As baby boomers get older and closer to retirement, and the stock market continues to underperform, many investors have been driven to real estate investing. This demand has created a 'boomlet' that has significantly increased the pricing, and thereby the purchase cost, of real estate in many parts of the United States.

At the same time many investors are tired of being "hands-on" with their investments. This has created a significant desire to give someone else their money, letting others manage their real estate investments while waiting for the monthly check.

The combination of age and lack of desire to manage has created significant demand for single tenant investment properties like, post offices, medical buildings, restaurants, banks, etc. where you are the sole owner. This also holds true for Tenant in Common (TIC) investments in which you share ownership with others. This demand is particularly driven by investors selling an existing property and wanting to use the 1031 tax deferred exchange mechanism to trade into another property.

Such pressure in the market has energized sponsors who assemble properties and investors. Typically they select properties and then assemble a group of investors that must hit a drop dead date to close their sales.

These sponsors are similar to the entrepreneurs who assembled syndications in the 1980s to share tax benefits and depreciation. Nowadays the model is more robust and banks are much more demanding before they lend money.

Due Diligence

As investors place their money with TICs, they need to consider asking some hard questions. We have assembled some below for you to consider:

Are the sponsors reliable?

• Does the sponsor (and/or its principals) have a track record in TIC's (how many TIC's have they done) or at least a track record in commercial real estate?
  
• Does the sponsor have an organization, staff and infrastructure to properly close the transaction (if not already owned by the sponsor) and manage the TIC?
  
• How long projects are typically held?
  
• Does the sponsor already own the property, or will it close on the property with the TIC investors' funds?
  
• What is the closing date (if not already owned by the sponsor) and what is the sponsor's ability to close if the offering is not fully subscribed (remember, if you are a 1031 Exchanger, you must identify within 45 days and closed within 180 days)? What kind of deal structure is being implemented?
  
• Is this a real estate investment or a security?
  
• Who manages the properties?
  
• Is there a master lease (sponsor, or an entity formed by the sponsor, that leases the property from the TIC's and then subleases to the tenants) or is there a management agreement?

Deal Structure

• Is this a real estate investment or a security?
  
• How does the sponsor make money? Do they charge an asset management fee?
  
• Are there upfront charges?
  
• What are the closing costs (almost all TIC investment properties have closing costs, and some are more than others)?
  
• Do the TIC owners get the appreciation on the sale of the property?
  
• Do they share the upside with the Sponsor?
  
• What is the total "equity raise"?
  
• How much of the offering has already been bought by investors, how much is left and how long has the offering been on the market?
  
• How much money are you trying to raise over what time frame?
  
• What is the "load" (percentage and dollar amount) the sponsor is placing on the property? (In other words, how much is the sponsor marking up the property for resale to the investors), and what is the sponsor's purchase price and the total sale price to the investors?
  
• Does the sponsor have an appraisal for the property, and is it higher or lower than the sponsor's purchase price and the total sale price to the investors?
  
• What is the TIC investment property purchase minimum? (Some are below $200,000 and range up to over $1 million.)

Risk to investors

• Are the loans non-recourse to the investor? Who has first right to buy the shares? Investors? TIC Sponsor?
  
• What is the long term exit strategy to the TIC sponsor? If a key employee of the sponsor gets ill or retires what happens to the investments? Who takes over?
  
• Are there any major tenant lease expirations or exits during the projected holding period and, if so, what reserves are being set up for down time and new tenant improvements?
  
• If I need to sell my share of the TIC investment, how is that done?

What kind of return is being forecasted?

• (Cash on Cash) Cap rate? What is the purchase cap rate and what is the cap rate for sale of TIC's to the investors ("loaded cap rate")?
  
• What is the projected exit cap rate (when the property is resold) and is it larger or smaller than the purchase cap rate and the loaded cap rate and, if smaller, does the sponsor believe the property can be sold at a cap rate lower than the other "going in" cap rates and, if so, why?

Why did the sponsor choose the property out of the hundreds most sponsors look at before making a decision to buy?

• What is the "play" (In other words, is the property a one credit tenant occupied triple net property with a long term lease thereby providing a stable return to investors, is it in an improving area where the sponsor thinks values are increasing, is there some vacancy the sponsor thinks he can fill and thereby increase returns, etc. What was the strategy)?
  
• What are the demographics of the area in which the property is located (population growth in the area where the property is located, declining or improving area where the property is located, competition, surrounding rent rates, etc.) and is the market area a primary, secondary, tertiary, etc?
  
• When was the property built and, if applicable, when was it renovated, and is there any deferred maintenance (roof condition, paint, HVAC, parking lot, etc.)?
  
• What is the amount of mortgage being placed on the property by the sponsor (loan to value ratio or LTV)?
  
• Is the mortgage interest only, what is the interest rate (and is it variable), is it amortizing, when does it mature, etc. (and is there a refinancing anticipated during the holding period before resale)?
  
• Is the property located in a high or low income tax state?
  
• Is the property residential (greater depreciation deductions) such as apartments or non-residential like office, retail and warehouse/industrial or land?
  
• Do the pro-forma projections for operation make sense (look out for overly rosy occupancy and rent increase projections, declining costs projections, etc., but these things can differ depending upon the "play", etc.)?
  
• How do rents compare with similar properties in the area (market rent) and how does vacancy compare with similar properties in the area (market vacancy)?

What is the Exit Strategy?

• Typically between five and seven years, but can go out ten years or maybe longer.
  
• Understand the dissolution clause of the TIC.
  
• For all of these investments there are requirements for unanimous consent of the TIC members. How this is achieved is different in each TIC. You typically need some sort of unanimous consent to allow for the dissolution and sale of the TIC's assets . You must understand this clause and be comfortable with it before entering into a TIC investment.

As you can see from this list of questions, as an investor, you want to avoid cash calls, as these are complicated investment vehicles. A strong reserve fund is important. In addition I prefer investments that are of a retail nature.

In my mind the most important things to consider are as follows:

• The strength of the sponsor
  
• The track record of the sponsor
  
• Your return on investment
  
• The risk of the deal
  
• Your exit strategy

Summary

For all of these investments there are requirements for unanimous consent of the TIC members. How this is achieved is different in each TIC. You typically need some sort of unanimous consent to allow for the dissolution and sale of the TIC's assets. You must understand this clause and be comfortable with it before entering into a TIC investment.

These investments can be great. Many people have had favorable results pooling their funds with other investors, but some of the organizations are so deal driven that making deals drives transactions rather than the best return on investments.

Multiple tenant office TICs make me more nervous. Some TICs are designed with a lease-back component in which the sponsor takes the risk of the tenants paying their rent and guarantees specific return to the investor. This might be a successful formula to get around the risk of buying an office building.

Just like any investment you make, it pays to take the extra time to check out the investments and the sponsors before you decide to invest. Sponsors that use the securities vehicles to sell their investments deliver a massive amount of information. I would encourage you to read it.

It is definitely worth the look and to compare them to other investments -- especially if you don't want to manage your property (or the property manager) any longer. But please read the fine print!