What a difference a few years make.  When I first started talking about ICs, many clients and brokers were obsessed with risk and flaky sponsorswho would steal the rent money.  Now, after years of seminars by clueless stockbrokers, clients are pouring money (on faith) into questionableproperties with unknown sponsors.  

A flurry of calls over the past few weeks, from past and prospective TIC clients and brokers, prompted me to write the following piece on my approach to TIC investments in general:

1.  The sponsor is everything.  TIC sponsors have multiplied like mosquitoes on a humid summer day (there's a vision), with beautiful glossy brochuresand a brilliant management team.  However, at this point in the cycle, it is much better to pay the taxes than to trust an unknown management team with our passive investment.  I'll take a "B" property with an "A" manager any day.  A national sponsor is big enough to fill an empty building or refinance in a tough market.  A new, smaller sponsor lacks the heft (for my money) to perform in a tough market.

2.  Only buy securities.  TICs registered as private placements with the SEC are required to provide exhaustive disclosure, initially and on an ongoing basis.  And if the sponsor acts inappropriately in one deal, the SEC comes in and investigates every deal.  Wonderful incentive to behave.  Non-securities TICs, such as those offered by SCI or FOR1031, simply do not offer the protection against fraud or misrepresentation that a securities-registered deal does.  I have heard a number of sponsors have co-mingled funds and stopped distributions.  This is unacceptable.

3.  Niche properties.  Huge multi-tenant office buildings or the ubiquitous luxury apartment complex currently everywhere, contain too much macroeconomic risk.  These projects blow with the economic winds, and may perform poorly in spite of heroic efforts.  I prefer smaller properties targeted to a specific niche, which has an arguable chance for success even if real estate as an asset class does poorly.

4.  Cap rates 101.  Property in rural Montana or Arkansas is supposed to yield more.  Less appreciation potential, more risk.  Yield whores are chasing 7% properties in 10-12% markets, which will become evident in the next downturn.   A lower initial yield in a better market will have a better back-end, and offer higher probability of greater total return.

Many clients I have spoken to are making rapid and ill-informed investments strictly to meet the 45 days.  Particularly smaller investors with $50,000-$200,000 to re-invest.  If the investor is not sure about a TIC, or is unwilling to trust you or do a little homework, better to pay the damn taxes.