|
The Wall Street Journal
Apr 5, 2006, p. B7
Real Estate Finance: Joint Property Ownership Picks Up;
Tenant-in-Common Deals Allow Buyers to Chip In On Commercial Properties
By Jennifer S. Forsyth
Cathy Scullin was in a pickle.
Enticed by high prices, the Beverly Hills, Calif., commercial real-
estate broker began selling off pieces of her small southern California
real-estate portfolio about two years ago. Only then did she realize
she couldn't use the profit to buy another property.
"Everything I found needed an enormous amount of work and, in my
opinion, was way overpriced," says Ms. Scullin. If she didn't reinvest
in real estate quickly, she would have to pay capital-gains taxes on
the proceeds.
Her solution: a Tenant-in-Common transaction, where she joined a group
of investors who each bought a fractional share of investment property
-- in this case a small retail center.
TICs -- the real-estate version of chipping in for a pizza and then
grabbing your own slice -- have been around for years, but their
popularity soared in 2002 when the Internal Revenue Service said they
would be allowed for so-called 1031 exchanges. That refers to the
portion of the U.S. tax code that allows investors to defer capital-
gains taxes if they reinvest the proceeds of an investment-property
sale in a "like kind" of property within 180 days.
Though it is too early to know if most of these investments will pay
off, TICs are proving particularly attractive to baby boomers who
invested in real estate years ago but, upon retirement age, are looking
to shed the hassles of management, such as spending on upkeep and
negotiating with tenants. Investors can get the benefits of property
ownership -- rental income and profit on any future sale -- but leave
the day-to-day details to professional managers. "It's something they
can understand, it's relatively safe and it produces income that can
grow over time," says Marc Paul, president of Los Angeles-based SCI
Real Estate Investments, one of the largest TIC companies that match
properties and investors.
In 2002, about $550 million flowed into TIC investments, according to
the research firm Real Capital Analytics Inc., based in New York. In
2005, TIC transactions surpassed $6.4 billion.
As the number of investors and TIC companies increased, so have the
blockbuster deals. At least five recent TIC acquisitions topped $100
million each, according to Real Capital Analytics.
But here is the rub: As with all real-estate investments, TIC property
can fail to meet projected returns and investors should perform due
diligence as with any piece of property. Real-estate experts also warn
that TIC investors, focusing too narrowly on the tax benefit, may be
bidding up prices on marginal deals. Another possible pitfall: If an
investor needs to get out before a property is sold, it may not be easy
to find a buyer for the share.
Gary Gorman, managing partner of The 1031 Exchange Experts LLC, an
investment advisory firm, says his company tracked the case of an
apartment complex bought by a TIC two years ago. He says the complex,
which he declines to name, was on the market for $15 million, but was
really worth about $12 million. A TIC company promised to pay the $15
million, then sold individual shares to investors for a total of $18
million. "The building is still only worth $12 million," Mr. Gorman
says. "So that property has got to appreciate 50% before those people
are going to break even."
Mr. Paul of SCI believes those are isolated incidents, saying his
company often finds itself outbid for properties by pension funds or
publicly traded real-estate investment trusts. "We're just paying the
market rates."
Gilbert Reese, a retired ophthalmologist from Menlo Park, Calif., says
his $750,000 investment in two TICs in 2001 hasn't worked out. In one
of those, he says high-profile tenants emptied out of a Denver- area
office building as the tech market soured. A new tenant recently moved
in, but he says its rental rate is considerably below the original
leases, reducing the likelihood of cash disbursement to the investors
for some time. So far, he hasn't found a buyer for his share. Tony
Thompson, chief executive of Triple Net Properties LLC, the Santa Ana,
Calif.-based TIC investment company that managed the transaction, says
that, unfortunately, the building was bought at market peak, but he
believes the Denver market is showing signs of recovery.
But Ms. Scullin, the Beverly Hills broker, is happy with her TIC's
$16.8 million investment in a retail center in Rancho Cucamonga, Calif.
"It's something I could never dream of owning on my own," says Ms.
Scullin, who is now investing in her 12th TIC. Returns for her
properties have met projections, she adds, though none of her TIC
investments have been sold yet.
Experts say that many investors simply won't know if their TICs will
pay off until more properties are put back on the market. Says Harold
Hunt, a research economist with the Real Estate Center at Texas A&M
University, "We're just not far enough down the line yet to say whether
this is a great idea or a bad idea."
|
|
WSJ: Tenant-in-Common Deals Allow Buyers to Chip In On Commercial Properties
