Tenant In Common Industry Takes Off
The TIC industry has emerged as one of the more popular investments for those involved in 1031 exchanges.
Lara Fuller

The tenant-in-common (TIC) industry has come a long way in recent years. In the past, there was a lack of knowledge and understanding in terms of the TIC structure, by both lenders and investors. Now, however, all that is starting to change. As the 1031 industry continues to grow and mature, so does the TIC industry. Because of new legislation and tax laws, TIC properties are becoming easier and easier to use as replacement properties in 1031 exchanges. Because of this, and a greater understanding of the nature of TIC investments, the industry has seen tremendous growth across the board.

SCI Real Estate Investments acquired the 116,673-square-foot Chino Towne Center in California’s Inland Empire in June.

Education And Awareness

Though the TIC and 1031 industries are gaining respect among lenders and investors, that wasn’t always the case. One of the major issues that has plagued the industry for several years is a basic lack of knowledge regarding the investment structure. “Although the rules have remained relatively static for the past 25 years, the 1031 industry has changed dramatically,” says Todd Pajonas, Esq., president of Security 1031 Services in Trumbull, Connecticut. “The main reason for the dramatic change is education and awareness. As little as 6 or 7 years ago, a general awareness about 1031 exchanges was confined to the West Coast. Today, most people in the real estate industry nationwide are at least aware of the benefits of exchanges due to educational classes run by qualified intermediaries and TIC property sponsors.”

Jay Bastian, senior vice president with National Retail Properties in Orlando, Florida, has seen a similar situation. “1031 exchanges originated, were popularized and were marketed on the West Coast. Now, I still see a majority of buyers coming from the West Coast, but there is a growing interest by East Coast and other buyers,” he says.

In the past, investors, as well as lenders and brokers, weren’t aware of the benefits the TIC structure can offer those involved in the 1031 industry. That is now changing. “There is no question about it,” says Tim Snodgrass, president of Argus Realty Advisors. “We used to have to spend a lot of time educating lenders about how these things work. Now it is no work at all.”

Adds Paul, “Sophisticated real estate brokers and lenders understand that the TIC sponsors are successful, dependable buyers and borrowers, and in working with the TIC sponsors, they can transact successful business.”

Lenders and brokers used to be wary of TIC sponsors and investors, as they didn’t know much about the industry. Now, lenders and brokers have come to realize that TIC investments are beneficial and not as complicated as they once thought.

“TIC sponsors are great buyers that can act quickly and brokers love that,” says Paul. “Individual TIC buyers and their agents have come to appreciate that they have an attractive alternative in TICs, in addition to exchanging into a sole ownership property. The ability of buyers to purchase higher quality, more stable TIC assets is very attractive to individual buyers. When properly structured, TICs can offer safer and more stable assets than sole ownership properties, due to the size and quality of the TIC properties.”

The Benefits

Now that lenders and brokers have a better understanding of the TIC industry as a whole, they are able to pass that information along to their clients. As investors involved in 1031 exchanges look for more attractive investments, they are beginning to realize that a TIC replacement property can offer a range of benefits not available in other property types. For example, a TIC property can allow an investor to own a part of a property that would normally be out of reach. As a single investor, it takes a tremendous amount of money to own a large commercial property. With TICs, however, an average investor can own a part of high-quality investment. “1031 exchange investors and their real estate brokers now understand there is an opportunity to invest in institutional quality properties with as little as a $250,000 investment,” says Paul.

The 130,096-square-foot Casa Paloma Shopping Center in Chandler, Arizona, was acquired by SCI Real Estate Investments in March 2005.

Adds Snodgrass, “And obviously, it can upgrade your holdings. You can go from owning residential properties to retail or industrial.”

Jon King, senior vice president of Investment Property Exchange, also sees the ability to choose property type as an advantage to TIC investments.

“Investors are able to choose any property type they want, it is just a matter of whether that investment is available at the time,” he says. We are finding that most investors pick a sector that they are comfortable with. We find retail, industrial and multifamily are at the tops of most investors’ lists.”

Other benefits of the TIC structure are that it provides investors with a secure asset, as well as stable cash flow and the potential for long-term appreciation. “The structure is attractive to investors because it allows them to retain control,” says Snodgrass. “It is different from a partnership in that they actually own a piece of it.”

