WILL 2006 BE THE YEAR THE tenants-in-common business reachesmaturity? Many industry participantssay yes, pointing to a slowdown in equitysales, a diversification in the types ofinvestments available and other indus-try-wide trends as evidence.

The TIC sector has enjoyed phenom-enal growth over the past several yearsand the high deal volume certainly con-tinued in 2005. Equity raised for securi-tized TIC transactions, including dealsthat were still pending at year’s end,totaled approximately $3.5 bil l ion,according to broker-dealer OmniBrokerage Inc. of Sal t Lake City.Subtract those transactions that had yetto close and the figure was just above $3billion. That’s a significant increase overthe $1.8-billion figure for 2004 and $756million in 2003. The volume of non-

Argus Realty Investors LP purchased the Atrium at Empire Lakes (left), a 390,484-sf office building inRancho Cucamonga, CA, for a TIC deal. The firm paid $65.2 million for what it describes as a 100%leased, B-plus property in an A-plus location.

Geneva Organization frequently sources its properties through relationships with developers. One suchdeal involved Bridle Creek Apartments (right), a 384-unit community in Lexington, KY that was purchasedfrom developer MLP LLC.

TIC BUSINESSGROWS BUT SALES SLOWBy Michelle Napoli

AS THE MARKETPLACEBECOMES MORE CROWDED,THE PACE OF DEALS IS DECELERATING AND SPONSORSMUST WORK HARDER TOSTAND OUT FROM THE PACK

securitized TIC transactions, however, isdifficult to gauge.

The increase in activity has meantmore TIC product on the market. “Wewent from having as few as five dealsfrom all sponsors on the Street lastJanuary to Omni alone having 33 deals ayear later,” says Omni president GregPaul. “There’s a lot of equity out there

right now.”That availability of product has made

equity sales slow down considerably.While a year ago it was not unusual tohear of deals being oversubscribed, it isfar less common today.

“Six to nine months ago, an offeringwould be oversubscribed in a couple ofhours,” notes Dawn Campbell, seniorvice president of sales for the GenevaOrganization, a Minneapolis-basedsponsor. “We are not seeing that quicksales process these days, which I thinkisn’t such a bad thing for the industry.”

Indeed, many industry participantsagree. The increasing supply of proper-t ies means more choices and givesinvestors and their representatives moretime to choose the deals that work bestfor them. “Volume is increasing,although it’s certainly not doublingevery six months like it was for a while,”says Marc Paul , president of LosAngeles-based SCI Real EstateInvestments. “The major difference thisyear is that we have a lot more sponsorsand product on the street.”

The growth of available product inlarge part reflects the growth of the num-ber of sponsors. A few short years agothere were just nine; as of the third quar-ter of 2005, Omni Brokerage tracked 59sponsors selling securities. As the markethas gotten more populated and equitysales have waned, one wonders whether

new sponsors will continue to enter theindustry. Opinions among existing play-ers appear to be mixed, yet most believenew entrants will continue to try to pen-etrate the market. Still, like overall paceof deals, most expect that the number ofnew participants will be below that ofprior years. Furthermore, some predictthat this could be the year when somesponsors drop out of the market, disillu-sioned by the complexities and costs

associated with TIC offerings, the com-petitive acquisition market for commer-cial properties or due to consolidationamong the sponsors themselves.

“A lot of fringe players are going toget pushed out ,” observes Carl tonCabot, president and CEO of Boston-based Cabot Investment Properties

Among SCI Real Estate Investments’ recent prop-erty purchases for TIC offerings are Park Place II(right), a 242,674-sf retail center in Sacramentoacquired for approximately $71.5 million, and PricePlaza Shopping Center (left), a 205,828-sf powercenter in Katy, TX acquired for $37.6 million.

“Six to ninemonths ago,an offeringwould beoversubscribedin a couple ofhours. We’re notseeing quicksales these days.”

DAWN CAMPBELLGENEVA ORGANIZATION

LLC. “There will be consolidation in thebusiness. I myself have been approachedby another sponsor about acquiring theirbusiness.”

