Tenants In Common (TIC)? Anyone Using These?
I am interested in investing in a Tenants In Common (TIC) administered by www.for1031.com. I'm looking for income without having to look for properties (I looked for several months, the market is just to precarious in So Cal right now)
They pay 7% Cash-on-Cash the first year, with a 3% raise each year. I am thinking of going this route for the monthly income in a NNN situation.
Anyone using www.for1031.com or a similar TIC group? Anyone have any other real estate oriented investment vehicles like this? :-?
I'm not using these guys but I did attend a presentation for a similar group not long ago and I'll be glad to give you my impressions.
1) These guys are pooling your money with others to purchase large "commercial grade" properties. They are, in essence, using the 1031 exemption to entice you into buying into their REIT. Rather than organizing it like a REIT they are using the TIC mechanism to comply with the 1031 rules. There are some big difficulties with this in my mind
2) I doubt that they promised a 3% raise each year (think about it, in 10 years you'd be getting a 37% cash on cash each year-- not likely). Perhaps a 3% of 7% raise (year 2 rate: 7.21%) even that would be incredibly difficult to maintain for the long haul.
3) Its going to be incredibly hard to get out of these deals for the foreseeable future. In essence any money you put in is gone. You may see the projected returns, you may even do a little better than the projected returns but you cannot change your mind and sell. In order to sell any of these properties ALL of the tenants in common must agree. In some properties it would not be difficult to have 30 or more TIC's. Theoretically you could sell your TIC interest but no organized market for those interests exists.
4) You have no control of the project. As opposed to a building you own yourself or with a couple of partners these properties are going to be managed by professionals. With the corresponding management fees. You will not be able to approve or disapprove of any decisions: is this tenant a good one?; Shall we replace the roof or repair it? These decisions are going to be made by the TIC manager who's interests may not be the same as yours.
5) There are big advantages to the guys who put these deals together. Generally they get some hefty commissions on the front end. Then they lock in long-term management contracts that are almost impossible to break since it requires 75% of the Tenants In Common to authorize a new managment contract. Its a nice cushy deal for the organizer. On the other hand thats what they do for a living so you gotta expect to pay them for it.
6) This is the latest in a string of mechanisms which allow "the general public" to participate in "high grade commercial properties". The other mechanisms in recent memory include the Limited Partnership and the REIT. Returns in this vehicle will be about the same-- 8 to 12% ROI over 10 year averaged returns with the occasional high performer and the occasional spectacular crash. If you are comfortable with those rates and the inability to ever get your principle out of this deal then this is the kind of deal for you. Whether this specific organizer is better or worse than any other I have no idea.
7) You do not say thay you actually have properties to sell. Are you thinking about buying into this for cash, not 1031 exchange properties? In that case I'd definitely say no. A big part of the motivation for doing such a deal is to avoid the 35% tax bite on the sale of some existing property. Unless you are trying to do that I gotta believe there are better investment vehicles.
[ Edited by commercialking on Date 06/28/2004 ]
You're right, the 3% is of the 7% (7.21 yr 2).
I am transferring a 1031 property that produces no income, so almost anything is better for me right now.
They say they can find a buyer within 30 days or so usually. The secondary market is actually their primary market, too. Existing customers, new customers, etc. The benefit to buying an existing share is that the property already appreciates.
I imagine you need 75% or even 100% to make any real decision (sell, fire the management co, etc).
The way this company structures the program is that they have a sister company that signs a master lease and then subleases to the actual leasees that occupy the property.
The REIT option does not work with the 1031, so I can't do that, right? Are there any other vehicles that you know of that offer NNN?
The bottom line for me is this: If I risk $200+ on a property that I own that only has a Cash-on-Cash rate of 6-8% with 100% of the risk of ownership, isn't that as problematic as wondering if I may be able to sell a TIC a number of years from now?
I'm not entirely convinced this is the best move for me, either. I have thought of other avenues, like residential, however, I just don't want the headaches associated (toilets, trash, etc).
Has anyone invested with www.for1031.com or other's? What's your experiences?
Thanks in advance for the info!
I think commercialKing hit on two of the main points that I've found in looking into these deals: 1) the sellers have contracts to run the building, and make money there. They also probably got some nice profits in acquiring the building, too. 2) these things look like they could be hard to get out of. I could see that if you needed the cash, you might have to sell your ownership position at a deep discount in order to get liquid.
Which, of course, brings up another idea: if you really want to do this, why not find someone who is in that boat (having to sell) and buy his shares at a deep discount?
CT
You have raised some good points. I do between five and ten 1031 exchange workshops each month with TIC Brokers.
First, it is a real estate investment, so typical real estate market risks are still present.
Second, you are investing with a group of investors (fractional interests) so you should plan to hold until the planned exit strategy/event occurs.
