Wednesday, October 30, 2013

A Look Into the TIC Industry

By Tim Husson, PhD and Carmen Taveras, PhD

So far, we've discussed some of the concerns we have with TIC investments and shown how to use discounted cash flow analysis to value a TIC interest with our handy spreadsheet.  But you might be asking, just how prevalent are these concerns across all TICs?

To answer that, we examined 194 sets of offering documents for TICs sold from 2004-2009.  This totaled $2.2 billion in equity, which amounts to approximately 19% of all equity issued by TICs in that period, and included properties from 32 states.

YearNameIssuerStateEquity (MM)
2005Atlantic BoulevardDBSIFlorida$4.99
2007Beacon PointDBSIOhio$3.60
2008Belton Town CenterDBSIMissouri$3.62
2006Colonnade at West LakeDBSITexas$4.95
2007Colony CommonsDBSITexas$3.67
2008Houston Levee GalleriaDBSITennessee$9.80
2004Southtrust TowerDBSIFlorida$34.24
2006East 21st Street BuildingsDBSIKansas$11.28
2005Friar's Branch CrossingDBSITennessee$7.82
2007Goshen VillageDBSIIndiana$4.74
2007Haverford PlaceDBSIKentucky$7.15
2005Lakeview & Sojourn CentersDBSITexas$16.65
2008Landmark TowersDBSIMinnesota$16.50
2008North StaffordDBSIVirginia$13.22
2006Northpointe TowerDBSIMissouri$6.74
2007Park Plaza Retail CenterDBSITexas$8.30
2008Peachtree Corners PavilionDBSIGeorgia$3.95
2008Pinehurst Square EastDBSINorth Dakota$10.15
2008Pinehurst Square WestDBSINorth Dakota$6.36
2005Renaissance CenterDBSITennessee$13.21
2004Republic DBSITexas$18.10
2008Romence VillageDBSIMichigan$6.51
2007Sherwood VillageDBSITexas$1.94
2008Shoppes at TrammelDBSIGeorgia$3.72
2007Shops @ KatyDBSITexas$4.88
2006Silver Lakes DBSIFlorida$7.10
2007Village at Old TraceDBSIGeorgia$9.42
2007Willow BendDBSITennessee$2.87
2008Wisdom PointeDBSIGeorgia$3.35
2006Bridford Lake ApartmentsCore Realty HoldingsNorth Carolina$10.13
2006Brookfield Lakes Corporate Center Core Realty HoldingsWisconsin$32.00
2006Cardinal ApartmentsCore Realty HoldingsNorth Carolina$6.34
2006Chatham Wood ApartmentsCore Realty HoldingsNorth Carolina$4.39
2007Governor's PointeCore Realty HoldingsOhio$8.13
2006Hickory Creek ApartmentsCore Realty HoldingsVirginia$10.90
2007Hidden Lakes ApartmentsCore Realty HoldingsNorth Carolina$10.50
2008Hunters Chase ApartmentsCore Realty HoldingsNorth Carolina$4.93
2006Madison at Adams Farm ApartmentsCore Realty HoldingsNorth Carolina$11.62
2008Minneapolis Industrial PortfolioCore Realty HoldingsMinnesota$14.81
2007Promenade at NorthridgeCore Realty HoldingsCalifornia$11.13
2006Park West ApartmentsCore Realty HoldingsVirginia$9.89
2007Revere HoldingsCore Realty HoldingsNevada$17.50
2006Riverbend ApartmentsCore Realty HoldingsIndiana$30.50
2007San Antonio Airport IndustrialCore Realty HoldingsTexas$15.10
2006Sonoma Ridge ApartmentsCore Realty HoldingsCalifornia$16.00
2005West Michigan IndustrialCore Realty HoldingsMichigan$23.60
2005Westridge Executive PlazaCore Realty HoldingsCalifornia$8.50
2006Westwind Office ParkCore Realty HoldingsCalifornia$17.48
2007Griffin Capital (Independence) InvestorsGriffin CapitalOhio$13.10
2006Griffin Capital (Naperville) InvestorsGriffin CapitalIllinois$14.33
2006Griffin Capital (Q Street) InvestorsGriffin CapitalCalifornia$21.28
2006Griffin Capital (St. Paul) InvestorsGriffin CapitalMinnesota$19.73
2006Griffin Capital (Naperville) InvestorsGriffin CapitalIllinois$14.33
2007Marriott Courtyard-Columbus AirportMoody National CompaniesOhio$10.81
2007Marriott Courtyard-Columbus DowntownMoody National CompaniesOhio$5.85
2007Marriott Courtyard-LyndhurstMoody National CompaniesNew Jersey$19.22
2007Marriott Fairfield Inn MeadowlandsMoody National CompaniesNew Jersey$11.51
2007Marriott Residence Inn-Perimeter CenterMoody National CompaniesGeorgia$7.08
2007Marriott Residence Inn-TorranceMoody National CompaniesCalifornia$23.02
2007Marriott SpringHill SuitesMoody National CompaniesWashington$5.83
