It has been slow to catch on in New England’s commercial real estate investment world, but as the new year begins, TIC talk does appear to be on the rise.
Acronym-speak for a tenant-in-common exchange, TICs are the latest manifestation of the 1031 Exchange program that lets those selling real estate sidestep capital gains taxes by purchasing another income-producing property. On the upswing since the Internal Revenue Service set precise guidelines in 2002, TICs enable individuals to buy assets as part of a group, allowing those carrying stakes as little as $50,000 to take advantage of the 1031 process and own part of a larger property than they could alone.
“It opens up huge opportunities for investors who otherwise would have a hard time placing their money,” said Stephen Allison of Ashforth Paradigm Capital Advisors, a so-called sponsor which assembles real estate deals for TIC capital. Doing a traditional 1031 Exchange can be arduous given the brief time period one has to find a replacement property and other intricate requirements, Allison explained, while a previous restriction against jointly owning properties had also kept many smaller players from utilizing a 1031 vehicle. Those roadblocks have been circumvented due to the IRS ruling, with as many as 35 investors now able to put their funds into a single TIC deal.
While essentially still in its infancy, TIC investing in commercial real estate is already catching the attention of many industry professionals. According to one recent study by L.J. Melody Co., TICs acquired about $2.6 billion worth of property in 2004 after not even being on the radar screen prior to 2002. According to Allison, equity raised from TIC investors last year reached about $1 billion, twice the amount raised in 2003. That figure could again double this year, he said, a notion backed up by other observers who have watched TICs trickle into the area after initially making a splash on the West Coast.
“It is a factor out there in the marketplace right now, and we are trying to come to grips with how to do business with these groups,” said Gary J. Lemire, an investment sales specialist and principal with Boston-based CBRE/Whittier Partners. “People need to stay tuned about where it is headed.”
Using a network of financial planners and other securities brokers to peddle their TIC offerings, APCA has completed several acquisitions since being formed in late 2003, including 212 Elm St. in Somerville. According to Allison, that purchase marked the first true TIC investment in Greater Boston. It was followed up by the recent acquisition of a medical office complex in Houston and a 210,000-square-foot warehouse in Ohio that attracted three times the $4 million in equity needed to fund the deal.
“There is a huge amount of capital looking for a home,” said Allison, whose own firm tries to limit the ownership pool in its offerings to between 15 and 20 investors. Thus far, the average investor has put in between $400,000 and $500,000 in APCA deals, said Allison, and the average purchase price of properties has been ranged from $10 million to $20 million. The typical TIC range runs between $10 million and $50 million, said Allison, adding that APCA also is considering larger investments than it has heretofore made, including a $30 million deal it is chasing in Texas.
An affiliate of the Ashforth Co. of Connecticut and Boston-based Paradigm Properties LLC, APCA is a member of the recently formed Tenants in Common Real Estate Association, a Utah-based trade group which is promoting TICs and helping set standards aimed at keeping activity above-board and as straightforward as possible. Even with those goals, TIC advocates such as Allison are predicting “growing pains” as the concept evolves, with some sponsors likely to fall by the wayside over time.
“I do think there is going to be a shakeout,” said Allison, who estimates there are about 40 sponsors nationally. “There are going to be properties that aren’t going to perform as well as the sponsors are hoping they will.” Even so, Allison said he is generally unconcerned that the industry could be scarred by a TIC meltdown, maintaining that the broker/financial planner sales network is keeping a wary eye on sponsors that become too aggressive in their assumptions or register a poor performance. And while the upside is important, with annualized returns of 10 percent to 12 percent anticipated over the investment cycle for many deals, Allison said safety and stability are most critical to TIC investors.
“It is super important to look at who your sponsor is because you are relying on their credibility that it is a good, secure investment,” he said. Given APCA’s affiliation with the Ashforth Co., whose lineage in commercial real estate dates back more than a century, Allison said he believes his firm can alleviate such concerns.
Secondary Markets
Although APCA has long-range confidence in Massachusetts, TICs are not likely to play a major role locally over the near term, according to Allison, either in the amount of property acquired by such sources or in the ability of companies to become sponsors. Some will be turned off by the sheer complexity of putting together a TIC agreement, he maintained, noting the IRS rules require that each participant have an undivided fractional interest in the property. If there are 15 investors, each one is subject to separate underwriting and each loan is considered apart from the others, requiring an intense level of oversight by the sponsor. In addition, any key decision such as signing a new tenant or refinancing the property requires the backing of each investor.
“It is not for the faint of heart,” Allison said of being a TIC sponsor. “It is a lot of hard work.”
Besides APCA, there have been a few local firms that have done variations of a TIC deal. In one instance, he said, a Hub-based investor acquired some properties and provided operating units to those infusing TIC-related capital into the deal. One Boston firm that has been active is Cabot Investment Properties LLC, operated by Hub real estate veteran Carlton P. Cabot. In one just-completed TIC-funded deal, CIP acquired a three-building office complex in Miami for $19.7 million. The firm also has been active in other southern markets, including North Carolina.
Until Boston’s investment market cools down, most of the TIC activity will be occurring outside the region, predicted Allison, largely because the intense local ardor among investors has made it difficult to find deals in Massachusetts, especially any involving properties considered core or core-plus as preferred by many TIC sponsors such as APCA. In response, APCA is eying real estate in secondary markets, Allison said. Institutional capital sources “aren’t investing in Grand Rapids [Mich.], but there are good real estate opportunities in Grand Rapids, and so that is our [target] right now,” he said.
In any event, Allison said he believes TICs will play a role going forward, particularly if interest rates spike and lessen the amount of leveraged money buying real estate. As for APCA itself, the firm hopes to acquire between $150 million and $200 million worth of real estate annually from TIC sources. “We’re right on track,” he said of the company’s progress in reaching that level.
