TIC (Tenants In Common) Investments

[EconProf]

Yep, timing is everything.
The concept was touted by commissioned sales people and seminars, always a red flag.
Still, TICs could evolve into viable products if competition and the transparency of an efficient marketplace took hold. For example, shares should be able to be bought and sold. Right now our old-fashioned founding documents allow it only with a $25k fee.
REITs also evolved to become respectable investments, but it has taken decades. With today’s computer-enabled communications, TICs will come along faster. The 1031 exchange aspect of TICs are just too compelling for them to fade away.

[clearfund]

Querty – I’ll start this response by disclosing that I run a commercial real estate investment firm (investors, not brokers). We have never been involved in a single TIC on any level, but have advised our clients on the pros/cons of several TIC’s over the years(ps: coincidently our analysis was always not to make the investment due to their individual circumstances. We thought selling/paying the taxes was best since we knew tax rates were going to be rising and they’d have other losses to offset the gains..and getting debt off of their personal balance sheet/backs!).

Timing was the reason for most of the problems, not the TIC concept specifically. However, the TIC concept is limiting by its nature because you are personally on the hook for your share of the debt, and the odd restrictions on sales,etc. Have never been too interested in that investment model.

TIC’s are simply an outgrowth of old fashioned real estate partnerships. The TIC is a structure designed when people figured out the 1031 clients needed to actually BE ON TITLE for the 1031 exchange to be valid. If you do not take title to the new property then your exchange is invalid.

We won’t discuss the horrific front end fee structure of TIC’s which is due to the securitites lobby getting rulings that TICs are securities and NOT direct real estate offerings. This creates a huge middle man industry which is literally stealing fees from clients which should be going into the real estate. Fees north of 10% and no performance risk is absurd. One problem is that most TIC firms are really securitites firms playing real estate, not institutional real estate guys.

My suggestion is to speak with knowlegable people about your real estate goals/objectives (income, tax loss/gain/shelter, upside, etc) and then you can find reputable sponsors to work with to meet these objectives. Need to really look to the real estate developer/manager as the key to the process.
Be careful when speaking to real estate brokers/agents (commercial/residential) as their response will likely be “I’ll sell your property and buy you a great deal”. That may, or may not, be what’s in your best interest.

I have heard many of the stories countless times about these deals. What we like are properties as follows:

1) leased ONLY to Investment Grade Tenants (s&p BBB or better)
2) Fortune 500 Tenants(Fortune 100 preferred: no income risk)
3) new/long term leases (15 years+ so no vacancy risk)
4) NNN leases so we have no expense exposure/risk
5) rental guarantees from the corporation
6) invest for strong sheltered cash flow
7) upside profits is desired, however, not relied upon given timing of your needed exit not timing up with the peak of the market.

Best of Luck

[clearfund]

Querty – I’ll start this response by disclosing that I run a commercial real estate investment firm (investors, not brokers). We have never been involved in a single TIC on any level, but have advised our clients on the pros/cons of several TIC’s over the years(ps: coincidently our analysis was always not to make the investment due to their individual circumstances. We thought selling/paying the taxes was best since we knew tax rates were going to be rising and they’d have other losses to offset the gains..and getting debt off of their personal balance sheet/backs!).

Timing was the reason for most of the problems, not the TIC concept specifically. However, the TIC concept is limiting by its nature because you are personally on the hook for your share of the debt, and the odd restrictions on sales,etc. Have never been too interested in that investment model.

TIC’s are simply an outgrowth of old fashioned real estate partnerships. The TIC is a structure designed when people figured out the 1031 clients needed to actually BE ON TITLE for the 1031 exchange to be valid. If you do not take title to the new property then your exchange is invalid.

We won’t discuss the horrific front end fee structure of TIC’s which is due to the securitites lobby getting rulings that TICs are securities and NOT direct real estate offerings. This creates a huge middle man industry which is literally stealing fees from clients which should be going into the real estate. Fees north of 10% and no performance risk is absurd. One problem is that most TIC firms are really securitites firms playing real estate, not institutional real estate guys.