2008Marriott TownePlace Suites-PortlandMoody National CompaniesMaine$9.69
2007Fairfield Inn Denver (Denver One)Moody National CompaniesColorado$8.63
2006Philips OfficeMoody National CompaniesNew Jersey$21.04
2007Renaissance MeadowlandsMoody National CompaniesNew Jersey$22.39
2007TownePlace Suites Fort WorthMoody National CompaniesTexas$4.58
2007TownePlace Suites Mount LaurelMoody National CompaniesNew Jersey$5.60
2006Weatherford PlazaMoody National CompaniesTexas$9.53
2007Beamer Place ApartmentsGenevaTexas$10.16
2005Bridle Creek ApartmentsGenevaKentucky$13.79
2006Chesterfield Valley Medical Office Building IIGenevaMissouri$8.15
2008Cooper Glen ApartmentsGenevaTexas$6.44
2005Honey Creek Corporate Center IIGenevaWisconsin$11.92
2006Honey Creek Corporate Center IIIGenevaWisconsin$10.45
2007International Market SquareGenevaMinnesota$13.63
2007Carrington Ridge ApartmentsTIC PropertiesGeorgia$8.55
2007Duncan Distribution CenterTIC PropertiesSouth Carolina$7.25
2007TIC N. Central Dallas InvestorsTIC PropertiesTexas$5.95
2007SBC FentonTIC PropertiesMissouri$6.90
2006Acropolis Office ParkTIC PropertiesOhio$11.95
2005Southfield Office BuildingTIC PropertiesTexas$8.85
2006302 West Third StreetTIC PropertiesOhio$8.54
2007NNN 824 North Market StreetTriple Net PropertiesDelaware$15.00
2007NNN Central PlazaTriple Net PropertiesArizona$32.80
2007NNN Darien Business CenterTriple Net PropertiesIllinois$13.20
2007NNN Eastern Wisconsin Medical PortfolioTriple Net PropertiesWisconsin$12.94
2007NNN Exchange SouthTriple Net PropertiesFlorida$12.34
2007NNN Harbour LandingTriple Net PropertiesTexas$7.38
2008NNN Jacksonville Medical PlazaTriple Net PropertiesFlorida$14.04
2007NNN Mainstreet at FlatironTriple Net PropertiesColorado$5.85
2007NNN Old Line Professional CentreTriple Net PropertiesMaryland$6.65
2007NNN One Ridgmar CentreTriple Net PropertiesTexas$11.85
2007NNN River RidgeTriple Net PropertiesNorth Carolina$10.85
2008NNN Six Forks StationTriple Net PropertiesNorth Carolina$11.70
2007NNN Three Resource SquareTriple Net PropertiesNorth Carolina$11.48
2008NNN Washington ParkTriple Net PropertiesOhio$12.07
2006116 Defense HighwayDirect InvestMaryland$7.62
2007246 Omni WayDirect InvestMassachusetts$12.59
20072810 North Parham RoadDirect InvestVirginia$7.82
2007500 East MainDirect InvestVirginia$16.90
2007Braintree ParkDirect InvestMassachusetts$21.94
2008Heron CoveDirect InvestNew Hampshire$10.63
2007Cummings Research Park - Portfolio IIBluerock Real EstateAlabama$21.28
2007Summit at SouthpointBluerock Real EstateFlorida$13.55
20081600 Barberry LaneGrubb & EllisGeorgia$19.07
20085001 EnclaveGrubb & EllisTexas$11.22
2008Oak Park Office CenterGrubb & EllisTexas$18.65
20082650 Old NorcrossGrubb & EllisGeorgia$13.66
2008One Live OakGrubb & EllisGeorgia$17.49
2008Plantations at HaywoodGrubb & EllisSouth Carolina$21.36
20087207 Snowden RoadGrubb & EllisTexas$12.36
20081650 SunflowerGrubb & EllisCalifornia$14.93
20085200 Upper MetroGrubb & EllisOhio$6.33
2007Houston Office BuildingsArgus Realty InvestorsTexas$13.62
2008IBPArgus Realty InvestorsTexas$55.00
2007Hendersonville Desanto Realty GroupTennessee$13.32
2007Cypress MedicalDesanto Realty GroupKansas$10.81
2007ClearviewDesanto Realty GroupMichigan$9.91
2007Fox ChaseDesanto Realty GroupOhio$9.77
2008Hunter’S ChaseDesanto Realty GroupOhio$11.44
2007Perry's CrossingDesanto Realty GroupOhio$10.07
2007Ashtabula Acquisition CabotOhio$15.10
2007Northpark Southland Acquisition CabotIndiana$22.00
2007Creekside Acquisition CabotGeorgia$17.50
2005Trafalgar/Avion AcquisitionCabotFlorida$10.70
2007Fontaine Business ParkU.S. AdvisorsSouth Carolina$11.50
2004North Valley Tech CenterArgus Realty InvestorsColorado$20.20
2006Triwest PlazaArgus Realty InvestorsTexas$17.00
2005Covington Lansing AcquisitionDirect Capital Securities Inc.Michigan$7.38
