As an “industry” tenant in common and 1031 exchange investments are thriving. More individuals are aware of and taking advantage of these alternative investments. This increased awareness and activity means that equity greater then last years $5.48 billion dollars will likely be invested in 2006.
This level of activity has established the tenant in common and 1031 exchange industry as a viable investment choice.
The viability of these options has translated into more properties and more sponsors competing for the investor dollar. There are more properties available at any given time for a TIC investment then at anytime over the previous three to four years. There also are more sponsor/real estate companies offering TIC properties – now there are nearly 75 whereas a few years ago there may have been at most 20.
In general, greater choice can be positive. When it comes to a multi-billion dollar industry, more choices can also create challenges. This is where separating the experts from the novices becomes important. I have always said that it is easier for a poor company to hide amongst other stronger competitors.
However, more sponsors and more properties to choose from by themselves do not ensure that the TIC investor’s decision-making process is any easier. In fact, the process may have become more difficult. This is true because having more properties and sponsors to choose from can make it harder to discern which properties are likely to perform according to plan and which sponsors have had stronger track records.
Overcoming this challenge requires time to evaluate sponsors and properties and asking the right questions.
When investing in a TIC, or any other type of investment, selecting a seasoned, experienced TIC advisor with a real estate background should be a priority. An advisor experienced in real estate and TIC transactions typically has the knowledge, experience and support staff to help investors make appropriate choices and close their transaction smoothly, without encountering significant problems.
An advisor who is a TIC specialist can further benefit investors because they tend to have access to the most current industry information. This can be timely when making important real estate investment decisions. To work with a representative who is part of a large broker/dealer network of TIC specialists can be advantageous because investors benefit from their constant exchanging of information on hundreds of transactions, sponsors, and properties on a weekly basis.
What is more, an advisor who is a TIC specialist who is frequently asked to speak at TIC industry events and attends other real estate conferences tends to be the most current on regulations, market results and developments which investors can benefit from immediately.
One of the most important reasons to work with a seasoned TIC advisor is that they tend have a better working knowledge of the sponsors who offer the TIC properties. The advisor’s firm has completed sponsor due diligence which includes, but is not limited to, running background checks, reviewing past transactions for performance and investor satisfaction, and reviewing sponsor financials as it relates to solvency.
But that is just the beginning of the sponsor due diligence process. An experienced TIC advisor should know the historical background of each sponsor. This provides a working knowledge of their investment structure which is critical when dissecting detailed private placement memorandums (PPMs) which are lengthy to say the least.
Some of the questions that the TIC advisor should be able to answer are:
Does the sponsor have a history of budgeting adequate financial reserves to pay for tenant improvements and leasing commissions to avoid adverse impact to investor cash flows?
What is the sponsor’s track record? Have they been successful in both strong and soft real estate markets?
Is the sponsor a full-service real estate firm capable of managing a property to help deliver the expected returns?
Does the sponsor have a good historical performance of acquisitions and dispositions of institutional quality buildings and assets and a quantifiable philosophy for identifying property investments?
Is the sponsor new to the TIC industry and possibly trying to take advantage of a market with tremendous growth?
How does the sponsor demonstrate its commitment to investor relations? Do they send out timely reporting statements? Are they responsive to investor questions?
Of the two different offering structures (property management agreement and master lease) which format does the sponsor use and how do they implement that structure? The offering structure and implementation could be important in helping investors reach their investment goals.
The TIC industry is once again experiencing continuous growth. The industry has matured in many ways. This maturation process has overall been positive for investors. At the same time, there seems to be an increased need to seek the services of seasoned TIC advisor who can appropriately assist in making important real estate investment decisions.