My suggestion is to speak with knowlegable people about your real estate goals/objectives (income, tax loss/gain/shelter, upside, etc) and then you can find reputable sponsors to work with to meet these objectives. Need to really look to the real estate developer/manager as the key to the process.
Be careful when speaking to real estate brokers/agents (commercial/residential) as their response will likely be “I’ll sell your property and buy you a great deal”. That may, or may not, be what’s in your best interest.

I have heard many of the stories countless times about these deals. What we like are properties as follows:

1) leased ONLY to Investment Grade Tenants (s&p BBB or better)
2) Fortune 500 Tenants(Fortune 100 preferred: no income risk)
3) new/long term leases (15 years+ so no vacancy risk)
4) NNN leases so we have no expense exposure/risk
5) rental guarantees from the corporation
6) invest for strong sheltered cash flow
7) upside profits is desired, however, not relied upon given timing of your needed exit not timing up with the peak of the market.

Best of Luck

[clearfund]

Querty – I’ll start this response by disclosing that I run a commercial real estate investment firm (investors, not brokers). We have never been involved in a single TIC on any level, but have advised our clients on the pros/cons of several TIC’s over the years(ps: coincidently our analysis was always not to make the investment due to their individual circumstances. We thought selling/paying the taxes was best since we knew tax rates were going to be rising and they’d have other losses to offset the gains..and getting debt off of their personal balance sheet/backs!).

Timing was the reason for most of the problems, not the TIC concept specifically. However, the TIC concept is limiting by its nature because you are personally on the hook for your share of the debt, and the odd restrictions on sales,etc. Have never been too interested in that investment model.

TIC’s are simply an outgrowth of old fashioned real estate partnerships. The TIC is a structure designed when people figured out the 1031 clients needed to actually BE ON TITLE for the 1031 exchange to be valid. If you do not take title to the new property then your exchange is invalid.

We won’t discuss the horrific front end fee structure of TIC’s which is due to the securitites lobby getting rulings that TICs are securities and NOT direct real estate offerings. This creates a huge middle man industry which is literally stealing fees from clients which should be going into the real estate. Fees north of 10% and no performance risk is absurd. One problem is that most TIC firms are really securitites firms playing real estate, not institutional real estate guys.

My suggestion is to speak with knowlegable people about your real estate goals/objectives (income, tax loss/gain/shelter, upside, etc) and then you can find reputable sponsors to work with to meet these objectives. Need to really look to the real estate developer/manager as the key to the process.
Be careful when speaking to real estate brokers/agents (commercial/residential) as their response will likely be “I’ll sell your property and buy you a great deal”. That may, or may not, be what’s in your best interest.

I have heard many of the stories countless times about these deals. What we like are properties as follows:

1) leased ONLY to Investment Grade Tenants (s&p BBB or better)
2) Fortune 500 Tenants(Fortune 100 preferred: no income risk)
3) new/long term leases (15 years+ so no vacancy risk)
4) NNN leases so we have no expense exposure/risk
5) rental guarantees from the corporation
6) invest for strong sheltered cash flow
7) upside profits is desired, however, not relied upon given timing of your needed exit not timing up with the peak of the market.

Best of Luck

[clearfund]

Querty – I’ll start this response by disclosing that I run a commercial real estate investment firm (investors, not brokers). We have never been involved in a single TIC on any level, but have advised our clients on the pros/cons of several TIC’s over the years(ps: coincidently our analysis was always not to make the investment due to their individual circumstances. We thought selling/paying the taxes was best since we knew tax rates were going to be rising and they’d have other losses to offset the gains..and getting debt off of their personal balance sheet/backs!).

