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

Salt Lake City—Performance is a topic that is not going away in the TIC marketplace. It is being discussed more and more among many active participants. Concern about underperforming properties and a general lack of information about many sponsors' performance are the key issues. Now pressure is beginning to mount on several fronts that could change the kind of TIC property track record information that broker-dealers, reps and investors could access.

Particularly for the securitized world--where disclosure is much more than a mere buzzword--practices among sponsors appear to be surprisingly varied when it comes to providing information on past performance, and, if they do, to what extent and in what format. "Currently, it is very, very limited," says Trent Broderick, director of due diligence for Omni Brokerage Inc. of Salt Lake City. "There are all kinds of levels of reporting in the PPMs. We have some reps who are demanding that we get this information."

Daniel Oschin, director of real estate services for another BD, Calabasas, CA-based AFA Financial Group LLC, says, "The information varies widely, but there should be quarterly updates on each property, providing comprehensive, thorough information. We want to know how they're doing. And we get everything from very comprehensive information to almost nothing."

Omni and AFA are two of a small group of broker-dealers that are informally trying to create some kind of standardization that the industry could be urged to follow, Broderick reports. In addition, some of the broker-dealers active in the TIC marketplace are applying pressure on their own. Omni, for example, has been establishing a database of TIC deals that it will use to keep track of how the properties are performing, and it is moving forward with its own template of performance reporting that it will ask those sponsors it does business with to comply with. AFA, for its part, won't do business with a sponsor unless it gets an annual in-depth sponsor-level review by a reputable third-party and answers all of its questions in full. Past performance is one of the areas of information it requires, says Oschin.

Meanwhile, a subcommittee of the Tenant-in-Common Association's due diligence committee identified the area of concern about a year ago and began working on it in earnest early this year, reports Broderick, who is involved in the effort. It has led to a proposed template for reporting quarterly performance compared to projections from deals' PPMs, while allowing sponsors the opportunity to address and account for deviations of more than 10%. The idea is to have a TICA-endorsed template that would be incorporated into the association's best practices, and the proposal has been passed on to the TICA board of directors for its review and input. "They're in a refining process," he says.

Some sponsors are already making prior performance information available. Todd Williams, chief marketing officer of San Clemente, CA-based Argus Realty Investors LP, says that while his company's PPMs include prior performance tables that he admits can be difficult to read, Argus is constantly updating a spreadsheet on all of its deals that is available to broker-dealers and reps. "We have a spreadsheet of each deal, what we indicated the property should be doing in pro formas vs. what the property is actually doing," he says.

As for those who won't disclose their prior performance, Williams, like many, conjecture that "either they don't have a track record because they're brand new, or they have deals that are underperforming or nonperforming." Gerald J. Laport, chief of the office of small business policy in the division of corporation finance of the Securities and Exchange Commission, said at last month's TICA Symposium that his own experience has been that those who don't want to disclose prior performance in their PPMs are those who don't have good performance track records--precisely those who should be including it. "The PPM serves two purposes. It's a disclosure document. It's also a shield in subsequent litigation," he said.

Whatever the cause of resistance or reluctance, broker-dealers like AFA and Omni hope, with greater market pressure from the BD and rep side of the business, they will see increased buy-in among sponsors. If a substantial enough number of sponsors provide this information, the argument goes, reps and their investor clients will begin asking the rest why they aren't, too. And if BDs and reps decline to do business with sponsors that won't disclose their prior performance, sponsors will be forced to adopt the practice, says Oschin: "Then they'd all just do it. They'd be out of business if they didn't."

But an attorney who represents sponsors, Deborah Froling, a partner in the Washington, DC law firm Arent Fox PLLC, has concerns. If an industry standard is adopted, she says, any sponsor that does not adhere to that standard could bring more liability on itself. She also says comparing projections with actual performance on a line by line basis, the way some in the industry are suggesting, "from a securities standpoint could present risks to sponsors and push sponsors to present less information rather than more."

Further, Froling argues that if deals are sold only to accredited investors under the 506 rules, "sponsors are not required to disclose anything." Without a requirement, it goes back to being a matter of industry standards. "There still is no industry standard vis a vis performance. Getting to an industry standard will be difficult," she says. "With 70 sponsors out there, you're going to have 70 different ways of doing things."

"I appreciate that people want to do it, and it's a valid point, but the question is, how do you do it?" Froling concludes. "There are a lot of things that in an ideal world you want to do, that in a practical sense aren't going to happen."

Bryan Mick, president of Mick & Associates PC in Omaha, NE, which provides third-party due diligence services, insists prior performance information should "absolutely" be available. "When people start debating what should be provided, that's reasonable. Debating whether it should be provided--that boggles my mind," he says. "That should not be debated."

Mick believes prior performance information could constitute material information, and thus has to be disclosed under securities laws. "On a going-forward basis, we are asking for prior performance information" when conducting deal-level reviews, he adds, "and always have at the sponsor level. We are promoting to various sponsors the need to attach prior performance data to their PPMs."

Concern over underperformance and nonperformance of TIC properties is building, but despite anecdotes, it is impossible to know just how extensive a problem exists in the industry without performance information being readily available. Having this information at hand would help the industry have a clearer picture of the extent to which problems exist. "The problem is, we don't know how bad the problem is," says Broderick.

And it seems like a no-brainer that reps and their clients would want, even demand, to know how well a sponsor is performing as they consider where to place their hard-earned money. "If you are artificially inflating your underwriting to be able to sell," as Argus' Williams puts it, "well, the proof is in the track record."

Mick, like others, agrees that fully disclosing deal performance could help identify a pattern of poor performance, and thus bad underwriting, excessive markups or aggressive assumptions on the part of certain sponsors--something a prospective investor would surely want to be aware of. "I think there's a continuing theme in a lot of cases in how these deals are structured that leads to nonperformance outside of the old 'this is real estate, real estate has risks.' You have to ask yourself, what has been involved structurally that a sponsor's deals aren't performing?"

Instant Insights /

Performance Disclosure Is Key Issue

Related Stories

Recommended For You