And while investors are owners of the property, they have no management responsibilities. Being able to reap the benefits with no day-to-day duties is a definite plus for many investors.

“More and more investors are becoming comfortable with TICs as a replacement property source because traditional real estate has become too expensive and returns are too low,” says Pajonas. “Another factor in TIC acceptance is the relatively low amount of equity needed to get into an investment-grade property with no management responsibility.”

The Tenant-In-Common Association (TICA)

While the growth of the industry is apparent in the numbers of investors and lenders that are getting involved, the formation of the Tenant-In-Common Association (TICA) is also a measurement of the industry’s growing importance as a true real estate investment.

“The TICA was formed 4 years ago by like-minded individuals involved in the TIC industry,” says Snodgrass, founding president of TICA. “They felt like the segment was getting ready to grow and that it needed its own association to represent it.” The group now has more than 400 members that work to ensure the success of the TIC segment. Members include everyone from attorneys to brokers to lenders to investment advisors. The organization strives to educate those involved in the industry, as well as educate those outside of the industry.

TICA has created several committees in order to make sure that the organization stays current and is well represented. These committees include ethics and standards, marketing, finance, legislative and regulatory, due diligence and compliance, membership council, conference planning committee and the TICA editorial board.

Because one of the organization’s primary goals is to make sure that the TIC industry is always well represented in Washington, the legislative and regulatory committee of TICA is very active in D.C., lobbying on behalf of the industry as a whole. The committee works closely with professional lobbyists and is creating a grassroots program to bring more attention to the industry. “As in any group, we get active on Capitol Hill,” says Snodgrass. “We have hired Washington council to represent us and we spend time meeting with different people and groups.”

The formation of this organization and its presence in Washington is evidence of how far the TIC industry has come in recent years.

The Risks Of TICs

However, despite the growing acceptance of the TIC industry, there are a few areas that still concern many investors: liquidity and exit strategies. Many investors are fearful of becoming involved in a TIC investment and not being able to get out when they want to. However, industry professionals say that those interested in TIC properties should not look at them as a short-term investment. Instead, it should be entered into understanding that one of a TICs greatest benefits is its long-term appreciation potential.

“Although TICs are relatively illiquid, most investors are focused more on the tax deferral than the actual exit from the TIC investment,” says Pajonas. “Most investors view the duration of their investment as a function of waiting out a real estate cycle. When their TIC investment comes up for sale, they will redistribute their investment into other areas of the country that have growth potential.”

Many investment companies have realized the concern regarding exit strategies and have come up with ways to give investors a greater peace-of-mind.  “SCI structures our TIC properties on a pure real estate platform, which we strongly believe offers TIC buyers much better exit and re-sale opportunities than other TIC models,” says Paul. “After first offering their TIC fractional real estate interest to their fellow co-owners, they are free to market and advertise their TIC interest for-sale and to use real estate brokers in the re-sale.” Educating investors on their options and providing them with possible exit strategies has helped address the issue for many investors.

The Outlook

Because of the unique benefits and structure it offers, many expect to see continued growth of the TIC sector as more investors become aware of the option.

“Although the number of investors who take advantage of a 1031 exchange has vastly increased, there are still many who are unaware of the benefits,” says Pajonas. “As more people become aware of 1031 exchanges, the number of TIC sponsors will continue to increase.”

Even though increased awareness will bring new investors, the growth of TICs is also contingent upon the success of the 1031 market as a whole. “The 1031 market has grown a lot over the past 2 or 3 years,” Bastian. “It is still a peak area, though it did soften a little earlier this year. There are unpredictable interest rates, but the demand will still be there. The TIC industry is becoming more and more accepted, more popular and more widespread.”

“There will be continued growth, but there will still be hurdles, in terms of regulatory issues and things like that,” says Snodgrass. “It is an investment, and it is contingent upon other things. But the industry will continue to grow.”

Although the industry is expected to welcome new players over the next few years, there will also be a number of sponsors that will be pushed out. The elimination of smaller sponsors has the potential to be both a positive thing and a negative thing for investors. There might be a smaller pool of sponsors to choose from, however, some of the less reputable ones will be knocked out of the market.

“The industry should continue to grow in volume, however, I think we now have too many small sponsors whom not all will survive,” says Paul. “The larger sponsors that can consistently offer high-quality performing institutional properties will likely grow in size. The free market system will likely take a toll on less professional sponsors.”