the death-and-divorce market,” says David O’Bryon, president of the American Association of Limited Partners (800-342-2257), which lobbies for the rights of limited partners. The bitter truth is that limited-partnership units rarely fetch on resale what they’re worth.
Spencer Jefferies, publisher of Partnership Profiles, which analyzes partnerships, estimates that sellers of limited partnerships net an average of only 56 cents for each dollar in assets.
Adds Jim Frith, president of the Chicago Partnership Board, which handles partnership sales: “Typically, the sellers in the market are unsophisticated and the buyers are multimillionaires, so that should tell you something.”
Before you sell into this inhospitable market, get quotes on recent market trades of your partnership. Stanger Report’s phone service (900-786-9600; $5 per minute) is a convenient source.
Next, contact the broker or financial planner who sold you the partnership. He or she may be able to match you with a buyer. If that doesn’t work, the general partner might buy your units or know of people who will buy you out.
Only when those efforts fail to secure a decent price should you go to the secondary markets. Your watchword should be: Seller beware.
Even if you do sell, your woes aren’t over. Many partnerships were sold primarily as tax shelters, entitling limited partners to attractive tax write-offs. But when you sell early, you may invalidate some of those write-offs and be forced to repay the IRS.
“Even if you sell at a loss, you can still get stuck with a hefty tax bill,” says Lawrence Hales of Los Angeles, who buys and sells partnerships.
If you own a partnership, reading all this may have made you angry-perhaps mad enough to go after the people who sold you the partnership in the first place. Disgruntled investors in limited partnerships may be able to take action against their brokers or financial planners, as well as the general partners.
The statute of limitations for most arbitration claims by investors is six years. Examine the agreement with your broker or planner to see whether you must file suit to settle a dispute or whether arbitration is required.
Should your losses not be large enough to justify hiring a lawyer, you can go through arbitration on your own, or you can pay a lawyer a few hundred dollars to advise you on arbitrating your claim. For information on arbitration, call the National Association of Securities Dealers (212-480-4881).
