Can TIC’s Survive in the Existing Real Estate Market?

ESPASMO Investors

In this very dynamic real estate market TIC (Tenant in Common) investors have suffered as the market has damaged. In particular, those real estate investors that joined up with TIC investments in the last four years, (at the top of the market) are finding that in some locations, high vacancy rates and falling rental rates are grounding their cash flow and the ability to pay their mortgages. halifax

Who bought TIC investments?

As baby boomers have aged, they wanted to reposition their assets into investments that did not take up as most of their time and that would not involve their day to day attention. These buyers wanted to escape management powerful investments and get into real estate investments that guaranteed them a “safe and consistent” return. 

That they had typically sold other investments and traded in to the TIC by using a 1031 exchange, pooling with other buyers which seemed like a safe bet. Unfortunately, many (not all*) TIC opportunities were organized by syndicators who purchased the properties at one price and then marked the properties to resell with their traders. In many cases they used short term “interest only” loans to get their deals to pen, betting that real house appreciation as well as increasing rents would improve the value of the properties quickly and permit the properties to be refinanced.

While a result of the large range of investors (TIC syndicators, REITS and others) competing for the similar inventory, the price of assets went sky high thus lowering the produces of the investments. COVER rates as low as five and a fifty percent were not unusual and CMBS loan originators and other financial institutions were willing to lend to TIC syndicators and their investors on a not recourse basis.

The Specific Estate Market was not as strong as traders expected.

Market appreciation, and rent increases would not occur. In the the greater part of American markets most property vacancy rates have increased, rendering it difficult for TIC’s to acquire enough money to cover their expenditures. In many cases the properties performed to ?ng?rülen, when the time emerged to refinance them the rules had changed and the lenders wanted to see more equity in each investment. Nervous lenders have moved their entrepreneur equity requirements from 25% to 40% and even 50%.

This has pressured many TIC investors into the unpalatable position of significantly increasing their cash investments in properties just to save their existing equity positions and furiously attempt to get new financing for their deals to replace the existing “interest only loans”. These new fairness requirements are stretching the time of TIC shareholders.

Today

In the previous two years DBSI and Sunwest Management two major TIC syndicators have blended and filed for individual bankruptcy. As these cases move through the courts, questions have emerged about the future of TIC property sales. It seems likely that real estate TICs sold by real house brokers will disappear and most likely be changed by securitized TIC’s for larger investments and real estate partnerships for smaller investments. (TICs can be sold as real property investments or as investments, but Real estate TICs are not held to the same high standard of disclosure as investments investments).

A reflection with this trend, is that the Tenant-In-Common Association (TICA) improved their name to Specific Estate Investment Securities Affiliation ( REISA). In the last year REISA advised that all TICs be structured as securities. ** Some TIC syndicators continue to be in business such as RealtyNet Advisors. Realtynet Consultants have adjusted to changes in the marketplace with their special approach to TIC’s where there is no debt just fairness invested, in other words they just do not borrow money to make a deal. They will find enough investors to contribute equity for the complete sales price.

The future of TIC investments will be dictated by the recovery of the market; in the mean time look for other ways to generate profits purchasing real estate. Some of these other available choices include purchasing in foreclosure property, purchasing real house relates to large (50%) down payments or buying records from banks that are desperate to enhance their cash positions.