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Can TIC's Survive in the Existing Real Estate Market?

Written by Clifford A. Hockley on Tuesday, 20 April 2010 7:00 pm
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In this very dynamic real estate market TIC (Tenant in Common) investors have suffered as the market has weakened. In particular, those real estate investors that joined TIC investments in the last four years, (at the top of the market) are finding that in some locations, high vacancy rates and plunging rental rates are squeezing their cash flow and their ability to pay their mortgages.

Who bought TIC investments?

As baby boomers have aged, they wanted to reposition their assets into investments that did not take up as much of their time and that did not involve their day to day attention. These investors wanted to escape management intense investments and buy into real estate investments that guaranteed them a "safe and consistent" return.

They had typically sold other real estate investments and traded into the TIC using a 1031 exchange, pooling with other investors which seemed like a safe bet. Unfortunately, many (not all*) TIC investments were organized by syndicators who purchased the properties at one price and then marked up the properties to resell to their investors. In many cases they used short term "interest only" loans to get their deals to pencil, betting that real estate appreciation as well as increasing rents would increase the value of the properties quickly and allow the properties to be refinanced.

As a result of the large number of investors (TIC syndicators, REITS and others) competing for the same inventory, the price of assets went sky high thus lowering the yields of the investments. CAP rates as low as five and a half were not unusual and CMBS loan originators and other financial institutions were willing to lend to TIC syndicators and their investors on a non recourse basis.

The Real Estate Market was not as strong as investors expected

Market appreciation, and rent increases did not occur. In the majority of American markets most real estate type's vacancy rates have increased, making it difficult for TIC's to have enough money to cover their expenses. In many cases the properties performed to proforma, but when the time came to refinance them the rules had changed and the lenders wanted to see more equity in each investment. Nervous lenders have moved their investor equity requirements from 25% to 40% and even 50%.

This has forced many TIC investors into the unpalatable position of significantly increasing their cash investments in properties to save their existing equity positions and furiously attempt to get new financing for their deals to replace the existing "interest only loans". These new equity requirements are stretching the resources of TIC investors.

Today

In the past two years DBSI and Sunwest Management two major TIC syndicators have dissolved and filed for bankruptcy. As these cases move through the courts, questions have emerged about the future of real estate TIC property sales. It seems likely that real estate TICs sold by real estate brokers will disappear and most likely be replaced by securitized TIC's for larger investments and real estate partnerships for smaller investments. (TICs can be sold as real estate investments or as securities, but Real estate TICs are not held to the same high standard of disclosure as securities investments).

A reflection of this trend, is that the Tenant-In-Common Association (TICA) changed their name to Real Estate Investment Securities Association ( REISA). In the last year REISA recommended that all TICs be structured as securities.

**Some TIC syndicators are still in business such as RealtyNet Advisors . Realtynet Advisors have adjusted to changes in the market place with their special approach to TIC's where there is no debt just equity invested, in other words they do not borrow money to make a deal. They find enough investors to contribute equity for the full sales price.

The future of TIC investments will be dictated by the recovery of the real estate market; in the mean time look for other ways to make money investing in real estate. Some of these other options include purchasing foreclosed property, purchasing real estate deals with large (50%) down payments or buying notes from banks that are desperate to increase their cash positions. Notes:

*"RealtyNet Advisors, are not your average Tenant-In-Common sponsor. Unlike most TIC sponsors, Realty Net Advisors don't burden their properties with debt, brokerage fees, or other costly charges, and they do not sell at a higher than market rate (see the Benefits of a RealtyNet TIC). With the RealtyNet's simple, co-ownership structure, investors own an undivided, fractional interest in an entire property. They each share in their portion of the net income, tax shelters, and property appreciation." (quoted from RealtyNetAdvisors website)

** REISA is a national trade association for professionals who offer and distribute securitized real estate investments

Note: What is a Tenant in Common (also known as Undivided Fractional Interest) Investment?

The tenant in common (or undivided fractional interest) structure allows investors to purchase an interest in a significant real estate asset, perhaps larger than they could obtain individually. The investor acquires a percentage ownership (title and deed) and receives passive rental income while receiving the tax benefits of traditional real estate. The investors own and control the properties, not a third party. TIC ownership provides investors with the first ever means for ownership diversity, both in location and type, of their real estate portfolio.

Unlike partnership real estate, TIC ownership entitles each owner to the same ownership rights regardless of the equity invested. This element of the investment structure puts no individual owner (or group of owners) in direct control of the property over any other investor(s). You can truly have all of the ownership benefits and security of a large commercial asset with significantly fewer obstacles. As with any type of investment real estate, the value of a fractional interest typically increases annually due to escalations inherent in most tenant leases. From Real Estate Investment Securities Association website at, www.reisa.org.

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