Tenant-in-common capital in value added transactions

Abstract

Billions of dollars of equity is flowing into the emerging tenant-in-common (TIC) market, forcing demand for such investments to outweigh the current supply of TIC offerings. Investors seeking deferral of capital gains are enticed by the flexibility of passive ownership, the access to institutional quality assets, and the comfort of professional third-party management. In attempt to tap into this growing source of equity, a feasibility study was conducted to determine whether TIC capital could finance development and/or redevelopment (value added) transactions that are initially non- or low-income producing assets. Tenant-in-common investments, regulated by various IRS guidelines and potentially security laws, are very complex. If structured incorrectly, a TIC investment could lose its tax deferral status and could even open the door to security law violations. Therefore, a thorough review of the industry is prerequisite to introducing such capital into riskier value added transactions. No organization has ventured to use TIC capital in value added deals. If a legal structure is determined to appease all regulations and still offer a marketable return to investors, then it is a win-win scenario; TIC investors gain access to higher yielding assets and developers gain access to a valuable new source of capital.

(cont.) TIC investors have historically been relatively risk-averse. However, it is believed that a certain segment of TIC investors would react favorably to value added deals and allocate a portion of their investment to higher risk-adjusted returns. After a thorough analysis, five types of hypothetical transactions were formulated with structures that legally fulfill all requirements while still offering a competitive yield to investors, granting evidence that it is feasible to finance value added transactions with tenant-in-common capital.