2005Covington Montelago AcquisitionDirect Capital Securities Inc.Texas$9.72
2007Courtyard Matthews & Courtyard Rock HillOxford Capital GroupNorth Carolina$10.33
2007Residence Inn & Courtyard by MarriottOxford Capital GroupSouth Carolina$11.68
2006Residence Inn by Marriott - ChantillyOxford Capital GroupVirginia$13.05
2007Residence Inn CharlestonOxford Capital GroupSouth Carolina$7.50
2007SpringHill Suites RiverviewOxford Capital GroupSouth Carolina$5.52
2007Crystal Lake & Pelican PointeCabot 1031Florida$13.00
2007East Town Acquisition Cabot 1031Wisconsin$7.10
2006Oak Grove Acquisition Cabot 1031Florida$8.65
2007Turfway Ridge Acquisition Cabot 1031Kentucky$11.75
2007Portland Senior Properties Christopher PlaceOregon$4.60
2007Traverse Bay Senior Properties Christopher PlaceMichigan$4.00
2006DFW Office/Flex IEquitable CompaniesTexas$10.85
2008Evanston PortfolioEquitable CompaniesIllinois$9.49
2006DFW Office/Flex IIEquitable CompaniesTexas$12.75
2006Barrett Woods Corporate CenterExchange Point PropertiesMissouri$9.49
2008Cameron Brook ApartmentsExchange Point PropertiesGeorgia$17.17
2007Mapleridge Shopping CenterExchange Point PropertiesMinnesota$7.72
2007Southridge PlazaExchange Point PropertiesTexas$6.47
2007Dobson RanchGeyser HoldingsArizona$4.90
2009Keaau HawaiiGeyser HoldingsHawaii$4.33
2008ShowplaceGeyser HoldingsIndiana$5.59
2007YumaGeyser HoldingsArizona$6.00
2006Springs - Office InvestorsMeridianKentucky$15.39
2006Atlanta OneMoody National CompaniesGeorgia$7.21
2006Memphis Residence InnMoody National CompaniesTennessee$6.93
2006Residence Inn LebanonMoody National CompaniesNew Hampshire$9.36
2006Texas TwoMoody National CompaniesTexas$9.30
2008Madison At Fairwood ApartmentsPassco CompaniesWashington$16.90
2006121 Airport Centre I & IIPrinciple Equity ManagementTexas$16.87
2007Johns Creek Office PortfolioPrinciple Equity ManagementGeorgia$12.64
2007Technology Parkway Office PortfolioPrinciple Equity ManagementGeorgia$13.30
2005Thistle LandingPrinciple Equity ManagementArizona$22.35
2007University Shopping CenterPrinciple Equity ManagementTexas$7.56
2005Baylor Garland Medical PlazaRainier Capital ManagementTexas$5.60
2006Business ExchangeRainier Capital ManagementMissouri$3.19
2007Enclave ParkwayCreekstone PartnersTexas$11.54
2007WoodlandsCreekstone PartnersTexas$7.36
2004Cypress Pointe IVMammoth EquitiesCalifornia$14.65
2005Professional Building - RosevilleMammoth EquitiesCalifornia$7.72
2007Vista RidgeSequoiaTexas$9.39
2007ForumSequoiaTexas$12.00
2006The Best Western Airport Inn Fort MyersGibralter HoldingsFlorida$10.69
2006Maunakea MarketplaceGibralter HoldingsHawaii$6.30
2008Algonquin GalleriaNelson Bros.Illinois$9.54
2006Pueblo Crossing IORIX EMPIREColorado$6.00
2007Kansas CityORIX EMPIREMissouri$8.60
2007Battle Creek IORIX EMPIREOklahoma$14.00
2006Fountains II And Fountains IIIWilkinsonIllinois$7.01
2006State Of Michigan BuildingAPCAMichigan$3.69
2007Landmark/Laumeier Office PortfolioBluerock LandmarkMissouri$7.53
2008Meadow Green ApartmentsDelmar Equity PartnersTexas$2.40
2007Colonnade At King’S Grant Shopping CenterKodiakNorth Carolina$3.85
2007Hotel Indigo Peachtree StreetPennbridge CapitalGeorgia$8.40
2006RMC AutoSonic BMWN League CityRMC PropertyTexas$9.95
2007Selina PlazaTIC CapitalFlorida$2.54
2006State Farm Insurance BuildingTIC CapitalCalifornia$7.05
20082801 East Enterprise DriveWhitecap Real Estate Wisconsin$2.38
2006Rambling Oaks Assisted Living And Rambling Oaks CourtyardWilkinson 1031 Oklahoma$7.20
2007Northgate Business Center And Blackhawk Corporate CenterArgus Realty InvestorArizona$20.55
2006220 Virginia AvenueTriple Net PropertiesIndiana$20.76
2005Sixth Avenue WestTriple Net PropertiesColorado$6.60
2005Woodside Corporate ParkTriple Net PropertiesOregon$24.65
2006Las Colinas HighlandsTriple Net PropertiesTexas$15.40
2007Laveen Village MarketplacePassco CompaniesArizona$8.50
2005LegacyRMC PropertyTexas$9.78