Third, TIC Interests are typically sold as security interests so getting out of them will depend on the market unless 100% of the TIC owners vote to sell 100% of the property. Liquidity will always be the number one issue here in my mind.
Fourth, most initial rates of returns that are being quoted start between 6.5 to 7.5% and end up with an estimated total return, which would include cash on cash returns plus the capital gain at the back end, of 13% to 15%.
Fifth, the TIC Sponsors, as they are called, do make money up front. This is compensation for their due diligence, financing, packaging, etc. Is it expensive, yes. Could you or I take down a $50 million building, probably not. You must evaluate the deal, including the costs and determine if the investment makes sense for you. It is not for everyone. It is not a good place to "park" money due do the liquidity concerns. It is not a good place to invest if you can do a deal with a better return and want to deal with the property management.
Sixth, you get rid of all the property management headaches. The TIC Sponsor will either handle the property management or contract it out.
These can be great investments and allow investors to buy into some great institutional quality properties that most individual investors would not be able to take down on our own.
All but two companies sell these TIC Interests as securities. There is considerable amount of debate in the industry right now as to whether you can sell these interests as real property interests at all. I have my concerns, so becareful if the TIC Broker/Sponsor is selling them as a real estate interest.
I also have a list of TIC Brokers that we have worked with and given 1031 exchange workshops with and I would be happy to provide you with a list of them. I would call a number of them and kick the tires to make sure this investment makes sense for you. I would also be happy to chat on the phone in more detail if you would like, or you are more than welcome to attend our 1031 exchange workshops (FREE) to learn more about 1031 exchanges and/or TIC investments.
[addsig]
Thanks everyone for the reply. I have a concern about the liquidity, as well. I trust that they do have a secondary market, however, as with any purchases, the promises of what comes after is always something to question.
Bill, I would be interested in the list and talking with you. Could you send me a message off-list with your e-mail and/or phone?
Also, has anyone delt specifically with www.for1031.com?
if you're unsure of the so. cal market would you consider 1031ing into another area?
If there such a large tax liability as to be "stuck" with a TIC deal.
Are there lowerend deal similar to the TIC that you could buy by yourself or a small groups and have more control.
It does sound like a lot of the motivation relates to your time commitments.
On the secondary market comments... There is no market. There is a company matching buyers and sellers. If there are no buyers at a price then there will be no deal of a much lower price to get a buyer interested. In this situation it might have been better to just pay the tax now and move the remainder to something that works for you better.
I am surprised that you have not been able to find a broker who specializes in 1031 transactions to find you a deal that would work without the TIC.
John
Quote:
On 2004-06-28 10:27, cameadows wrote:
I am interested in investing in a Tenants In Common (TIC) administered by http://www.for1031.com. I'm looking for income without having to look for properties (I looked for several months, the market is just to precarious in So Cal right now)
[addsig]
I can make time to look. Looking outside Calif. is hard because of the travel time and costs. If looking outside Calif is anything like what I've been doing (MLS searches; pre-screen for income and desirable; drive out and look; make offer; counter; etc.) It is wasting my time. The only benefit is things outside CA are much less expensive, in general.
I've looked throughout SoCal and many parts of Central Cal for commercial property and have been disappointed either by the returns, the amount of risk, or the conduct of the seller (or agent). I've been lied to several times by the selling agent, trying to make something look better than it is. I think that this is a problem at the price point (1 million or less), and the types of properties one can buy in this range in CA are not A rated.
Recently, in looking at properties, I must admit, I'm gauging properties by this TIC, in other words, the property must outperform the TIC in order to gain my interest. So far, few, if any properties offer the income of the TIC with the same or less risk.
One of my big concerns is the ability to liquidate and be able to take some appreciation, which I figure would be commesurate with the income increase, since it seems that's how commercial property is guaged. I know appreciation will be slower than if I buy something on my own, most likely.
I'm surprised no one has really used this company, I see their advertisements in financial magazines (Money, Kiplinger's) as well as the LA Business Journal.
Well I suspect the reason no one here has used them is that the people here tend to be hands-on types. The idea of handing over our money to somebody else to manage is not going far among most of the investors here.
I agree. I am very hands on (that's why I'm researching them). I have other money that is more liquid to invest in income property and plan on looking for other investments.
Some of the suggestions have been good for my research in that there were things brought up to consider.
If anyone reading this post has any experiences with TIC co's, please post.
Thanks, Chris
I am curious about some of the statements posted concerning tenants in common ownership. Tenants in common have a right of partition which often leads to a forced sale of the property if the property cannot be divided. Are these partition rights waived in these TIC investments? If not, it would seem that a TIC owner could force the sale at any time to get out of the investment (with associated legal costs). What is the answer here?
The TIC company I'm looking into structures them to allow a 51% vote to force the sale or fire the management.
