TICs Not So Hot Anymore?

Live Fast, Die Hard, as they say. Courtesy of CRE News.

By Jeff Mordock, Commercial Real Estate Direct Staff Writer

Some industry players are starting to fret that the tenant-in-common market has fallen out of favor with investors.

In the second quarter of 2008, sponsors of TIC groups recorded $353 million of investment activity, according to Omni Brokerage, a Salt Lake City sponsor of such vehicles. That's a 20 percent drop from the $443 million of activity recorded in the first quarter and a nearly 50 percent drop from the $700 million a year ago. It's also the third straight quarter that TIC activity has dropped by at least 20 percent.

So far this year, TIC investment activity has totaled $796 million, down from $1.6 billion a year earlier.

TIC investments exploded earlier this decade in lock-step with the residential housing market. Legislation was passed in 2002 to facilitate the spike in deals.

As investors sold second homes into a frothy market for profit, increasing numbers sought to shelter their gains through tax-deferred transactions. By pooling their capital with that of others, they were able to pursue large commercial properties with the promise of larger returns.

Orchestrating such investments are TIC sponsors, whose numbers grew to 80 at the market's peak in 2005-2006 and has since shrunk to 64. Only 21 of them completed deals during the first half. And of those, only nine completed more than one deal.

The housing crunch has forced many investors to hold their properties, nearly shutting the spigot of capital that was being funneled to TIC sponsors. So sponsors aren't doing deals and some are said to even be struggling to meet their payrolls.

"It's a terrible time to be a TIC sponsor right now," said Lee Travis, acquisition director of Ellison Equities, a Los Angeles sponsor. "Regulatory scrutiny is increasing, costs are doubling and debt and equity is impossible to find."

This year's $796 million of TIC activity accounts for less than 1 percent of the $85 billion of total investment activity, according to Real Capital Analytics.

That's a sharp contrast to the market's heyday. In 2006, TIC sponsors raised a record $4 billion of capital, plowing that into $8 billion of investments. And last year, they raised $3 billion, turning that into $7.5 billion of investments.

It's not known how much equity has been raised so far this year, but most industry watchers expect that for the full year, capital raises will total substantially less than last year's $3 billion and could even be less than $2 billion.

"If things don't improve, the whole industry is going to have to face serious questions," says Wesley Dodds, a partner with Dodds, Belmont and Hawkins, a Philadelphia law firm that specializes in TIC transactions.

Read the rest of the story at CRE News