ICT investors
In this very dynamic real estate market, TIC (Tenant in Common) investors have suffered as the market has weakened. In particular, those real estate investors who have jumped into ICT investments in the last four years (at the top of the market) are finding that, in some places, high vacancy rates and falling rental rates are reducing their cash flow and their ability to pay their mortgages
Who bought the ICT investments?
As baby boomers got older, they wanted to reposition their assets into investments that weren’t as time consuming and didn’t involve their daily attention. These investors wanted to escape management-intensive investments and buy real estate investments that would guarantee a “safe and consistent” return.
They had typically sold other investments and traded TICs using a 1031 exchange, bundling with other investors, which seemed like a safe bet. Unfortunately, many (not all*) ICT investments were organized by syndicates who bought the properties at a price and then marked the properties up for resale to their investors. In many cases, they used short-term “interest only” loans to close their deals, betting that real estate appreciation and rising rents would increase property values quickly and allow properties to be refinanced.
As a result of the large number of investors (TIC syndicators, REITs and others) competing for the same inventory, asset prices skyrocketed, lowering investment returns. CAP rates as low as five and a half were not unusual and CMBS loan originators and other financial institutions were willing to lend to TIC syndicators and their non-recourse investors.
The real estate market was not as strong as investors expected.
Market appreciation and rent increases did not occur. In most US markets, most property vacancy rates have increased, making it difficult for TIC to have enough money to cover their expenses. In many cases, properties performed on a proforma basis, but when it came time to refinance, the rules changed and lenders wanted to see more equity in each investment. Nervous lenders have moved their capital requirements from investors from 25% to 40% and even 50%.
This has forced many ICT investors into the unpleasant position of significantly increasing their cash investments in property to salvage their existing equity positions and furiously trying to raise new financing for their deals to replace existing “interest only loans”. These new capital requirements are straining the resources of ICT investors.
This day
In the last two years, DBSI and Sunwest Management, two major ICT syndicators, have been dissolved and declared bankrupt. As these cases progress through the courts, questions have been raised about the future of ICT property sales. It seems likely that real estate TICs sold by real estate brokers will disappear and will most likely be replaced by securitized TICs for larger investments and real estate companies for smaller investments. (ICTs can be sold as real estate investments or as securities, but real estate TICs are not subject to the same high level of disclosure as securities investments.)
One reflection of this trend is that the Tenants in Common Association (TICA) changed its name to Real Estate Investment Securities Association (REISA). In the last year REISA recommended that all ICT be structured as securities.** Some ICT syndicates are still in business, such as RealtyNet Advisors. Realtynet advisors have adapted to the changes in the market with their special approach to ICT, where there is no debt, only capital invested, in other words, they do not borrow money to make a deal. They find enough investors to put up capital for the full sale price.
The future of ICT investments will be dictated by the recovery of the market; In the meantime, look for other ways to make money investing in real estate. Some of these other options include buying foreclosed properties, buying real estate deals with large down payments (50%), or buying notes from banks that are desperate to increase their cash positions.
Grades:
**RealtyNet Consultants are not your average tenant sponsor. Unlike most TIC sponsors, Realty Net Advisors does not burden its properties with debt, brokerage fees, or other costly charges, and does not sell at a higher than market rate. With RealtyNet’s simple co-ownership structure, investors own a fractional, undivided interest in an entire property. Each shares their share of the net income, tax shelters, and property appreciation.” (Quoted from RealtyNetAdvisors website) See http://www.realtynetadvisors.com/benefits-of-a-tic.php.
Note: What is a tenant-in-common investment (also known as undivided fractional interest)?
The tenant-in-common (or undivided fractional interest) structure allows investors to purchase a stake in a significant real estate asset, perhaps larger than they could obtain individually. The investor acquires a percentage of ownership (title and deed) and receives passive rental income while receiving the tax benefits of traditional real estate. The investors own and control the properties, not a third party. TIC property provides investors with the first avenue for property diversity, both in location and type, from their real estate portfolio.
Unlike real estate companies, TIC ownership grants each owner the same property rights, regardless of the capital invested. This element of the investment structure does not put any individual owner (or group of owners) in direct ownership control over any other investor. You really can have all the ownership benefits and security of a great business asset with far fewer hurdles. As with any type of investment, the value of a fractional interest generally increases annually due to the escalations inherent in most tenant leases. From the Real Estate Investment Securities Association website at, http://www.reisa.org.
** REISA is a national trade association of professionals who offer and distribute securitized real estate investments