Selling the Farm

{Q} If I buy one of these, I get an undivided interest in a property. Do I get income from it?

Correct. The investments are structured primarily to preserve wealth and generate stable monthly income. In addition, a TIC is structured as a passive investment that doesn’t require active management. The typical profile of an investor is going to be a property owner who is at or near retirement, built their wealth through real estate ownership, and is at a point in their life where they no longer want to manage real estate.

{Q} How long does one of these investments last?

Typically, the holding period is about seven years. So it’s a relatively long-term horizon. But that sort of holding period fits the profile. If it were a two-year hold, when the property was sold they’d have another tax issue.

{Q} What is the appeal of one of these deals to an investor?

Primarily, what the investors are looking for is the income stream. What the investors are looking at is that cash flow.

{Q} From what I know about bonds, the higher the yield, the higher the risk. Is that also true for TICs?

Yes. For instance, a sponsor may go out and buy what’s called a ‘value-add deal.’ Say it’s a strip mall in California that’s not in a great location where the sponsor, in order to add that value, might have to find a new anchor tenant and rehab the property. With the property in that condition, the sponsor will be able to buy it for less and hope to generate a higher level of income based on the upgrades to the property. But that sort of scenario also carries higher risk. In contrast, let’s say you have a Walgreen’s store with a 20-year lease, backed by a multibillion-dollar corporation [Illinois-based Walgreen Company]. That sort of deal may only yield 5 percent or so.

{Q} Let’s say you show me a property that looks great in the picture. How do I know that it isn’t located in a slum?

All the materials that we give to our investors include a due diligence package. In that package, we have a market study on the area, [which is] done by an independent company . . . . Let’s say it’s an apartment building in a declining area with a 20 percent vacancy rate—we’re not going to buy it. The investor can look at the market study; they can look at the environmental report.

[As a potential investor], I would make sure I look at the private placement memorandum with the broker and at the fees and commissions associated with the deal. Certain fees won’t change from deal to deal, such as the commission paid to the broker; however, the management fee will vary, as well as some of the other costs. So what you want to do is look at the use of proceeds and compare that to other offerings.

{Q} Are some types of real estate appreciating faster than others?

In a general class, I’d say multi-family [rental property] looks like it’s going to be a good appreciation play because you have rising interest rates. When interest rates were low, you had many new homebuyers able to afford their first house. With higher rates, that becomes tougher and helps the apartment building market.