A Look Into the TIC Industry

So far, we've discussed some of the concerns we have with TIC investments and shown how to use discounted cash flow analysis to value a TIC interest with our handy spreadsheet. But you might be asking, just how prevalent are these concerns across all TICs?

To answer that, we examined 194 sets of offering documents for TICs sold from 2004-2009. This totaled $2.2 billion in equity, which amounts to approximately 19% of all equity issued by TICs in that period, and included properties from 32 states.




After we compiled this information, a couple of things stood out. We have said before that TICs tend to have high upfront fees. In our database, the average upfront fees totaled 28% (!) of total equity. The lowest upfront fees were a still-high 17%, and the highest was a remarkable 72%. We have also said that TICs tend to be highly leveraged (i.e., use a lot of debt). Some TICs had no leverage, but both the average and median debt-to-equity ratio (total debt / total equity) across our sample was 1.56.

We've also talked about how TICs tend to have low net present values, even taking a sponsor's projected cash flows at face value. When we valued all the sponsor's projections in our database, we found that the average TIC was worth only 83.6 cents on the dollar.¹ But were the sponsors' assumptions valid?

For each property, we compared the cap rate used by the sponsor to cap rates published by a real estate market analysis firm. Cap rates are used to estimate the final value of the property at sale. The lower the cap rate, the higher the resulting property value. We found that sponsors tended to use cap rates that were lower than market rates, inflating the property value at sale, as shown in the figure below (Figure 10 in the paper):




When we value all of the properties using market cap rates rather than those assumed by the sponsors, the average present value drops to 74.5 cents on the dollar. The distributions of present values before (blue) and after (red) correcting the sponsor's caps are shown below (Figure 12 in the paper):




These results suggest that TIC sponsors use aggressive assumptions when preparing cash flow projections for offering materials. These cash flows are the primary justification for projected distributions and investor returns, yet even a relatively straightforward discounted cash flow analysis reveals that most TICs were exceptionally poor investments.

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¹ Sponsors often include multiple projections, especially for cap rate assumptions. We valued each of these alternative projections and averaged the resulting values.