TICs Get Personal
Successful management of 1031 exchange portfolios hinge on relationships.
Larry Zipf

It’s plain and simple. If you’re going to be a successful asset manager of a tenant-in-common (TIC) property you will be cultivating a lot of relationships.

Of course there are the unique reporting requirements driven by IRS guidelines, and the administrative systems that need to be in place to work with multiple owners, and the bottom-line performance results pertaining to the properties, but at the heart of the tenant-in-common model you will find relationships…and lots of them.

There are the relationships with the TIC sponsors, relationships with 20 to 35 TIC owners, and the relationships with real estate professionals in cities and small towns all across the country that help facilitate management and leasing. And all of these relationships require cultivation.

Sponsors and Investors and Managers…

As the preferred provider of retail property assignments for the one of the nation’s largest sponsors of TIC/1031 exchange investments (SCI Real Estate Investments), our firm has come to recognize the value of partnering with the sponsor in the earliest phases of a project’s development. We have found that most successful TIC assignments are those in which our team is involved before the sale, when we are engaged to perform due diligence work. Being at the forefront of the process, including review of leases and financial assumptions, performing the actual physical site survey and tenant interviews, and being an integral part of the capital improvement analysis, prior to the acquisition by the sponsor, is invaluable in terms of understanding the property and managing the financial risk associated with any acquisition. This front-end work is all done to prepare to be a successful asset manger after the sale. Positioning yourself for success in this way is key to ensuring you will meet the needs of all parties involved.

As a TIC asset manager it’s important to remember that you are always serving two very important task-masters: First, the original sponsor, or in our firm’s case, SCI. Our goal for this client is to make sure we understand how the deal was originally modeled so that the financial performance of the asset meets or exceeds proforma. Successful projects help the sponsor to retain existing and attract future investors. Second, but no less important, is our goal is to meet the TIC owners’ objectives because, in many cases, they rely upon the cash flow from these investments as a significant part of their overall (retirement) investment portfolio.

Who Are the TIC Investors?

A significant demand for the TIC structure comes primarily from baby boomers that own highly appreciated real estate and are looking to accomplish two things: First, this structure allows them to defer capital gains tax on the appreciation that would occur upon the sale of their property. Second, and probably equally important, they want to be relieved of the daily demands of hands-on management and leasing in favor of a less involved ownership position. TIC owners have a deeded fractionalized ownership. As such, they control the destiny of the real estate. They vote on budget and leasing decisions, they hire and fire management, they decide to sell, they decide to refinance and they do this by relying on their asset and property managers for guidance.

Essentially, what becomes challenging for real estate professionals engaged in these types of relationships is that they are often required to answer the needs and concerns of up to 35 individual interests. And to further complicate the issue, the properties that are involved are nationwide, and few, if any, of these individual owners have the detailed knowledge of the asset, and the associated health of the property’s local or regional market.

In addition, the diversity of ownership among TIC investors is pretty extraordinary…not to mention challenging. While all will agree that they expect reasonable cash on cash returns on their investment, the investors have different objectives, different knowledge bases and different motivations. Some live in the United States; others live abroad. Some speak English; others do not.  As a result, asset managers, property managers and leasing teams are required to function on a much higher level than if they are dealing with a sole owner who is well versed in the retail real estate market.

Hand Holding a Must

Before the actual “management” of the properties comes into play it is necessary to address the level of personal interaction and interest that must take place in order for managers to be successful. Asset managers must expect to be “on call” for their owners. Not only is there an education process that many first-time TIC investors have to be walked through, but the month-to-month inquiries from 30-plus owners must also be factored into the management equation.

All investors on each of the projects Fameco manages have my phone number and contact information. They can call me anytime to ask me what’s going on with their property. And they do. As a TIC asset manager, you have to constantly remind yourself that this is real money to these investors. Not that there is any less of a business expectation from an institutional owner, but daily you are reminded how personal these investments are to TIC owners when posed with the question “Where is my distribution? Will the property continue to perform? How is the market?”

A recent example of this is the farmer from Southern California who decided to sell his farm, retire and reinvest the proceeds in multiple tenant-in-common investments. He will now rely on these investments for his cash flow during his retirement years. Imagine the questions an investor of this type might have. Think about the monthly expectations this retiree will have and the questions that might need to be fielded on a regular basis. Now multiply that times 35 for each property being managed. There is no arguing that TIC management is an endeavor driven by both communication and relationships.

A Place for Everything…and Everything in its Place

With multiple owners, everything from the communication process to the authorization of budgets requires a system. From monthly distributions to annual re-ratifications of asset and property managers, the development of strong administrative systems is a must. Leveraging experience into an operating model allows the property and asset managers to ultimately concentrate on their job of managing the property. After all, it doesn’t matter if your bookkeeping or administrative systems work if your property is not performing.

With relationships forged with TIC owners, and with the proper systems in place, the more traditional management roles fall into place, such as site maintenance, tenant relations, leasing, and managing the property’s budget.  The major difference between a single owner and a TIC operation is that keeping a careful eye on cash flow is critical because of the expectation for monthly distributions consistent with the proforma.  It’s extremely important to plan and execute according to plan so as to avoid multiple calls asking “Where is my distribution?” or “Why is my distribution cut in half?” or, the worst case scenario, “What’s this cash call all about?”

In the End

Ultimately, the goal of a successful TIC manager is to work with his or her owners through the life cycle of the asset. It is critical for the manger to understand the market, evaluate the performance of the property and incorporate the insights and recommendations into a cohesive business plan. Of course, the model will eventually come full circle when it is time to list the property for sale. Ideally, the owners will consider the success of the asset, determine how to reinvest the proceeds, and look for continued advice and assistance from the team that they have relied upon — at which point the whole relationship process starts again.  scb

Larry Zipf is the senior vice president of owner services at Fameco Real Estate, LP in Plymouth Meeting, Pennsylvania. Fameco specializes in retailer representation, owner representation, investment sales and management services in Pennsylvania, New Jersey, Delaware and beyond.