Timing was the reason for most of the problems, not the TIC concept specifically. However, the TIC concept is limiting by its nature because you are personally on the hook for your share of the debt, and the odd restrictions on sales,etc. Have never been too interested in that investment model.

TIC’s are simply an outgrowth of old fashioned real estate partnerships. The TIC is a structure designed when people figured out the 1031 clients needed to actually BE ON TITLE for the 1031 exchange to be valid. If you do not take title to the new property then your exchange is invalid.

We won’t discuss the horrific front end fee structure of TIC’s which is due to the securitites lobby getting rulings that TICs are securities and NOT direct real estate offerings. This creates a huge middle man industry which is literally stealing fees from clients which should be going into the real estate. Fees north of 10% and no performance risk is absurd. One problem is that most TIC firms are really securitites firms playing real estate, not institutional real estate guys.

My suggestion is to speak with knowlegable people about your real estate goals/objectives (income, tax loss/gain/shelter, upside, etc) and then you can find reputable sponsors to work with to meet these objectives. Need to really look to the real estate developer/manager as the key to the process.
Be careful when speaking to real estate brokers/agents (commercial/residential) as their response will likely be “I’ll sell your property and buy you a great deal”. That may, or may not, be what’s in your best interest.

I have heard many of the stories countless times about these deals. What we like are properties as follows:

1) leased ONLY to Investment Grade Tenants (s&p BBB or better)
2) Fortune 500 Tenants(Fortune 100 preferred: no income risk)
3) new/long term leases (15 years+ so no vacancy risk)
4) NNN leases so we have no expense exposure/risk
5) rental guarantees from the corporation
6) invest for strong sheltered cash flow
7) upside profits is desired, however, not relied upon given timing of your needed exit not timing up with the peak of the market.

Best of Luck

[clearfund]

Querty – I’ll start this response by disclosing that I run a commercial real estate investment firm (investors, not brokers). We have never been involved in a single TIC on any level, but have advised our clients on the pros/cons of several TIC’s over the years(ps: coincidently our analysis was always not to make the investment due to their individual circumstances. We thought selling/paying the taxes was best since we knew tax rates were going to be rising and they’d have other losses to offset the gains..and getting debt off of their personal balance sheet/backs!).

Timing was the reason for most of the problems, not the TIC concept specifically. However, the TIC concept is limiting by its nature because you are personally on the hook for your share of the debt, and the odd restrictions on sales,etc. Have never been too interested in that investment model.

TIC’s are simply an outgrowth of old fashioned real estate partnerships. The TIC is a structure designed when people figured out the 1031 clients needed to actually BE ON TITLE for the 1031 exchange to be valid. If you do not take title to the new property then your exchange is invalid.

We won’t discuss the horrific front end fee structure of TIC’s which is due to the securitites lobby getting rulings that TICs are securities and NOT direct real estate offerings. This creates a huge middle man industry which is literally stealing fees from clients which should be going into the real estate. Fees north of 10% and no performance risk is absurd. One problem is that most TIC firms are really securitites firms playing real estate, not institutional real estate guys.

My suggestion is to speak with knowlegable people about your real estate goals/objectives (income, tax loss/gain/shelter, upside, etc) and then you can find reputable sponsors to work with to meet these objectives. Need to really look to the real estate developer/manager as the key to the process.
Be careful when speaking to real estate brokers/agents (commercial/residential) as their response will likely be “I’ll sell your property and buy you a great deal”. That may, or may not, be what’s in your best interest.

I have heard many of the stories countless times about these deals. What we like are properties as follows:

1) leased ONLY to Investment Grade Tenants (s&p BBB or better)
2) Fortune 500 Tenants(Fortune 100 preferred: no income risk)
3) new/long term leases (15 years+ so no vacancy risk)
4) NNN leases so we have no expense exposure/risk
5) rental guarantees from the corporation
6) invest for strong sheltered cash flow
7) upside profits is desired, however, not relied upon given timing of your needed exit not timing up with the peak of the market.

