Losson believes these structures could also work for larger institutional investors and property owners who are searching for “a reliable chain of disposing properties at fair market value,” he says. “You can build a nice exit [strategy] business model with TICs.”
Investors are certainly interested in the concept. Losson’s firm expects to place $1 billion in real estate this year with its 500 to 600 investors. And sponsors are gearing up for better days ahead. SCI’s acquisition team has grown to 12 people from three during the last few years. U.S. Advisors, a Napa, Calif.-based company that is the industry’s largest multi-family sponsor with 13,000 apartment units in 1031 structures, last year assembled a five-person sales team. This year, it expects to raise between $350 million and $400 million in equity for investment in tenant-in-common deals, $250 million to $300 million of which would be for multifamily, according to Kevin Fitzgerald, U.S. Advisors’ president.
Multifamily Issues
Some big players, though, wonder how much of this money will end up in multifamily properties. Currently, apartments account for about one-fifth of all TIC deals, a figure that isn’t expected to go much higher.
“I don’t see TICs becoming a real big factor [in multifamily], because the yields on apartments, on a cash-on-cash basis, aren’t as good as other properties,” says David Schwartz, managing member with Chicago-based Waterton Associates, which owns and manages 15,000 apartment units. “We entered into discussions with one TIC fund, but they walked away because they couldn’t make the yields work.”
David Cardwell, vice president of capital markets and technology for the National Multi Housing Council, said lenders he’s spoken with are ambivalent about financing TICs. They question the leverage, which tends to be 50 to 60 percent of the acquisition price, and no one knows yet how complicated a tenant-in-common deal would be to unravel if an investor declared bankruptcy or a property went into foreclosure.
There is a fear in some quarters that TIC syndicates, which can include up to 35 investors, could start looking too much like limited partnerships, whose excesses in the 1980s gave real estate investment a black eye. Skeptics raise red flags about the sheer number of players pouring into this field. In 2002, there were eight securitized tenant-in-common sponsors; by the end of this year, there could be 65. They also wonder about tenant-in-common investors’ knowledge about real estate, managing a property, or how shifts in market conditions can render profit projections irrelevant.
“TICs will last as long as interest rates stay low, and as long as investors understand what they are buying,” predicts Mike Kelly, vice president of acquisitions at United Dominion Realty Trust, which owns and manages more than 80,000 apartments around the country.
Several sources note that TICs have very little liquidity. “It’s like owning a bond,” observed Ned Midgley, vice president with CB Richard Ellis’ investment property group. There isn’t much of a secondary market, either, so investors have few options if they want to exit a TIC before the building is resold.
The Four Ts
While there is some regulatory wrangling over TICs (see “TIC-ing Upward” below), it hasn’t tempered the optimism expressed by sponsors and some analysts about TICs’ growth potential. Even Kelly acknowledges that the tenant-in-common sponsors he knows are having no trouble finding investors, many of whom are people near retirement who want steady cash flow, respectable returns, and a property in which their management involvement is strictly passive. “There is a good percentage of real estate owned by non-institutional investors who want to get away from the three ‘Ts’—toilets, trash, and tenants—and go into the fourth ‘T’: travel,” says Mike Franklin, executive vice president with FORT Properties, a tenant-in-common sponsor based in Los Angeles.
And apartments remain a relatively appealing option. Total return for TIC properties still outpaces most other investment alternatives, according to Hessam Nadji, Marcus & Millichap’s managing director of research services, who points out that rental properties look even more appealing given skyrocketing home prices and the influx of immigrants, many of whom will be renters initially.