TENANT-IN-COMMON BUYERS
Tourists Run Up Big Tabs Who’s Buying: As real estate prices have risen, many small sellers faced catch-22 scenarios as they evaluated their options. Sure, they could sell their properties for tremendous profits. But then what? They could hold the money, but that would result in severe tax consequences. Or, they could reinvest the funds in real estate, but the hot market has made it difficult for small buyers to compete.
The answer: tenant-in-common arrangements, which emerged in response to tax law changes and situations such as the one outlined above. The principle of the tenant-in-common deal is fairly simple: A number of people pool their money and purchase a property they never could have afforded alone.
Faced with taxes on their capital gains, these buyers will turn to an advisory firm, which will assemble these deals for a fee. “They’re willing to accept a lower yield because they need a place to put their money,” says David Schwartz, managing member of Waterton Associates in Chicago, a private firm that joint ventures with major financial institutions, Wall Street investment banks, and pension funds.
Though many multifamily owners haven’t seen private REITS at the table for deals, a number of them are also bidding for real estate. Like tenant-in-common buyers, they rely on pools of money from individuals to buy properties and also charge management fees.
Last Call? Market factors could limit tenant-in-common buyers (often called TICs) in the future. If the real estate market cools off, individuals won’t get the capital gains they’ve been using to invest in these deals. “If cap rates go up, the 1031 exchanges would go away and there would be no TICs,” Schwartz says.
As for the unlisted REITs and their colleagues, some multifamily executives question whether these companies’ approach of paying extremely low cap rates and charging high management fees is really viable. “They can’t buy at the cap rates they’re buying and hit their return expectations unless they use an unusual amount of leverage, which they’re not,” says Ed Lange, CFO of San Francisco-based BRE Properties, which owns 24,198 units. “So, it would make sense that they started liquidating parts of their portfolio and the return includes a return of capital.”
REITS
The After-Dinner Drinkers Who’s Buying: REITs came to prominence back in the early 1990s, when people saw the potential in securitizing real estate investments. But the private capital and condo converters in many markets today have turned several REITs into net sellers. Instead of gulping up properties like other multifamily investors, many REITs have chosen to fine-tune their portfolios by targeting specific geographic markets and exiting others. “In general the drop in cap rates has presented a great opportunity for real estate companies to sell non-core properties, or reduce exposure to non-core markets,” Lange says.
In some cases, companies were already selling in certain markets, and the low cap rates of the past year have added to the incentive to sell. “We’ve been actively selling since the late ’90s,” says Lili Dunn, senior vice president, investments, for AvalonBay Communities in Alexandria, Va. “Some of it has been strategic and some of it has been more opportunistic. The past year was more opportunistic.”
Last Call? Brokers already say that they’re seeing REITs leaving their selling pattern behind. The numbers also say REITs are spending more. In 2004, REITs shelled out $6.7 billion in acquisitions after spending $3.5 billion in 2003, according to Real Capital Analytics. “As the interest rates go up, [REITS] become more powerful buyers,” Sperry Van Ness’ Wallace notes.
CONDO CONVERTERS
Big Spenders Go For Top Shelf Choices Who’s Buying: Condo converters have a distinct edge over apartment owners when they’re bidding for the same property. Instead of basing their price on rent expectations in sluggish markets, converters can base it on the onetime profit they expect to gain by selling individual units.
