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TIC's are much like traditional real estate. Buyers use a variety of approaches to buying traditional properties, Triple Nets and TIC's, from a stab in the dark (often in reliance upon the advise of someone) to exhaustive analysis and due diligence. However, with securities TIC's (which is the only kind 1031Replace.Com deals with), the Private Placement Memorandum (PPM) provides you with exhaustive analysis and due diligence information about the sponsor, the property, demographics, projections, etc. and is the best place to obtain detailed information on the property and the TIC offering, so much of the work involved with choosing a property in which to invest has been done for you. You and your advisors should compare PPM's for the list of properties you are interested in to make an informed decision. We encourage you
to read the entire PPM for any TIC you think you may wish to purchase.
| Having said that, we believe the following questions deserve to be asked (and the answers form part of your decision making) regarding any TIC investment property:
- Does the sponsor (and/or its principals) have a track record in TIC's (how many TIC's have they done) or at least a track record in commercial real estate?
- Does the sponsor have an organization,
staff and infrastructure to properly close the transaction (if not already
owned by the sponsor) and manage the TIC?
- What kind of property is the TIC
(retail, office, residential, industrial/warehouse, etc.)?
- What are the demographics of the area
in which the property is located (population growth in the area where the
property is located, declining or improving area where the property is
located, competition, surrounding rent rates, etc.) and is the market area a primary, secondary, tertiary, etc?
- Does the sponsor already own the property, or will it close on the property with the TIC investors' funds?
- What is the closing date (if not already owned by the sponsor) and what is the sponsor's ability to close if the offering is not fully subscribed (remember, if you are a 1031 Exchanger, you must identify within 45 days, you can't change or add to your identification list after the 45th day, the best identification is to actually
close on your replacement within the 45 days, etc.)?
- What is the total "equity raise", how much of the offering has already been bought by investors, how much is left and how long has the offering been on the market?
- What is the purchase cap rate and what is the cap rate for sale of TIC's to the investors ("loaded cap rate")?
- What is the projected exit cap rate (when the property is resold) and is it larger or smaller than the purchase cap rate and the loaded cap rate and, if smaller, does the sponsor believe the property can be sold at a cap rate lower than the other "going in" cap rates and, if so, why?
- What is the "load" (percentage and dollar amount) the sponsor is placing on the property (in other words, how much is the sponsor marking up the property for resale to the investors), and what is the sponsor's purchase price and the total sale price to the investors?
- Does the sponsor have an appraisal for the property, and is it higher or lower than the sponsor's purchase price and the total sale price to the investors?
- What is the TIC investment property purchase minimum (some are below $200,000 and range up to over $1 million)?
- Why did the sponsor choose the property
out of the hundreds most sponsors look at before making a decision to buy?
- Are there any major tenant lease
expirations or exits during the projected holding period and, if so, what
reserves are being set up for down time and new tenant improvements?
- What is the "play" (in other words, is the property a one credit tenant occupied triple net property with a long term lease thereby providing a stable return to investors, is it in an improving area where the sponsor thinks values are increasing, is there some vacancy the sponsor thinks he can fill and thereby increase returns, etc.-what was the strategy)?
- Why did the seller sell the property?
- When was the property built and, if
applicable, when was it renovated, and is there any deferred maintenance (roof
condition, paint, HVAC, parking lot, etc.)?
- What is the amount of mortgage being
placed on the property by the sponsor (loan to value ratio or LTV)?
- Is the mortgage interest only, what is
the interest rate (and is it variable), is it amortizing, when does it mature,
etc. (and is there a refinancing anticipated during the holding period before
resale)?
- Is the property located in a high or low
income tax state? View
State Tax Rates Here
- Is the property residential (greater
depreciation deductions) such as apartments or non-residential like office,
retail and warehouse/industrial?
- What
is the exit (resale) strategy, which normally is between five and seven years,
but can go out ten years?
- Do the pro-forma projections for operation make sense (look out for overly rosy occupancy and rent increase projections, declining costs projections, etc., but these things can differ depending upon the "play", etc.)?
- How do rents compare with similar
properties in the area (market rent) and how does vacancy compare with similar
properties in the area (market vacancy)?
- What kind of tax opinion supports the TIC
and the expected tax result (it is in the PPM, and should be a so called “should
opinion” from a major lawfirm)?
- What are the closing costs (almost all TIC investment properties have closing costs, and some are more than others)?
- Is there a master lease (sponsor, or an entity formed by the sponsor, leases the property from the TIC's and then subleases to the tenants) or is there a management agreement, but the TIC's are landlords directly with the tenants of the property?
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This is not an exhaustive list of questions. You may and should have others. TIC's are no small investment and deserve your attention. We ask these (and other questions) to all sponsors whose offerings we sell. 1031Replace.Com is here to help you with your questions, choices and final decisions. Also, always remember, TIC's are private placement investments involving not more than 35 investors in any one deal, so the people at the sponsor generally invite potential buyers and their advisors to be directly in touch with them to get answers to questions like the above.
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