Look again, I think they require 75% to change management company or sell and thats after there's an initial vote where they did not get unanamous consent and then there is a second notice and waiting period before the vote.
In addition the unanamous consent thing is sorta in the definition of TIC in common law. Its not clear to me that you can change this contractually without risking the IRS ruling that this is no longer a TIC and therefore not eligable for the 1031 exemption.
"Are these partition rights waived in these TIC investments?"
You can sell your 6% interest, just like other TIC, but you can't force mt to sell my 94%, unless we have a co-tenacny agreement and a buy/sell right of 1st refusal agreement.
That's correct. You can sell your portion without any influence of the others TIC owners, since it is deeded.
Collectively, you can sell the whole building as a group with a 51% ownership. I am reviewing the contract to make sure that's true.
I would think since 75% is the general rule, this may make it more liquid, however, it could also force the sale and compromise your income stream. Of course, you could 1031 into another TIC with the company (no costs to you) and you would be back in business again.
I had a message off-list too about TIC's and they brought up a concern that you do not know who your partners are. That is a real concern, also, since they may have different interests and business thoughts. To the contrary, they may well be more savey investors than me. However, if they are interested in realizing appreciation ASAP and I'm interested in long-term income, this could create hassles, since I would have to 1031 again and again.
These are a little different animal than your typical TIC investment. These TIC interests are considered to be real estate for real estate and tax law purposes, but are considered to be securities for securities law purposes. It gets really complex, but the Department of the Treasury issued Revenue Procedure 2002-22 that defines 15 characteristics that these TIC interests should have in order to absolutely qualify as a real property interest and therefore qualify as like kind property for 1031 exchange treatment in my world. The problem is that complying with all of the 15 requirements would make it impossible for sell these investment interests, so most of the TIC Sponsors comply with 12 or 13 of the requirements and then obtain a "most likely will qualify" legal opinion. One of the requirements is that it requires 100% of the TIC Interests to approve the sale of the property, the refinance of the property, any leases entered into and to fire the management company. 100% is not real practical, so the various TIC Sponsors have each developed various mechanism to deal with this.
You should have your own counsel evaluate each deal in conjunction with the Rev Proc 2002-22, especially if you want to do a 1031 exchange into or out of these TIC investments.
[addsig]
Quote:
All but two companies sell these TIC Interests as securities. There is considerable amount of debate in the industry right now as to whether you can sell these interests as real property interests at all. I have my concerns, so becareful if the TIC Broker/Sponsor is selling them as a real estate interest.
I too am investigating TIC properties, www.For1031.com musat be one of the few that offers these properties as Real Estate, which is attractive to me. What do you perceive as the risks to this strategy? It seems much more liquid than securities, and the secondary market is developing (the fully developed strategy has only been in place since 2002). The loads on a R/E transaction vs. a security are much smaller. In my case, the agent is making 2% vs 8% in commission. The management company is not the same as the sponsor, eliminating potential conflict of interest issues. For the mgmt company to make their $$, they have to manage efficiently.
I have seen very few discussions of TIC transactions as securities vs. R/E, so would be very interested in uncovering any information.
I was told (however, I haven't read it in the contract, yet--still reviewing) that a 51% vote could force the sale. The solution, you invest in another TIC with your monies via another 1031 exchange.
The 51% also applies to changing the building management.
This brings up a good point that I will research is: Is the vote based on 51% of the investors or their percentage of the property. So if one TIC investor has 51% of the property, can he force the sale? Or, if you have 20 investors total, can 11 of the investors voting force the sale?
I'll research this and post...
I have also looked at the www.for1031.com properties. I analyzed one of thier past deals. It was a $12M property with a 50%LTV. Cash flow was 7% on year 1, and went up to 12% on year 20. I have the following general comments:
1. The leverage is low - about 50% LTV. This is the best it gets with thier properties. This is not the way to make higher returns on appreciation. I have found other TICs that go to 75% LTV. By keeping the leverage lower, they should be able to get positive cash flow easier. I suspect that they are getting a large cash flow also for setting the deal up! The 7% cash flow sounds great - but not if you are putting 50% cash into a property!
2. Getting out is one of my biggest concern. I have asked how you get out and they told me they can sell them quickly. However, here is the rub.....
Let's say you put up $100K for a $200K interest in the property, and the property goes up in value by 30% over 10 years (3% per year). Your 200K portion is now worth $260K. Your portion of the debt paydown is $15K, so your equity is $175K. That is not a real good return. But it is worse than that.
- You now try to sell.
- The income stream is up to about 10% of your $100K - so it is $10K/year.
- The new buyer is can get a 7% return on a new investment -- or they can buy yours and get significantly lower cash-on-cash return. I also suspect that the leverage will need to be lower for them. So you will need to discount it - I suspect significantly
These are my basic thoughts....