Best of Luck

[34f3f3f]

EconProf, sorry to hear about your woes, but thanks for taking the time to be upfront about them. I’m sure there’s a lesson for us all in there. I had assumed that since they were popular for CGT deferment, leverage wouldn’t be their undoing, so much as poor management, poor investment choices, and a disconnect between securities brokers and real estate.

Clearfund, timing seems to be a feature for all real estate losses (or gains), as is over-leverage. Your point about securities firms playing real estate is one I raised, and was wondering if there were any brokerage firms with strong real estate ties. Looking to the real estate manager/developer makes sense, and I would be interested to know where to start my search. Since commercial real estate has seen significant declines, with possibly a bit more downside to continue into 2011, I’d have thought investment in a TIC with triple net Class A properties, would be a safer route?

[34f3f3f]

EconProf, sorry to hear about your woes, but thanks for taking the time to be upfront about them. I’m sure there’s a lesson for us all in there. I had assumed that since they were popular for CGT deferment, leverage wouldn’t be their undoing, so much as poor management, poor investment choices, and a disconnect between securities brokers and real estate.

Clearfund, timing seems to be a feature for all real estate losses (or gains), as is over-leverage. Your point about securities firms playing real estate is one I raised, and was wondering if there were any brokerage firms with strong real estate ties. Looking to the real estate manager/developer makes sense, and I would be interested to know where to start my search. Since commercial real estate has seen significant declines, with possibly a bit more downside to continue into 2011, I’d have thought investment in a TIC with triple net Class A properties, would be a safer route?

[34f3f3f]

EconProf, sorry to hear about your woes, but thanks for taking the time to be upfront about them. I’m sure there’s a lesson for us all in there. I had assumed that since they were popular for CGT deferment, leverage wouldn’t be their undoing, so much as poor management, poor investment choices, and a disconnect between securities brokers and real estate.

Clearfund, timing seems to be a feature for all real estate losses (or gains), as is over-leverage. Your point about securities firms playing real estate is one I raised, and was wondering if there were any brokerage firms with strong real estate ties. Looking to the real estate manager/developer makes sense, and I would be interested to know where to start my search. Since commercial real estate has seen significant declines, with possibly a bit more downside to continue into 2011, I’d have thought investment in a TIC with triple net Class A properties, would be a safer route?

[34f3f3f]

EconProf, sorry to hear about your woes, but thanks for taking the time to be upfront about them. I’m sure there’s a lesson for us all in there. I had assumed that since they were popular for CGT deferment, leverage wouldn’t be their undoing, so much as poor management, poor investment choices, and a disconnect between securities brokers and real estate.

Clearfund, timing seems to be a feature for all real estate losses (or gains), as is over-leverage. Your point about securities firms playing real estate is one I raised, and was wondering if there were any brokerage firms with strong real estate ties. Looking to the real estate manager/developer makes sense, and I would be interested to know where to start my search. Since commercial real estate has seen significant declines, with possibly a bit more downside to continue into 2011, I’d have thought investment in a TIC with triple net Class A properties, would be a safer route?

[34f3f3f]

EconProf, sorry to hear about your woes, but thanks for taking the time to be upfront about them. I’m sure there’s a lesson for us all in there. I had assumed that since they were popular for CGT deferment, leverage wouldn’t be their undoing, so much as poor management, poor investment choices, and a disconnect between securities brokers and real estate.

Clearfund, timing seems to be a feature for all real estate losses (or gains), as is over-leverage. Your point about securities firms playing real estate is one I raised, and was wondering if there were any brokerage firms with strong real estate ties. Looking to the real estate manager/developer makes sense, and I would be interested to know where to start my search. Since commercial real estate has seen significant declines, with possibly a bit more downside to continue into 2011, I’d have thought investment in a TIC with triple net Class A properties, would be a safer route?