After we compiled this information, a couple of things stood out.  We have said before that TICs tend to have high upfront fees.  In our database, the average upfront fees totaled 28% (!) of total equity.  The lowest upfront fees were a still-high 17%, and the highest was a remarkable 72%.  We have also said that TICs tend to be highly leveraged (i.e., use a lot of debt).  Some TICs had no leverage, but both the average and median debt-to-equity ratio (total debt / total equity) across our sample was 1.56.

We've also talked about how TICs tend to have low net present values, even taking a sponsor's projected cash flows at face value.  When we valued all the sponsor's projections in our database, we found that the average TIC was worth only 83.6 cents on the dollar.1  But were the sponsors' assumptions valid?

For each property, we compared the cap rate used by the sponsor to cap rates published by a real estate market analysis firm. Cap rates are used to estimate the final value of the property at sale.  The lower the cap rate, the higher the resulting property value. We found that sponsors tended to use cap rates that were lower than market rates, inflating the property value at sale, as shown in the figure below (Figure 10 in the paper):
When we value all of the properties using market cap rates rather than those assumed by the sponsors, the average present value drops to 74.5 cents on the dollar.  The distributions of present values before (blue) and after (red) correcting the sponsor's caps are shown below (Figure 12 in the paper):
These results suggest that TIC sponsors use aggressive assumptions when preparing cash flow projections for offering materials.  These cash flows are the primary justification for projected distributions and investor returns, yet even a relatively straightforward discounted cash flow analysis reveals that most TICs were exceptionally poor investments.

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1  Sponsors often include multiple projections, especially for cap rate assumptions.  We valued each of these alternative projections and averaged the resulting values.

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