Only the Strong Survive

Financing hurdles slow tenant-in-common deals, sidelining a growing number of sponsors.

Capital constraints and sluggish commercial real estate sales have taken a big bite out of the tenant-in-common (TIC) marketplace. The volume of TIC equity raised has dropped significantly in the past year. Securities-based TIC sponsors raised $792 million during the first half of 2008, plummeting about 50% from the $1.6 billion raised during the same period a year ago, according to Omni Research & Consulting.

The sharp decline in deal flow has created a growing divide between TIC sponsors. On one side, the challenging investment market has forced consolidation among some sponsors, while others have suspended their TIC activity as they wait for the market to turn. On the other side sit those sponsors who are reaping the benefits of a less competitive market.

Oak Brook, Ill.-based Inland Real Estate Exchange Corp. is one of the most prolific TIC sponsors in the industry. The firm expects to post a record year for both equity raised and properties purchased in 2008. “Our pipeline of properties is the deepest that it has ever been,” says Patricia DelRosso, president of Inland Real Estate Exchange and president of the Tenant- In-Common Association (TICA). 2008. “Our pipeline of properties is the deepest that it has ever been,” says Patricia DelRosso, president of Inland Real Estate Exchange and president of the Tenant- In-Common Association (TICA).

This year, Inland plans to raise between $200 million and $250 million in equity compared with $180 million raised in 2007. Inland expects to deploy that capital by purchasing $500 million in properties for TIC investors this year.

Sponsor shakeout continues

There have been about 20 active securities- based TIC sponsors so far this year compared with 57 in 2007, according to Omni Research. “There is no question that the choices are fewer, but demand also has been reduced. Therefore, what we’re finding is a relative level of equilibrium between supply and demand,” says James Shaw, president and CEO of Cap Harbor Real Estate Exchange Solutions in Beverly Hills, Calif.

But the concern is that the volume of sponsors will continue to shrink unless the financing picture improves. “If the debt markets don’t change, I would guess that by the middle of 2009 there may be only 10 legitimate TIC sponsors still functioning,” says Daniel Oschin, president of SCI Capital Group and managing director of Los Angeles-based SCI Real Estate.

If the debt market remains constrained until the end of 2009, Oschin speculates that the number of sponsors could fall to five or six. “There are only a handful of TIC sponsors that are getting debt, and the rest of them can’t survive,” he says.

“Most of them are not diversified companies, and diversification is the key,” emphasizes Oschin. Sponsors that are able to draw from a broader base of real estate investment management activity will be better equipped to weather the ups and downs in the TIC industry.

That diversification will be even more important to sponsors in light of continued uncertainty in financial markets in the wake of Lehman Brothers’ bankruptcy filing and Bank of America’s acquisition of investment bank Merrill Lynch.

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