[clearfund]

Querty – Let’s not get focused on TIC’s specifically as they are just one specific vehicle that fits a specific situation: 1031 exchange into a passive real estate vehicle.

If this is not your specific situation, there are many other options open to you to achieve the same goals of passive, institutional-quality real estate investment.

There are traded REITS, non-traded REITS, diversified funds, llc/limited partnerships for single properties, and sole ownership.

No one of the items above are horrible, or perfect, by definition. However, your specific circumstances will dictate which one, or two, fit your needs best.

Once you determine this, then its a matter of sourcing/filtering the managers who run these operations, and then understanding the individual properties within the pool/s.

Only then, should one pull the trigger.

We come from the institutional pension fund advisory world so our predjudice is towards high quality cash flow AND protection of principal first, captial gains while important, are secondary.

The theory being that even if you ‘lose’ money in ‘real’ terms (meaning inflation exceeds cash flow yield) in the out years, you still have your principal in place to keep taking shots when opportunity presents itself.

As for nnn Class “A” properties I would say you are on the right track with the nnn part but be cautious about the allure of the class “a” generality. Remember that nnn is not magic. The tenant factors it into their total cost of occupancy and risk profile. They won’t just pay nnn charges because we ask them to.

The concern with fancy “A” buildings is that they are expensive to operate, and buy. Thus the lease rates are HIGH. When rates are high, vacancy rises in down times and you NEVER get that rent back…EVER.

Each time a tenant leaves, your dividend check drops $1:$1. Then they must drop their lease rate to fill it up so your dividend never returns to where it was and you never get that lost dividend income back.

Plenty of Class ‘A’ bldgs have been crushed. Take the John Hancock Tower in Boston. It was just sold at the foreclosure auction at 50% of what the last buyer paid for it…1/2 off the Hancock Tower!!!

Vacancy is the #1 enemy of real estate, thus find property where your vacancy risk is as close to zero as possible and you’ll be light years ahead.

[clearfund]

Querty – Let’s not get focused on TIC’s specifically as they are just one specific vehicle that fits a specific situation: 1031 exchange into a passive real estate vehicle.

If this is not your specific situation, there are many other options open to you to achieve the same goals of passive, institutional-quality real estate investment.

There are traded REITS, non-traded REITS, diversified funds, llc/limited partnerships for single properties, and sole ownership.

No one of the items above are horrible, or perfect, by definition. However, your specific circumstances will dictate which one, or two, fit your needs best.

Once you determine this, then its a matter of sourcing/filtering the managers who run these operations, and then understanding the individual properties within the pool/s.

Only then, should one pull the trigger.

We come from the institutional pension fund advisory world so our predjudice is towards high quality cash flow AND protection of principal first, captial gains while important, are secondary.

The theory being that even if you ‘lose’ money in ‘real’ terms (meaning inflation exceeds cash flow yield) in the out years, you still have your principal in place to keep taking shots when opportunity presents itself.

As for nnn Class “A” properties I would say you are on the right track with the nnn part but be cautious about the allure of the class “a” generality. Remember that nnn is not magic. The tenant factors it into their total cost of occupancy and risk profile. They won’t just pay nnn charges because we ask them to.

The concern with fancy “A” buildings is that they are expensive to operate, and buy. Thus the lease rates are HIGH. When rates are high, vacancy rises in down times and you NEVER get that rent back…EVER.

Each time a tenant leaves, your dividend check drops $1:$1. Then they must drop their lease rate to fill it up so your dividend never returns to where it was and you never get that lost dividend income back.

Plenty of Class ‘A’ bldgs have been crushed. Take the John Hancock Tower in Boston. It was just sold at the foreclosure auction at 50% of what the last buyer paid for it…1/2 off the Hancock Tower!!!

Vacancy is the #1 enemy of real estate, thus find property where your vacancy risk is as close to zero as possible and you’ll be light years ahead.