Richard Lipton, a partner in theChicago office of law firm Baker &McKenzie LLP, is among those who pre-dict there will be fewer new sponsorsthis year. “I’ve had a couple of potentialsponsors consult with me, and once Itold them the realities of the market-place, they decided not to enter indus-try. A year ago, you couldn’t keep them

out,” he says. “To the extent that we willsee new entrants, they’re likely to be, asthey say in the trade, bigger boys: bettercapitalized with better internal struc-tures. Some of them may enter theindustry via acquisition.”

Greg Paul adds, “I can see a well-known, recognizable real estate com-pany come into this space and beaccepted with open arms. That’s becausethere is a flight to quality, and a brandname helps sell the deal. You expect alarger real estate company to haveaccess to better deals, particularly off-market ones.”

In an increasingly crowded TIC mar-ketplace, sponsors new and old areactively trying to differentiate them-selves. One way of doing that is to haveaccess to for-sale real estate withouthaving to compete in a bidding process.The Geneva Organization, for one,sources available properties by partner-ing with developers. The developerstays in the deal as an equity owner andmaintains property managementresponsibilities for which it obtains fees,says Dawn Campbell. Recently, the firmpicked up the Bridle Creek Apartments,a 384-unit community in Lexington,KY, through a partnership with devel-oper MLP LLC.

“We’re able to get better pricing thanif we went out to the marketplace andbought listed properties. That’s a huge

advantage for us,” she says, since itenables the company to offer invest-ments with yields that are 25 to 50 basispoints higher than the competition.

For San Clemente, CA-based sponsorArgus Realty Investors LP, its competi-tive edge comes from the ability to get afirst look at possible acquisitions basedon its reputation for closing deals, assertscompany president Tim Snodgrass. “Wehave established relationships withmany key sellers. We get to see officeand industrial properties that othersmight not, because sellers know we canunderwrite and manage the deal.”

Another way sponsors stand out fromthe pack is by having the financial muscleto purchase properties before being takenout to the equity sales market, as well asthe means to weather any difficultiesdown the road. “The concern is that someof the newer sponsors don’t have the abil-ity, or the financial resources, to take aproperty down and then syndicate post-closing,” says Cabot. “The days of simul-taneous closings are gone. People need tohave the ability to control the asset, pur-chase it and then syndicate the equity.”

If a sponsor is not prepared to buy aproperty with its own capital in place, “youhave to wonder why someone else shouldbe doing it,” remarks Charles Runnels,

president and CEO of Los Angeles-basedsponsor Fort Properties Inc. If a sponsordoes not have sufficient financial capabili-ties, “that ought to tell you somethingabout the company right off the bat.”

A highly competitive marketplace isalso inspiring an increasing number ofsponsors to offer other real estate invest-ment products in an effort to becomeless dependent on new TIC deals and tocreate new revenue streams. These alter-native investment programs, such as pri-vate REITs and opportunity funds, alsoallows sponsors to pursue properties thatmight not be immediately appropriatefor a TIC structure, but could ultimatelybecome a TIC offering down the road.

“The major difference thisyear is that wehave a lot moresponsors andproduct on theStreet.”

MARC PAULSCI REAL ESTATE INVESTMENTS

SCI Real Estate Investments purchased the 248-unit Camino Real apartment community in Albuquerque.The price was not disclosed, but SCI said the cap rate was approximately 6.25%.

“A lot of fringeplayers aregoing to getpushed out.There will beconsolidation inthe business.”

CARLTON CABOTCABOT INVESTMENT PROPERTIES

Chicago-based TIC sponsor TSGReal Estate LLC, for one, has launchedTSG Fundamental Opportunity Fund,which expects to raise $100 million ofequity. It will target value add, JV anddevelopment opportunities as well as asmall number of stabilized assets thatwould not work for a TIC transactiongiven existing encumbrances.

