A strategy for unlimited growth is the holy grail of business. DBSI, a Boise real estate investment firm, appeared to have found it.

President Douglas L. Swenson, an accountant, founded the company 29 years ago. It grew modestly until 2002, when Swenson and his team began marketing shares of ownership in commercial buildings around the nation to investors. The shares took advantage of a provision in federal tax law that lets investors avoid certain capital gains taxes.

Helped by the real estate boom, profits for DBSI and its investors grew effortlessly - and fast. The value of its assets grew from several million dollars in 2002 to $2.6 billion in 2008, said Paul Mangiantini, a Boise lawyer who represents investors.

But the mirage evaporated this year as the economy soured. This fall, the company began delaying payments to 12,000 investors around the globe, saying income from some rental properties is no longer enough to cover debt payments. It suspended all sales activity, closed sales offices around the country and laid off most of its staff.

Investors - some of whom had millions of dollars invested in DBSI-run properties - filed 10 lawsuits last week in Boise, alleging the company collected $500 million in illegal profits as a result of fraud. DBSI and more than 100 affiliated companies responded Monday by filing for bankruptcy.

Earlier this year DBSI said it manages more than 18.6 million square feet of space in 280 properties with a total value of more than $2.65 billion. Among them are 16 commercial properties in the Boise area. Kastera Homes, a home builder in the Treasure Valley, is a DBSI subsidiary.

Until closing all operations in October, DBSI had at least two companies that sold fractional ownership investments in real estate called tenant-in-common investments. One, Spectrus, sold them as real estate. The other, DBSI Securities, sold them as securities.

Both sought to shelter investors from taxes. Under Section 1031 of the U.S. tax code, investors who sell a property and make a profit can avoid paying capital gains taxes by re-investing their earnings in other property. So-called 1031 exchanges were a driving force in the commercial real estate explosion in the first half of this decade.

When the section was written in 1929, "It was intended to allow farmers to trade property," said Patricia DelRosso, president of the Tenant-In-Common Association in Indianapolis, a nonprofit organization that represents TIC securities brokers and dealers.

DelRosso said the industry took off in 1999 after the Internal Revenue Service and the Securities and Exchange Commission said TICs qualified as exchanges under section 1031.

Instead of farmers swapping fields for pasture, the new investments targeted retiring landlords who were tired of dealing with "tenants, toilets and trash," DelRosso said.

DBSI and other TIC "sponsors" buy shopping malls, office buildings and other commercial property and offer investors the opportunity to buy a portion - a fractional share - of a property.

An investor could quickly sell a four-plex and use the proceeds to buy a half dozen deeds in office buildings, collect regular payments based on tenants' rent, and leave all the work to DBSI under a "master lease."

Early in 2007, DBSI began an aggressive initiative to buy land for development. Three sources who have worked with DBSI, but asked not to be identified, said the land became a drain when the economy turned and the land sat undeveloped. They say shrinking cash flow from sales and continued debt and tax liability put the company over the edge.

But it was DBSI's practice of pooling cash reserves for all the properties into a single general fund to pay expenses, taxes and loans that sent investors to court, Mangiantini and others said. They said DBSI used proceeds from profitable properties and new sales to prop up the unprofitable ones.

The practice was legal but "unsustainable," Mangiantini said. "When sales stopped there was nothing to fall back on, and instead of losing a few underperforming properties, the whole thing collapsed."

One investment broker, who asked not to be identified because he still does business with the company, told the Idaho Statesman that "people are terrified." He said DBSI is pulling out of all its master leases, beginning with the worst properties first.

Mangiantini says DBSI's master lease arrangement makes DBSI's TIC investments securities subject to strict federal disclosure requirements to protect investors. But some were being sold as real estate, whose disclosure requirements are weaker. That has drawn the attention of Idaho securities regulators.

"Both federal and state law would call a TIC with a master-lease provision a security," said Marilyn Chastain, head of the Securities Bureau at the Idaho Department of Finance.

Chastain wouldn't say if her agency is investigating DBSI.

According to the U.S. Securities and Exchange Commission, "a security is an investment in a common enterprise with reasonable expectations of profit derived solely from the efforts of others, i.e., investing money into a business where a profit is gained without effort on the investor's part."

DelRosso, of the Tenant-In-Common Association, said a federal investigation wouldn't surprise her.

"Anytime a securities sponsor is challenged, state and federal regulators will be in there," she said. "Real estate is a buyer-beware transaction. I'm an advocate of working within a securities form, because there is much more protection for the investor."

DelRosso believes DBSI, like the rest of the real estate industry, is a victim of constricted capital markets.

"I'm sure they had loans and lines of credit coming due and couldn't find replacement financing," she said.

Mangiantini says DBSI did not disclose important information to investors who purchased investments from the real estate division - things like the existence of property appraisals and the fact that DBSI bought properties as little as a week earlier for millions less than it was selling them.

Calls to DBSI and its attorney Thomas Banduccci were not returned, nor was a call to a DBSI leasing office in Boise.

Brad Talbutt: 672-6737