Dave
SharonaF,
There is still a lot of controversy surrounding this issue. Most of the attorneys that I speak with think it should be treated as a security interest and I think the SEC has made it very clear that these should be treated as a security interest because of the way they are packaged and distributed to the investors. The company that you mentioned has positioned itself differently according to their marketing material and they have a legal opinion that I would review thoroughly before investing. If you are interested, I can refer you to an attorney that did the first TIC deal in 1993 and writes many of the major TIC PPMs through out the country.
[addsig]
Let me try a different approach on the same matter. The question is:
1. Does anyone know of an investment instrument that allows someone to invest via 1031 exchange in a property (because of like kind) that will offer anything better than www.for1031.com?
The points that were brought up have great merit, however, if the alternative is to buy your own property, and you put $250-300k down on a 70% LTV property ($1 mil sale price), you almost cannot make 7%.
I agree that www.for1031.com and the underlying management company makes a great deal of money that could/should go into our pockets, however, they seem to be taking on the liability. They aren't saying the 7% is gauranteed, yet they say they haven't missed a payment, yet.
I know there is still great risk, as with any investment. I'm looking for the most money with the least work.
Is there anything else worth investigating?
Yeah, well I think there are a lot of alternatives to TIC companies. Two preliminary discussions that seem to me to be helpful in analysing such transactions:
1) How efficient is the offering company? In other words, count the number of white collar people vrs the number of blue collar people. A lot of the work of running a property day-to-day is blue collar work: Fix the plumbing, fix the roof, fix the broken window, mop the hallways. make sure the elevator runs, mow the grass. So you need to have a certain number of blue collar people around somplace. But there is an efficiency ratio in my mind between the number of blue collars around and the number of white collars around. White collars are essentially unproductive, necessary to the funtioning of the property but not actually producing product which makes you money (similar to the distinction between line and staff personel in a factory). The TIC companies seem very white-collar heavy to me. Lots of managers and secretaries and salespeople running around. Not many plumbers, carpenters, landscapers. One of the joys of white collar jobs is that the more you have the more you can have (Parkinson's first law and all that). Now you need people to co-ordinate among the staff. And the more white collars you have in a deal the easier it is for them to stand around "meeting" with each other instead of actually getting something productive done.
Now all that is great fun unless you are the guy paying for all those white collar positions. Ultimately when you buy one of these TIC securities you are the guy paying for all that staff because they are comming out of your rate of return.
2) On the other hand the growing efficiency of markets has a tendency to erode the value of capital in a transaction. Once upon a time if I wanted to sell a house in California while I was in Chicago that would have been a difficult transaction. Now I fax a listing agreement to a broker, overnight him/her the keys. They list it in the MLS computer and I've got offers comming in via e-mail in a few weeks. Back when it was inefficient for me to sell out-of town property it was easy for an investor to find a bargain. But now non-locally owned property is likely to sell for very close to FMV.
Now, turning to the kind of AAA, NNN properties that the TIC companies are typically buying it is very hard to find a bargain here because this is a very efficient marketplace. So your rate of return is going to be very low: 7% for the use of your capital and another 2 to 4% for the rate of inflation which represents the rate at which your money is loosing value.
So what you'd like to find is a situation where the company is efficient (i.e. high blue/white collar) and the market is not (i.e. you are able to find a bargain). Fortunately I think such opportunities exist. They are out there in the smaller development companies more than willing to accept private investors putting together deals for little niche markets that the "big boys" couldn't possibly manage efficiently because they would need three levels of white collars between them and the janitor.
But don't those kind of deals tend to be riskier? you might ask. Yes they do but the reason is that they tend to be highly levered. If you were to bring 50% LTV to the table in relatively patient private money then the risk in such transactions would drop back to levels comparable to those of the big TIC companies. In addition because these small deals have few TIC investors (possibly one per deal) some of the liquidity issues we have been discussing go away. The decision to sell, for example, is much easier to deal with if you are the sole investor. Likewise you could decide you were willing to lever a property up and take some cash out, a process you'd almost never get 30 other TIC's to go along with.
There is one sense in which the risk in such transactions is higher, however. Because a small strip center has only a few tenants the potential for significant vacancies is higher than in a shopping mall where the number of tenants is higher. On the other hand it is much easier to find a replacement tenant for a mom-and-pop convience store than it is to find one for the J.C. Pennys that used to be the anchor in your shopping mall so these things have a tendency to balance out.
So the answer is: find some smallish guy who is developing property and could use some moderate return- long term money and invest with him. Tell him what you want in terms of cash flows and how much you have to invest in a single deal & let him structure a deal around you.
Do this with three or four different developers or different deals (preferably in different markets) to diversify your risk.