Michelle Napoli is editor of TIC Monthly, from which this article is excerpted.

Editor's Note: Second in a two-part series.

Calabasas, CA—Prior performance, underwriting and projections, and investor relations and communications are hot topics for the tenants-in-common investment industry, surfacing as discussions of underperforming deals heat up. Last month's issue of TIC Monthly addressed the recent issues of one sponsor. However, there is evidence of deals that haven't gone as expected in the portfolios of many sponsors nationwide.

Daniel Oschin, EVP and director of real estate services for AFA Financial Group LLC in Calabasas, CA, estimates as many as 50% of TIC sponsors in the marketplace have at least one underperforming deal. "Some deals are over-performing and some deals are underperforming. That's the nature of real estate," Oschin notes. "Communication is what matters. It's all in how you handle it."

Increasingly, the way TIC market participants handle it begins with a look back at the TIC sponsors' track records and prior performance. With no real industry standard, investors and their representatives struggle to make the best out of any information they can get. The disincentive, as one source puts it, is that "there's always a concern that sponsors do not want to kill the goose that laid the golden egg. They do not want to show poor performance."

But Salt Lake City-based Omni Brokerage Inc., for one, hopes more sponsors will become more forthcoming. For instance, at a conference Omni held for its reps in August, sponsors were required to provide in advance information on how their deals were performing as a prequisite to participation. Omni president Greg Paul says more than a dozen sponsors agreed. He hopes even more will follow suit.

Another topic garnering increased interest, especially as the real estate market moves away from one characterized by cap rate compression, is underwriting and projections for TIC deals. The odds are there will be underperforming properties in any pool of properties. However, when bad deals attract attention, they bring up legitimate questions about the adequacey of the sponsors' due diligence, their underwriting assumptions and whether they have the wherewithal and willingness to take care of difficult situations.

Part of the problem may be an excessively optimistic characterization of the way a property is expected to perform on an annual basis over the course of its holding period. "You can't open a PPM that doesn't have a steady increase of cash flow," observes Oschin. "I've owned a lot of real estate and I've never owned anything for any period of time that always increased." A more realistic picture of a property's income and cash flow includes dips and decreases with time, he says. It's just as critical that BDs and reps communicate to their clients that "it's not a guaranteed income stream," he adds.

If a property does have problems, everyone seems to agree that early and forthright communication with the investors is key and that a lack of transparency can wreak havoc on what is otherwise an inherently good sponsor company. As the issue of underperforming and problem properties has gathered attention, it has affirmed the importance of investor relations to the TIC business.

And the issue does not just concern communicating with investors, says Oschin. It also involves the question of telling BDs and reps, too, since they are likely to be communicating with the investors. Oschin, for one, believes in informing BDs and reps immediately so they can communicate with their investor clients.

Real estate professionals often prefer to keep information and bad news to themselves, in stark contrast to operating in the world of securities, notes Deborah Froling, a partner in the Washington, DC office of Arent Fox PLLC. "Real estate people are taught not to disclose anything unless they have to," she notes, yet "the securities laws are all about full and fair disclosure."

Froling suggests syndicators remember they are no longer the owners of a property. When problems arise, the sponsor should give proper attention to investor relations. She advises her clients, "Tell them early and often. These are the owners. These are the people who own the property." Will investors be upset? Probably, she admits. But they are likely to be a lot more understanding when they are given adequate notice and knowledge that the sponsor is working on a fix, she adds. The attitude among investors is likely to be: "I'm an owner and I should know--even if it's a passive investment," Froling concludes.

"I think the investor needs to know," says Omni's Paul. "It's an obligation of the sponsor to give transparency. As an industry, we need to be vigilant in encouraging transparency. If the investors know there's a problem, they can put the heat on. Typically, investors will, I find, appreciate that openness and view the sponsors as their partner, not their adversary." That, he adds, is preferable to investors getting litigious because they feel like they were kept in the dark.

Earlier this year, the Geneva Organization found itself with a problem at a property--a Holiday Inn hotel it had bought in 2003 began having difficulties when its franchise tenant defaulted. The company reacted quickly. "We went full disclosure and contacted all of our investors and broker-dealers," says Minneapolis-based Geneva CEO Duane Lund, including BDs not involved in that particular transaction. That, of course, was on top of tackling the property level problem. Lund reports that in June, it put a new operator in place at the hotel. "The key is we had enough resources, both financially and in terms of employees, to throw at the problem," Lund says. "It's all about communications."

Most everyone agrees it is a bad idea if investors find out suddenly there are problems with their investment properties. In particular, Froling finds the notion that investors might be receiving master lease payments that are funded out of a sponsor's pockets, without knowledge of problems at the property level that require those out-of-pocket payments, disturbing. "That means that potentially the house of cards is in danger," she warns.

For many firms, good investor communications on a continuing basis is key. Louis Rogers, president of Santa Ana, CA-based Triple Net Properties LLC, a sponsor that has done enough TIC deals to have seen the good and the bad, says his company issues quarterly reports for all of its properties. Doing so, he adds, is not an industry standard, but should be.

Geneva also issues quarterly reports to investors for all of its properties, says Lund, though not all sponsors do. The reality, he says, is that TICs are unregulated, so sponsors have the luxury of doing whatever they want when it comes to disclosure. But for those sponsors that do not regularly communicate property performance to their investors, Lund thinks it will be a long-term mistake. "Full disclosure by TIC sponsors will be rewarded," he says.

"There are really good quality sponsors out there providing leadership. It is likely those sponsors will be successful in the long run," Oschin says. But he laments: "There is no standard at all. It is up to the sponsor."

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Experts: Investor Communications Key

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