It has been our experience that a common goal of TIC (Tenant-in-Common) investors is the desire to buy (1) the right property type, (2) at the right time, (3) with the right sponsor, (4) in a geographic location where demographics create value, (5) that is suitable for their lifestyle goals and investment objectives. The purpose of this white paper is to discuss some of the factors that could be considered to have an effect on these goals.

Effect of Property Types

TIC Property Types or Asset Classes include:

• Class A Office Buildings
• Industrial and Warehouse Space
• Multi-Family Apartment Complexes including Student Dormitories
• Hotels
• Shopping Malls and Other Retail Space
• Energy (oil and gas) Leases and Royalties

Seven to eight years ago the property type of choice for institutional buyers was Class A Suburban Shopping Centers, then it moved into Class A Suburban Office Buildings; now, it seems to be moving into Multi-Family Apartment Complexes. What are some of the factors creating this change?

Effect of Interest Rates on Housing

During the years of low interest rates, B to B+ complexes of 200 – 400 apartments were affected the most as an asset class, some dropping in value by as much as 40-50%. This is because high school and college graduates would only stay a few years in apartments before purchasing a condo or a home. As interest rates increase, owning a home is less affordable and young men and women are renting longer before they choose to buy.

Class A grade apartments have not been affected much by interest rates because they are rented by people who are “renters by choice” who choose to live there rather than owning their own home or condo.

Effect of Property Type on Holding Periods

An office building has been held by TIC sponsors an average of 3-4 years before sale, while a warehouse is being held 1-2 years more as it takes longer as a property type to raise in value.

Effect of Timing in Investments

With hindsight, one can see that investments in IBM, Microsoft or Oil & Gas have a certainty of being good investments; however, the timing of when you buy is more important than the certainty. Why? Because many good investments, including real estate, have periods of rising value and periods of flat stagnation.

Effect of a Real Estate Bubble

The question ‘Is there a real estate bubble?’ should be replaced by a more precise question: ‘Where is the real estate bubble?”

A real estate bubble exists on the low property value end where everyone is trying to make an entry into the real estate market; however, on the high end, where TIC deals are made, it hardly exists.

Effect of a Fractured Market on Value in Various Geographical Areas

Unlike the stock market, real estate does not rise up simultaneously throughout the US. It rises at different times in different cities and states. A TIC purchase should generally be made not in your own backyard, but in a location of rising values. Right now many believe that the Mid-West is still a good value area.

Effect of Demographics

In Seattle, there have been areas that were sub-par a few years ago and have now become the new hot areas of town for growth and development. So it is with all cities and states. Demographics change over time and ebb and flow about every 5-6 years, sometimes more. Right now (2006) Austin, Texas is a hot area along with Tempe, Arizona and Tampa, Florida. Three thousand new people move into Florida each day, and 2,000 of them go to the Tampa area. The supply of demographics will keep them growing.

Effect of Sponsors on TICs

The TIC industry has been experiencing phenomenal growth over the last six years. Six years ago there were about 5-6 sponsors, and now there are approximately 80. Six years ago, about $150M of TIC properties were offered, and now it is closer to $7 Billion.

You want to invest with the top 20% that have experience, a track record, a management team, and results. Some sponsors are putting their first properties on the market while others are putting their 168th on the market. It makes a difference who the sponsor is, in terms of communication, management of day-to-day affairs, offering of properties of value, and reselling for gain.

Effect of State Income Taxes

There are only 7 states in the US that don’t have income taxes. TICs are large enough and have enough revenue that most states have tax “nexus” on the TIC meaning each owner will have to file a state income tax return on their income and expenses for the property. The seven states without income tax are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two other states only tax dividends and interest income. They are New Hampshire and Tennessee.

Effect of Lifestyle Goals

Most TIC investors appreciate the simpler form of real estate management that TICs represent and find it fits their lifestyle goals better than active management of real estate does. However there are still differences in TIC investments that can affect your goals. For example one common difference is the amount of paperwork involved in a TIC purchase, in monthly communication, in perfecting of the title, in voting, and in approving the sale. Some TIC sponsors make communication natural and effective, others seem to think that the more paperwork they send your way, the better. In particular ask about the paperwork load on your time when investing in oil and gas royalties in multiple counties that will all want to communicate with you.

Effect of Different Tenant Options

Some TICs are sold with a master lease, some with a single tenant, and some with multiple tenants. In a master lease you get somewhat steadier rent payments and don’t have to deal with the loss of income from vacancies, but you don’t get the upside from higher rents or occupancy. In a single tenant you know what the terms of the lease are going to be for a long time in the future but don’t have the ability to adjust sharply upwards for an increasing rental climate as you do with multiple tenants.

Effect of Risk

As with any investment one needs to balance the level of risk they are comfortable with vs. the level of reward desired. There are many risks in any TIC purchase as it is fundamentally a real estate purchase.

These are a few of the considerations that we have seen clients use as they evaluate TIC purchase options.

This white discussion paper was written by Richard Dance and Al Murch for the benefit of 1031 Exchange Coordinator clients who want to learn from our experience about some of the considerations that would go through our mind if we were personally investing in TIC replacement properties. It doesn’t represent all considerations nor particular situations. This handout does not purport to give legal, accounting, or tax advice. SINCE TICS ARE MOSTLY SOLD AS SECURITIES, THE PPM (PRIVATE PLACEMENT MEMORANDUM) AND YOUR REGISTERED REPRESENTATIVE MUST BE USED AS THE DEFINITIVE GUIDES TO HELP YOU WITH THE SUITABILITY OF ANY TIC INVESTMENT.