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Fees and Tenants in Common Investments
Investors are attracted to Tenants in Common (TIC) investments for several reasons, including; reduced risk through diversification, the ability to own a small portion of a higher quality property that otherwise would be unavailable to them, little to no management responsibility and a high certainty of close (an important consideration when doing a 1031 exchange).
One concern when considering investing in a TIC property is the additional fees incurred which typically add between five and seven percent of the value of the property to its cost. The fee structure, and in particular how and when a sponsor is compensated requires careful consideration. The key question is whether the advantages listed above justify the additional fees which can impact cash flow and potential appreciation.
Certain costs are inherent in any real estate transaction - whether purchased as sole owner or through a TIC structure:
• Escrow and Title Fees
• Financing Fees
• Legal Fees
• Sales Commissions
(while technically paid for by the seller they ultimately are paid by the buyer)
• Working Capital Reserves
In addition to the above expenses the investor is paying fees to the TIC Sponsor for identifying and packaging the property. Effectively, the Sponsor purchases property at a "wholesale" price, adds fees for services rendered, and sells to Tenants in Common investors at a "retail" price. To get to the retail price the Sponsor may add fees such as
• Marketing and Due Diligence
• Equity Organization Costs
• Formation Fees
• Closing and Carrying Fees
If offered as a security, additional fees may also be incurred.
These fees are typically disclosed in the "Sources and Uses of Funds" or "Compensation of the Sponsor and its Affiliates" sections of the offering material.
It is important to compare what the Tenants in Common investor is paying versus what a single buyer would pay for the property. The difference in the two prices is a measure of the Sponsor's efficiency and whether the Tenants in Common investor is being treated fairly.
There is a good deal of confusion around the additional fees needed to create a TIC investment. One consideration when reviewing various tenant-in-common fee structures is that many fees are the same amount no matter what the size of the deal, and may represent more than 5-7 percent of additional load on smaller opportunities. Investors should also keep in mind that the higher the debt on the property, the larger the percentage of the investor's initial cash will be used to pay these fees.
When thinking about appreciation potential investors should take into account that at disposition the property will be sold in its entirety, not as a TIC. The core issue is whether the projected appreciation will cover the additional fees paid on purchase while providing a reasonable return to the investor.
Certainty of cash flow and the likelihood of adequate appreciation relate to the quality of the property being purchased. Location, quality and appropriateness of the improvements, quality of the tenants and terms of the leases all factor into whether the investment is viable, both for a single owner and the TIC investor.
The typical hold period for most income producing real estate is five to seven years. This means that the investor is giving up roughly one percent per year in potential appreciation by investing in a Tenants in Common property (the typical load of five to seven percent spread over the life of the investment). It is important to keep in mind that the one percent per year is for an all cash property; leverage will magnify any appreciation or loss in value.
Sponsors may also receive compensation through property/asset management fees. Any investment is going to require some form of management … be it the investor's own efforts or paying someone else for the services. Its best to focus on management quality and how reasonable the fee is compared to fees for similar properties.
The ability of a sponsor to bring a competitively priced investment to market deserves fair compensation. The investor's job is to make sure they are receiving a fair return on their money when compared with other investment options of similar risk.
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