“I wanted to create additional productlines that wouldn’t compete but comple-ment our TIC business,” says TSG CEORob Hannah. He adds that investors andtheir reps are “going to look to a sponsorto demonstrate expertise and depth inthe real estate markets. And these arethe types of vehicles that provide that. Ifit’s a complementary product, it will sup-port and enhance the TIC business.”

Cabot Investments also has plans foran opportunity fund. Like Hannah,Carlton Cabot anticipates that value-addproperties, once stabilized, could resultin new TIC product for his company inthe future. “It also accomplishes anotherobjective, which is the ability to betterunderstand how an asset really per-forms,” says Cabot. “We wil l haveowned and managed the buildings for aperiod of time before syndication, whichis unique. It creates an operating historywith the assets before syndication. Insome cases it may allow us to decide thatan asset is not right for the TIC marketand allow us to pursue another strategy.”

While the addition of other invest-ment products is something Runnelsexpects to continue for many sponsors,he says i t i s not a focus for FortProperties at present. One reason whythe trend has taken shape, the executiveexplains, is because “it’s hard to keep thevolume of TIC deals at a profitable levelto feed the company, unless you are setup to do that and many sponsors are not.The success of those new funds willdetermine how knowledgeable peopleare about real estate, which actually isthe way it should be. In the past, a spon-

sor has not had to demonstrate expertisein order to sell its deals. Now, it’s not justbuying and financing, but it’s creatingvalue given the underlying intricaciesand components of the market.”

The majority of equity raised for TICdeals has been for the more traditionalproperty types. During the third quarterof 2005, according to Omni Brokerage,48% of equity raised went into officeproperties, 19% to multifamily, 13% toretail and 8% to industrial. The remain-ing 12% went into the “other” category,which has been steadily growing and caninclude hotels, seniors housing and self-storage, as well as oil and gas interests.

A number of sources say land dealswill likely be added to the mix this year,as alternative asset classes are expectedto keep growing in the TIC marketplace.More complicated or creative deal struc-tures could begin to emerge, too. Cabot,for instance, is working on two transac-tions that will employ a bifurcated struc-ture, whereby the properties will be bro-ken up into a ground lease andleasehold, with the ground lease beingsold to an institutional investor and theleasehold to be sold in the TIC market.

Whether diversifying by asset type,investment product or structure, “younever want to be a one-trick pony. Everybusiness has a cycle,” notes Snodgrass.Argus, too, continues to expand its busi-ness in terms of both asset type andinvestment products. “It’s just a naturalprogression of the company and of theindustry as a whole,” he adds.

Meanwhile, though properties arebeing purchased for TIC deals al laround the country, geography still rep-resents potential new opportunity for themarketplace with respect to investors.While knowledge and awareness of theTIC structure has grown nationally,sponsors say that their investors are stillpredominantly from the West Coast,particularly California. That means

there is still a largely untapped investorbase throughout the rest of the country.

Campbell points out that Genevaraised more equity last year frominvestors located in the Golden Statethan i ts home state of Minnesota.However, she notes that she is starting tosee more activity from Midwest and EastCoast investors.

SCI’s acquisitions, largely mirroringthe TIC industry as a whole, started inCali fornia but have s ince spreadthroughout the country, even to theNortheast and mid-Atlantic regions.“The country will wake up a little bitwhen the real estate brokers realize,‘Wow, TIC sponsors are buying billionsof dollars of property in our backyard,’ ”asserts Marc Paul.

Opportunities aside, the TIC market isstill one with challenges and potential pit-falls. Regulatory review and legal issuesremain a chief area of concern for theindustry, a business that brings together acomplicated mix of real estate, tax andsecurities laws and regulations. While it iswidely known and discussed within TICcircles that an alphabet soup of regulatorsand industry groups are paying attention tothe business—the SEC (Securities andExchange Commission), NASD (NationalAssociation of Securities Dealers), NAR(National Association of Realtors),ARELLO (Association of Real EstateLicense Law Officials) and NASAA (NorthAmerican Securities AdministratorsAssociation)—little, if any, concrete guid-ance on issues needing clarity has beenforthcoming. The only exception: theNASD last March issued a notice to itsmembers that essentially stated many TICdeals are indeed securities and, when that’sthe case, securities laws must be followed.

