In Credit Crunch, TICs Follow Market Lead

MBA (7/23/2008 ) Murray, Michael
The credit crisis continues to take its toll on tenancy-in-common (TIC) structures as popularity wanes from previous years because of less available capital for debt financing.

In 2007, 34 percent of real estate executives said TIC investment structures were becoming more common in their markets, but that sentiment dropped nearly one-quarter to its current 12 percent of executives that find TIC structures popular, based on The Emerging Issues and Current Trends in the U.S. Real Estate Market 2008 Real Estate Survey from Grant Thornton LLP, Chicago.

“This fractional interest in real estate is likely down because liquidity and debt capital are harder to find,” the report said.

The amount of investor equity placed in TIC properties increased 13 percent in 2006 to $3.6 billion of equity placed, and the first quarter of 2007 reported $900 million of equity placed with a 2007 forecast of $4.5 billion for the industry as a whole. Securitized TIC sponsors—those that sell TICs as securities in accordance with the Securities and Exchange Commission regulations—raised $760 million in the first quarter and $875 million in the second quarter, reports Omni Consulting and Research, Salt Lake City, Utah.
However, $875 million of equity raised in the second quarter of 2007 was down from peak levels reached in the latter half of 2005 and early 2006—including three consecutive quarters at more than $1 billion.

Kaleb Keller, assistant vice president at George Smith Partners Inc., Los Angeles, said TIC volume "declined dramatically," although some lenders continue to look at transactions.

"There are also a number of regional banks that are looking at TIC transactions and various CMBS players that are considering them," Keller said. “Whether those transactions are getting done or not is a different story. I'm not sure about that, but I do know there are people considering TIC deals [as] solid even in today's market."

The Tenant-in-Common Association (TICA) defines TIC investments as the purchase of undivided fractional interest structures which allow investors to purchase an interest in a significant real estate asset—usually "proven" retail or multifamily properties. TIC investors own, control and perhaps invest in a larger property than they could obtain individually.

With a percentage of ownership—title and deed—an investor could also receive passive rental income and tax benefits of traditional real estate. In the past few years, TIC structures followed the overall commercial real estate market as they increased in volume, peaked in 2006 and then declined during the second half of 2007.

The survey said the TIC industry spawned from easy access to debt capital and in its ability to defer large capital gains taxes among taxpayers.

“With financing harder to come by for tenancy-in-common structures, this investment structure is less attractive than it was just a few years ago,” the Grant Thornton report said.

Keller said most industry players remain concerned about the overall market, and the TIC industry will recover as the market recovers.

"The underwriting parameters have tightened up so much that it just makes a number of deals that might have been feasible a year ago, just a lot less feasible today—particularly with the cost of debt and the scrutiny that deals are undergoing today," Keller said.

"I don't see the TIC industry just dying and going away," he added. "I think that there will probably be a resurgence in TICs as the market comes back."