Commercial Real Estate and TICs

[rockclimber]

My understanding is that the commercial real estate and SFR markets are only loosely connected, primarily by the cost of land. Usually, when someone buys commercial real estate, the investment numbers are thoroughly crunched making it a less speculative market. Is this true? What other factors are involved? Is the commercial real estate market in a bubble as well in SD? What about nationwide?

I have been made aware of a commercial real estate investment vehicle called TIC (Tenants in Common). I am having trouble finding any unbiased assessment of TICs. Does anyone know about these and care to enlighten me as to the pros and cons of this type of investment? Any pointers to good sources of data appreciated.

Here’s a recent add from a TIC brokerage:

Dear Investor,

We thought you would find the following new TIC opportunities of interest:

GSA Office Building
Min Investment: $200,000
Cash-on-Cash Projections: 1st Year – 7%, 5th Year – 7.08%
Location: Detroit, MI
Comment: Good cash flow with the security of a US Government Dept as the tenant

Office Depot-Anchored Retail Center
Min Investment: $350,000
Cash-on-Cash Projections: 1st Year – 8%, 5th Year – 10%
Location: Tampa, FL
Comment: Excellent location in fast growing area with strong upside potential

[Bugs]

“Tenants in common” is just another form of taking ownership, kinda like an LLC or a corporation or “sole and separate ownership”. With any form of joint ownership each of the members commit to paying their share of the downpayment and the mortgage in exchange for a return on their investment, either in the form of positive cash flow or in the form of the profits upon resale. If someone is not carrying their load the other members have to make up the difference. The structure of the partnership is a critical component that can lead to either success or failure.

You’d also have to do a little research and decide on the health of the tenants upon whose strength the properties are being marketed. Blockbuster Video was considered to be a real good commercial tenant to lease to until they went into bankruptcy. I can name a dozen other companies that on the face of it would appear to be ‘safe’ investments but which are vulnerable to the vagaries of the economy. The E-coli scare almost did in Jack in the Box, and Burger King has been closing down their less profitable locations. More than one investor has been burned by incorrectly assuming a lease would be extended just because it had already been in place for 20 years.

Even the governments can be a gamble, depending on which agencies they are and which political party is in power. Some minor social services agency might not be a good bet when the Conservatives are in power, and a defense think tank may not be a good bet when the Liberals are in power. Same goes for state agencies, only more so. Funding can get cut in a flash.

Right now, many of the commercial properties are almost as overvalued as are the residential properties. Commercial investors tend to not get too emotionally attached so the various changes in value can occur even more quickly. If you’re at all nervous about residential properties, commercial properties would not be a reasonable alternative.

[RightSide]

Actually the TIC you are talking about is really an entirely new investment vehicle (and industry) that was created a few years ago when the IRS ruled that this structure was eligible to be used as a 1031 exchange.

If you have an appreciated california investment property, I think they are especially attractive choice…you get passive income, ability to diversify across many commerical classes and geographic locations and all the beneifts of RE ownership (such as being able to offsset depreciation against income and deference of capital gains).

Here is a good source for info on them…
http://www.ticassoc.org/

The TIC market has gone from zero in 2000 to multi-billions in just 5 short years…amazing.

[rockclimber]

Thanks for the info, RightSide,

Your reply in more in line with my understanding. So, what are your thoughts on the health of commercial real estate?

[Anonymous]

I looked at some of these vehicles about 12 months ago and felt like I needed a shower after reading the documents and talking to the salespeople. Look for sponsors buying “b-quality” buildings at 8% yields and then on-selling them at 6% yields to 1031 investors (and pocketing the difference). Look for up-front fee loads of up to 15% on some of these. Oh yeah – and also look for temporary “buy-downs” of the interest rate on the property acquisition loan – those cash-on-cash yields in years 1 and 2 may not be as real as they look.

Think very carefully about how you get out of it if you need to. Lastly, saving taxes is all very well, but only if you 1031 into something you would actually want to own.

Of course, everything may have changed in the last 12 months!

[Anonymous]

New products always come out at the end of cycles to attempt to extend the cycles. If you look historically at these types of things you sill see them as a sign to beware. Just be sure in your own home with your wife or friend, or whatevery is applicable that title is held properly. You can have TIC or Joint w/ROS basically. Forget about all this other creative nonsense designed to sucker you in at the last second.

[RightSide]

I think the TICs are a great evolvement of our capital markets in that they allow smaller individuals to participate in deals that were traditonally the exclusive ground of institutions or ultra high net investors.

Personally, I think the commercial segment in many areas has become overvalued, but if I had a choice between owning a single investment property worth $2 Million in San Diego or a ten seperate $200K peices of TIC’s spread out across many geographic markets and real estate sectors, industrial, office, multi-family, etc., then I would definately take the latter. I think investing in commercial real estate may prove to be a relative poor performer compared to other choices, but I do think if you stick to A class properties, it will deliver a return above infation over most 10 year periods, especially when you take into consideration the tax benefits.

Like EVERY market, there are shady dealers and bad deals, and there are also good dealers and great deals. The TIC market is no different.

[Author]

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