I haven’t done a TIC deal, and probably won’t unless I decide to use the structure as an exit strategy for our own portfolio. For that reason, I’ve researched the business model and regulatory issues extensively. I wrote a post last year with my opinions. The direct URL is http://www.creonline.com/commercial-real-estate/wwwboard5/messages/15732.html
My thoughts haven’t changed. If you’re a buyer of a TIC interest, the returns are in the range of 7%-8% pre-tax, the interests are highly illiquid (meaning no secondary market yet exists to exit a deal if you don’t like it). The structure requires the deals to be formed at premium valuations, hence the relatively low level of returns.
As a promoter the structure can deliver lucrative returns, even after the expenses of regulatory compliance. That’s why in the time since my post the TIC market has exploded to an estimated $4B in deals in the past year. For investors that means it is not just important, but critical, to do complete due diligence on the promoter and the real estate at the property and market level.
I’m not for or against the model. I try to educate myself to every available option for deal structure. The TIC structure has several good points. Specifically, I think many RE investors come to a point when direct ownership is no longer attractive and, assuming the deal checks out both on a real estate basis and the promoter bona fides are impeccable, it can be a valid passive ownership strategy.
There are a number of posts in the archives on the subject. Use the search button at the top of the newsgroup and search for “TIC”.
ray
p.s. there are alternative methods to cash out, avoid a 1031, and still defer taxes. However, like TICs, every method comes under intense scrutiny before becoming mainstream. Here’s a couple more working their way through the system now; see this WSJ article from last week: WSJ Real Estate
Has anyone here done a tenants in common deal where you share ownership in a commercial investment property. Is there any disadvantages to this type of investment?
I don’t have much history … but I recently invested in TIC. I was pressed by the timing of the 1031 exchange and found it to be a reasonable solution … imho …
Pros include no managment by the TIC owner, financing is a bit better than what an individual can probably get, ability to diversify property type and geography rather than putting a large chunk of money into single property.
Cons … TICs pay more for the building than an individual would pay … this is because the “sponsor” is taking their cut … some may argue the point, but I view the sponsor as a flipper … who then agrees to hold a small % of the property and manage it or contract out the management. There is little incentive on the part of the management company to increase the value of the property … so no “forced” appreciation. There is no defined exit strategy up front … although most say they only hold property from 4-10 years. Many are set up with 10 year balloons which will “force” a sell or re-finance decision at that time. Coupled with this there is an inability to re-finance to pull out some cash as an individual … and no secondary market (as of yet) for selling yourTIC ownership.
Keys to selecting the right deal … again imho
What is the track record of the sponsor & as important, the company managing the property?
2 Do the same due diligence … as if you were buying the property on your own
location and marketability
tenant stability and lease terms
Phase 1 & Phase 2 inspection reports
Income/expense statements … (I looked at a few deals that looked great, but ultimately lacked enough for reserves and other expense issues)
What is the debt structure? Many deals are utilizing 5-7 IO loans so their COC returns can have a 7 in the first digit
3.THere are 2 camps,securitized and other … ecuritized deals have had the PPM has been put together in accordance with SEC requirements (but not approved) while the others are “real estate” people putting together an offering. I tend to like the “securitized” deals because all the downside info is there in plain english.
What is the potential exit strategy? Get examples of how the sponsor has exited previously.
Be careful of deals that are taking a long time to get done … there is a reason for that … due to my timing, a couple brokers tried to push into deals that they had been trying to fill for 2 months … I eventually selected one that filled up and closed in