[clearfund]

Querty – Let’s not get focused on TIC’s specifically as they are just one specific vehicle that fits a specific situation: 1031 exchange into a passive real estate vehicle.

If this is not your specific situation, there are many other options open to you to achieve the same goals of passive, institutional-quality real estate investment.

There are traded REITS, non-traded REITS, diversified funds, llc/limited partnerships for single properties, and sole ownership.

No one of the items above are horrible, or perfect, by definition. However, your specific circumstances will dictate which one, or two, fit your needs best.

Once you determine this, then its a matter of sourcing/filtering the managers who run these operations, and then understanding the individual properties within the pool/s.

Only then, should one pull the trigger.

We come from the institutional pension fund advisory world so our predjudice is towards high quality cash flow AND protection of principal first, captial gains while important, are secondary.

The theory being that even if you ‘lose’ money in ‘real’ terms (meaning inflation exceeds cash flow yield) in the out years, you still have your principal in place to keep taking shots when opportunity presents itself.

As for nnn Class “A” properties I would say you are on the right track with the nnn part but be cautious about the allure of the class “a” generality. Remember that nnn is not magic. The tenant factors it into their total cost of occupancy and risk profile. They won’t just pay nnn charges because we ask them to.

The concern with fancy “A” buildings is that they are expensive to operate, and buy. Thus the lease rates are HIGH. When rates are high, vacancy rises in down times and you NEVER get that rent back…EVER.

Each time a tenant leaves, your dividend check drops $1:$1. Then they must drop their lease rate to fill it up so your dividend never returns to where it was and you never get that lost dividend income back.

Plenty of Class ‘A’ bldgs have been crushed. Take the John Hancock Tower in Boston. It was just sold at the foreclosure auction at 50% of what the last buyer paid for it…1/2 off the Hancock Tower!!!

Vacancy is the #1 enemy of real estate, thus find property where your vacancy risk is as close to zero as possible and you’ll be light years ahead.

[clearfund]

Querty – Let’s not get focused on TIC’s specifically as they are just one specific vehicle that fits a specific situation: 1031 exchange into a passive real estate vehicle.

If this is not your specific situation, there are many other options open to you to achieve the same goals of passive, institutional-quality real estate investment.

There are traded REITS, non-traded REITS, diversified funds, llc/limited partnerships for single properties, and sole ownership.

No one of the items above are horrible, or perfect, by definition. However, your specific circumstances will dictate which one, or two, fit your needs best.

Once you determine this, then its a matter of sourcing/filtering the managers who run these operations, and then understanding the individual properties within the pool/s.

Only then, should one pull the trigger.

We come from the institutional pension fund advisory world so our predjudice is towards high quality cash flow AND protection of principal first, captial gains while important, are secondary.

The theory being that even if you ‘lose’ money in ‘real’ terms (meaning inflation exceeds cash flow yield) in the out years, you still have your principal in place to keep taking shots when opportunity presents itself.

As for nnn Class “A” properties I would say you are on the right track with the nnn part but be cautious about the allure of the class “a” generality. Remember that nnn is not magic. The tenant factors it into their total cost of occupancy and risk profile. They won’t just pay nnn charges because we ask them to.

The concern with fancy “A” buildings is that they are expensive to operate, and buy. Thus the lease rates are HIGH. When rates are high, vacancy rises in down times and you NEVER get that rent back…EVER.

Each time a tenant leaves, your dividend check drops $1:$1. Then they must drop their lease rate to fill it up so your dividend never returns to where it was and you never get that lost dividend income back.

Plenty of Class ‘A’ bldgs have been crushed. Take the John Hancock Tower in Boston. It was just sold at the foreclosure auction at 50% of what the last buyer paid for it…1/2 off the Hancock Tower!!!

Vacancy is the #1 enemy of real estate, thus find property where your vacancy risk is as close to zero as possible and you’ll be light years ahead.

[Author]

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