T-I-C, Anyone?

(Tomorrow's post will respond to some of the questions and statements that have been published as comments over the last few days. Stay tuned . . . )

For some unknown reason, I've been thinking a lot about T-I-C's today. No, it's not because all of the activity on my blog has left me with involuntary facial spasms. It's because, if we had ended up with any profits from selling those albatross apartments, we were thinking of trading into one. I had been researching them since before we bought the commercial properties (I probably would have fared better in a T-I-C). I had investigated several stock brokers who offered the services and called client references who had invested substantially in T-I-C's. We even received disclosures on properties that we were considering. But, alas, it was not meant to be. I'm still curious, though. What happens to large commercial properties when the market for SFR's is in the toilet?

Just in case you aren't familiar with Tenant-In-Common offerings, here's a snapshot that I'm quoting from one of the gazillion TIC sites out there:

"Tenant-in-Common real estate investments offer investors the opportunity to share in the ownership of large properties such as shopping malls, office buildings, and housing developments, as well as multi-million dollar industrial complexes. This investment structure is designed to allow you to invest in institutional quality real estate without having to buy the entire property . . . . .

According to IRS guidelines, no more than 35 investors may take part in a T-I-C property. T-I-C investors have a fractional deeded interest in a larger property which is professionally managed. Monthly payments are made to each investor according to his initial equity along with regular reports as to the performance of the property."

Here's more:

"Each can leave his or her interest upon death to beneficiaries of his choosing instead of to the other owners, as is required with joint tenancy."

When we were initially looking at T-I-C's in 2004-2005, the return rate was around 7-8%, with DBSI guaranteeing a 6.5% return. In the beginning of this year, the spread was more like 5.5%-7.5%, with the occasional 10% return on an assisted living facility for a short (18-24 months) period of time before the seller had the right to purchase the property back. I can't find my notes (we must have accidentally used them for fireplace tinder), but I think DBSI is down to 6%. I'm sure you'll be happy to correct me if I'm mistaken. Please do.

I had mentioned in an earlier post that my biggest problem with T-I-C's, besides abdicating all control over your investment, is that the front end costs are extreme, depending on the sponsoring company and the property. They are so high that you need to hold on to the property for a while in order to recoup the charges. But, if you're only interested in bottom line cash flow and totally passive real estate ownership, T-I-C's could be an answer. Plus, the due diligence performed on these properties was quite impressive.

I had chosen a company called Alexander-Partners. It took us a long time to decide between them and another financial firm in La Jolla, Aubrey Morrow's. Meeting Aubrey in person didn't impress me (he liked to watch the TV in his office over my shoulder---Yuck!), but the broker who we were assigned to seemed extremely competent. We checked the securities broker licenses of everyone and chose Alexander-Partners. But my husband and I were never totally convinced that a T-I-C was the right move. Now, it's a moot subject.

Last night, I visited the property offerings for Alexander-Partners. I haven't been on in a long time because, well, we have no money to invest. It seems that the first year ROI has fallen. The first year cash flow on most of their offerings is between 5.2% and 7.5%, with a majority falling in the 6% range. There are a few hotels that are in the 7.5%-8% range.

Surprisingly, there are two properties in the development stages with returns the first year. I've never figured out how that worked (not that I've ever looked into it). How do you make a return on your investment while the project is being built? One is a 10% return on a senior housing facility in Salem, OR. The other is a condo development in NY, NY, with an 8% first year cash flow. (Yes, I know that ROI and cash flow aren't exactly the same, but, I am using them interchangeably here. Sue me.)

Wait! There's just one existing senior living facility offered at 8% first year cash flow. When we were seriously considering a T-I-C, the list was wrought with assisted living facilities offering 10%, with the option of the seller to buy it back after a certain amount of time (not enough time to recoup those front-end costs). It seemed that the seller on all of them was the same company or person. That was odd. Did assisted living facilities fall out of favor? I thought the return was commiserate with the risk. If unfavorable legislation passed in the health-related field, it had the potential of closing down the facility. Then there's the risk of lawsuits. How about the vacancy rate? Code violations? You would hope that it would be managed well enough so that you don't have to worry about these matters, but, then again, you know my track record with property managers.

So, do any of you have any new information on the T-I-C market? Are the ones purchased a few years ago still performing as projected? I've been away from it for so long that I don't have much to contribute.