TIC industry participants are hopefulthat 2006 may be the year that furtherguidance is offered, but they will readilysay that it is extremely difficult to predictwhat regulators will do, if anything, andwhen. The Tenant- in-CommonAssociation and many of its membershave been making a concerted effort tobe proactive, however, and are workingon establishing a set of best practices forindustry members to abide by. Theeffort began as an ad-hoc initiative by agroup of broker-dealers, which in turnled to a response and input from spon-sors, and ultimately evolved into a for-mal TICA initiative. A final best prac-tices memo is expected to be released toits members sometime around in lateMarch, when the association holds itsannual symposium.

TICA and NAR, meanwhile, have

“It’s hard to keepthe volume ofTIC deals at aprofitablelevel to feed thecompany, unlessyou are set up todo that.”

CHARLES RUNNELSFORT PROPERTIES

“You expect alarger real estatecompany tohave access tobetter deals,particularly off-marketones.”

GREG PAULOMNI BROKERAGE

had an ongoing dialogue about how realestate licensees might be able to be com-pensated for advising clients on TICdeals in future. Licensing and compensa-tion issues are part and parcel of thebroader legal and regulatory reviews theindustry is currently subject to.

“I anticipate some things coming fromthe SEC this year, in the way of private-let-ter rulings relating to tenants-in-common,”says Snodgrass, who is TICA’s president,adding that he doesn’t necessarily expectbroad-reaching, generic guidance from theSEC. In general, “we’ll see more regula-tory action this year,” he predicts.

Outside of legal issues, arguably thegreatest concern among those in the busi-ness is for problematic and/or bad dealsto leave investors holding the short end ofthe stick and taint the industry as a whole.With the TIC market now havingreached a certain critical mass, the likeli-hood that one or more deals will not endwell is a matter of when, not if, they say.

“We have seen some deals sputter andothers blow up where there have been dis-tribution cuts and capital calls,” relatesOmni’s Greg Paul. “As those situations sur-

face more and the market becomes increas-ingly aware that can happen, investors andreps will be a little more selective aboutwho they do business with.”

Hannah says he fears some sponsorsare doing significant transaction volumeout of an effort to meet demand, ratherthan based on the quality of the underly-ing real estate and its appropriateness fortenant-in-common investors. When someproperties are not performing as pro-jected mere months into a deal, that’s a

sign of potential problems, the executivesays, one that could have repercussionsnot just for the sponsors involved but theentire business. “We can’t continue togrow as an industry on a weak founda-tion,” he adds. “The transactions have tolast, meet their projections and we haveto do what we said we were going to do.”

Consequently, the issue of sponsorshaving the financial capability to weatherunanticipated storms becomes that muchmore important and, ultimately, couldbecome at least one of the hallmarks of asuccessful TIC sponsor in the long run.

“What defines a substantive sponsor?”ponders Runnels. “Is it a lot of transac-tions? Is it that they’re profitable, stableor that they have a strong track recordwith the finance community, sellers ortheir investors? I think the definition isgoing to include all of those.” ◆

Publisher’s Note: Real Estate Media will behosting the inaugural RealShare Tenant-in-Common networking conference in Chicagothis June. For more information, go towww.realshareconferences.com.

Irvine, CA-based investment firm Passco recently sold the 1.2-million-sf Puente Hills Mall in City of Industry, CA to Glimcher Realty Trust for $170.1 million.Passco acquired the property back in May 2003 in what was believed to be the largest tenant-in-common transaction ever, involving a pool of 36 investors.The seller gained a $22-million profit from the disposition. Faris Lee Investments brokered the deal.

“I anticipatesome thingscoming from theSEC this year, inthe way of private letterrulings relatingto TICs.”

TIM SNODGRASSARGUS REALTY INVESTORS