FEATURE ARTICLE, JUNE 2006

TACTICS FOR THE TENANT-IN-COMMON INVESTOR
Many factors that come into play when making a tenant-in-common investment.
Charles “Duke” Runnels

Charles “Duke” Runnels President and CEO FORT Properties

As the TIC trend spreads across the country, the Midwest, which is known for its large inventory of distribution centers, industrial parks and a growing office market, quickly became a target for savvy TIC sponsors. The region has shown dynamic growth in recent years and provided significant real estate opportunities for the entire investment community. The Indianapolis market is a prime example, illustrating the positive changes that are occurring in the overall marketplace in the region.

In 2005, 21 transactions in the industrial marketplace were closed, representing approximately 12 million square feet at a total value of $440 million. This volume is a five-fold increase from the total transactions that were closed during the previous year. Additionally, large distribution centers are being constructed for sale or lease to high-visibility corporations including Epson and Caterpillar Logistics. Typically these new buildings are 50 percent pre-leased or sold before construction is even complete. Finally, the area is experiencing unprecedented occupancy rates, reaching 92.7 percent or better for most properties.

Another significant market factor that makes Midwest real estate attractive for TIC sponsors — and ultimately investors — is the impact of cap rate compression. A significant portion of the increase in real estate value across the country can be attributed to cap rate compression over a 5-year timeframe. For example, in California, cap rates fell from 9 percent to 5 percent on certain assets, causing property value to increase even without supporting NOI growth. The Midwest, on the other hand, has seen less volatility in cap rates and, as a result, property values have experienced healthy, sustained growth.

These factors, increased real estate commerce, controlled cap rate compression, impressive occupancy rates and job growth through corporate expansion, are all supporting increased TIC activity in the market.

There is a potential downfall to this increase in the region. The exponential growth and strong market dynamics in the Midwest have attracted several TIC sponsors that are looking to capitalize on opportunities that exist in the region. When considering a TIC investment, it is of the utmost importance to know the TIC sponsor is both familiar with the TIC industry and has deep real estate experience. Additionally, be sure to understand the asset and ensure there is transparency in the investment every step along the way. With all these components in place, TIC investments can help preserve established wealth while simultaneously generating monthly income.

The TIC sponsor is one of the most important variables to consider when investing in a TIC. The difference between a reputable sponsor with experience and proven success versus one with little or no real estate experience may make the difference between a successful investment opportunity and one fraught with risk. In addition, two important characteristics to confirm regarding a TIC sponsor are whether they are pre-capitalized and how their product is offered.

A pre-capitalized sponsor typically uses its own capital to purchase an asset that will eventually be packaged into a TIC investment. Through this process all the upfront work to identify an investment property, including the completion of due diligence, securing property financing and closing the transaction, is complete before the offering is available to an investor. This is an important consideration for TIC investors that are conducting 1031 exchanges, since like-kind replacement property needs to be identified within 45 days. Because a high percentage of TIC investors are 1031 exchangers, identifying a replacement property from a pre-capitalized TIC sponsor reduces the risk of failing to close a transaction in accordance with established regulations. The most common reason a 1031 exchange fails is because the exchanger was unable to identify an appropriate replacement property within the mandated 45-day timeframe. Because a pre-capitalized TIC sponsor already owns the property, which may be comprised of multiple assets, the firm has a personal stake in the investment property.

The second valuable consideration is how the TIC sponsors’ product is offered. Nearly all TIC sponsors offer their TIC investments in accordance to, and compliant with, securities regulations. The TIC offering document, or Private Placement Memorandum (PPM), is designed to provide an increased layer of transparency for potential investors with complete and thorough disclosure. Whereas real estate transactions are typically viewed as “caveat emptor” (buyer beware), TIC products offered with this additional layer of disclosure are truly investor-focused.

Real estate investments are dynamic and the market can change from one day to the next. Investors who plan to buy into a TIC should work closely with their sponsor to establish a comprehensive understanding of the investment and the projected returns.

Other considerations for TIC investments involve the type of assets, the strength of the tax opinion, type and term of financing, and the level of reserves. The sponsor conducts due diligence on all these aspects among others and provides a comprehensive overview of each. Remember, this is an investment that typically lasts 5 to 7 years; market conditions change, so the sponsor’s due diligence and the assets in which you invest are vital.

The TIC marketplace will continue to grow and can offer investors an outstanding return on investment. There is no guaranteed formula for a profitable TIC; however, savvy investors who employ these “tacTICs” will no doubt find the best investment available.

Charles “Duke” Runnels is president and CEO of Los Angeles-based FORT Properties, Inc., a provider of Tenant-in-Common (TIC) fractional ownership offerings. As one of the only pre-capitalized TIC companies, FORT reduces the financial and timing risks associated with 1031 exchanges.



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