Friday, November 1, 2013

The Consequences and Implications of TIC Investments

By Tim Husson, PhD and Carmen Taveras, PhD

The research we have outlined all this week strongly suggests that TIC interests are exceptionally poor investments.  We have focused our posts on what a thorough due diligence on the TICs should have revealed at the time of issuance. But you may be wondering, what happened to these TICs? What sort of returns did investors receive?

To our knowledge, there is no retrospective study of TIC returns.  But in our experience, the vast majority of TIC properties suffered significant impairments during the recent real estate market collapse.  Many properties saw lower rental revenue and many faced increased vacancy rates, leading to reduced or suspended distributions to investors. Many TICs have gone into foreclosure as they have been unable to pay their debt obligations.

Some TICs even required investors to pay more into the property for maintenance or other costs.  Unlike diversified real estate mutual funds or even traded REITs, TIC investors directly own a proportional share of the property, and are responsible for any required tax or management fees, whenever TIC revenues fall short of covering expenses. 

Many TIC issuers have also gone under.  Most notably, DBSI (who had 29 of the 194 TICs in our database) has gone bankrupt in the face of fraud and other charges.  Many of the broker-dealers who sold them, such as Pacific West Securities, are also defunct, while others face significant litigation from outraged investors.

Many of the issues that plague TICs are not present in liquid, diversified alternatives. However, those issues are present in many other private placement real estate funds.  In our opinion, TICs are just an example of the highly speculative, illiquid, and potentially fraudulent offerings made in private placement format.  We think investors should realize that private placements are often sold with limited disclosure of relevant information regarding potential conflicts of interest and the parameters underpinning projected cash flows.  We suggest that the vast majority of investors would be better served by simple, traditional allocations to market-traded index funds.  While such funds saw temporary losses during the real estate collapse, they fared far better than TICs.

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