TIC-tenant in common

There have been many articles recently on TICs.  First, what is a tenant in common (TIC)?  A TIC is a tax structure that allows investors to pool their funds with other investors to purchase real estate.  For example if I had 20k that I got from selling a commercial property.  I could take these funds to a TIC and purchase a share of a commercial property.  For example 35 or 40 investors might purchase a shopping center in Phoenix.  By rolling your money into another like property (1031 exchange), the investor can avoid paying capital gains taxes.  This all sounds nice and like a great idea except there are major risks that are not fully apparent.

According to a WSJ article (http://www.wsj.com ) DBSI (http://blog.dbsi.com/ ) recently filed for bankruptcy protection.  DBSI was one of the largest TIC providers in the country.  My theory for what brought DBSI down is as follows.  The theory is true for most TICs that I have evaluated.  Most small individual real estate investors are fairly unsophisticated.  They have little experience in valuing large commercial properties (cap rates, average vacancy rates, leas-up rates, etc…) and therefore they relied on the expertise of the TICs for valuation and management of their investment.  About six months ago we were approached to finance a TIC investment on a shopping center in Georgia.  The fundamental assumptions were flawed.  The TIC provider sold partial interests to investors all over the country.  The property was valued on a 6% cap for a class A/B retail in a nice area of Atlanta.  The trouble occurs because the property was purchased on a 6 cap, as opposed to a 7.5 or 8% cap.  This cap rate continues rising which means the value of the property is less than what the investors originally paid for it.

As the economy shrinks, tenants begin to renegotiate their leases (or move out like circuit city did of many locations).  This further deteriorates the value of the property.  At the same time the small TIC investors get restless, the property is managed by a consensus vote of all 35-40 investors in that particular transaction.  Imagine trying to get 35+ people who all have different motives, risk tolerance, etc… on the same page to make a unanimous decision.  This decision making further deteriorates the value of the property since decisions are very slow and can seem erratic.

It will be interesting to see how other TICs fare in this economy.  If I were investing my money in real-estate, I would think twice about utilizing a TIC. 

 

For more information on commercial lending valuation,

please see: https://www.fairviewlending.com/underwriting.htm#4  as well as my recent blog on cap rates:

https://www.fairviewlending.com/blog/?p=23

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