Joint Property Ownership
Picks Up, Lifted by Boomers
By Jennifer S. Forsyth
From The Wall Street Journal Online
Cathy Scullin was in a
pickle.
Enticed by high prices, the
"Everything I found needed an enormous
amount of work and, in my opinion, was way overpriced," says Ms. Scullin. If she didn't reinvest in real estate quickly, she
would have to pay capital-gains taxes on the proceeds.
Her solution: a Tenant-in-Common transaction,
where she joined a group of investors who each bought a fractional share of
investment property -- in this case a small retail center.
TICs -- the real-estate
version of chipping in for a pizza and then grabbing your own slice -- have
been around for years, but their popularity soared in 2002 when the Internal
Revenue Service said they would be allowed for so-called 1031 exchanges. That
refers to the portion of the
Though it is too early to know if most of these
investments will pay off, TICs are proving
particularly attractive to baby boomers who invested
in real estate years ago but, upon retirement age, are looking to shed the
hassles of management, such as spending on upkeep and negotiating with tenants.
Investors can get the benefits of property ownership -- rental income and
profit on any future sale -- but leave the day-to-day details to professional
managers. "It's something they can understand, it's relatively safe and it
produces income that can grow over time," says Marc Paul, president of Los
Angeles-based SCI Real Estate Investments, one of the largest TIC companies
that match properties and investors.
In 2002, about $550 million flowed into TIC
investments, according to the research firm Real Capital Analytics Inc., based
in
As the number of investors and TIC companies
increased, so have the blockbuster deals. At least five recent TIC acquisitions
topped $100 million each, according to Real Capital Analytics.
But here is the rub: As with all real-estate
investments, TIC property can fail to meet projected returns and investors
should perform due diligence as with any piece of property. Real-estate experts
also warn that TIC investors, focusing too narrowly on the tax benefit, may be
bidding up prices on marginal deals. Another possible pitfall: If an investor
needs to get out before a property is sold, it may not be easy to find a buyer
for the share.
Gary Gorman, managing partner of The 1031
Exchange Experts LLC, an investment advisory firm, says his company tracked the
case of an apartment complex bought by a TIC two years ago. He says the
complex, which he declines to name, was on the market for $15 million, but was
really worth about $12 million. A TIC company promised to pay the $15 million, then sold individual shares to investors for a
total of $18 million. "The building is still only worth $12 million,"
Mr. Gorman says. "So that property has got to appreciate 50% before those people
are going to break even."
Mr. Paul of SCI believes those are isolated
incidents, saying his company often finds itself outbid for properties by
pension funds or publicly traded real-estate investment trusts. "We're
just paying the market rates."
Gilbert Reese, a retired ophthalmologist from
But Ms. Scullin, the
Experts say that many investors simply won't
know if their TICs will pay off until more properties
are put back on the market. Says Harold Hunt, a research
economist with the Real Estate Center at
