Friday, January 11, 2013

SLCG Research: Tenants-in-Common Interests

By Tim Husson, PhD

While we've spent a great deal of time talking about non-traded REITs on this blog, so far we've given less attention to another kind of real estate investment that has also been sold to investors based on questionable merits:  tenants-in-common (TIC) interests.  TICs are private placement investments that were very popular during the real estate boom of 2002-2008, but have suffered tremendously when the markets turned sour.  We discussed TICs in our paper on non-traded REITs, but we felt that the subject deserved a more thorough treatment and are happy to announce a new working paper, What is a TIC Worth?, now available on our website and SSRN.

In it, we construct a stylized example of a TIC financial projection as it would appear in offering documents.  We demonstrate that the "cash on cash" returns highlighted by TIC marketing materials are often inflated or manipulated representations of the actual value of the property.  We also demonstrate that the tax benefit of a TIC, when used as part of a 1031 like-kind exchange, is overwhelmed by the high fees TIC sponsors charge for organizing the deal.

Our results suggest that a thorough financial analysis of TIC projections would reveal that TICs often have little benefit to the investor and frequently exhibit a significantly negative present value under reasonable assumptions.  Like many other private placement investments, and as reflected in FINRA's Notice to Members (PDF), TIC offering documents must be rigorously analyzed to determine exactly how the reported returns could be supported by operating income--because sometimes, they can't.

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