While the basic premise of tenant-in-common investments is thesame regardless of the sponsor — fractional ownership in acommercial real estate asset — individual firms can and dostructure their TIC programs differently. Some firms follow a modelsimilar to that of DBSI, whereby the assets are structured inside amaster lease with a stated monthly distribution by the mastertenant (sponsor) giving the allusion of a guaranteed return.

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While the quality and performance of the asset is paramount tothe overall yield to the investor, current events have demonstratedthat if the asset is underperforming to projections, the"guaranteed yield" offered under a master lease is only as strongas the financial stability of the sponsor. Although a promisedhigher yield might be attractive to an investor on the surface,questionable property in a questionable market with questionabletenants translates into a questionable investment when somethinggoes wrong, regardless of a guarantee.

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The majority of TIC sponsors, however, do not structure theirprograms this way. Most let each offering stand on its own merits,creating greater transparency through the use of a propertymanagement contract. Notwithstanding the vehicle used to invest inreal estate, when considering the offered yield to the investor,the old adage still holds, "if it looks too good to be true, itgenerally is."

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Regardless of how the program is structured, the responsibilityof due diligence and evaluation of the asset rests solely on theshoulders of the TIC sponsor, so a comprehensive understanding ofthe sponsor's real estate experience is crucial. It's not enoughfor investors to simply evaluate the sponsor on historical returns.As we've seen in this current down market, conditions can changequickly and those who were able to succeed in a vibrant real estatemarket may not be able to weather the storms that arise. This iswhere commercial real estate experience counts — in bull and bearmarkets. Projections for the asset must be realistic and investorsmust be sure that the executive management team has the skills andexperience to make adjustments deftly when conditions dictate.

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Investors should also evaluate the contract's exit strategy toensure that provisions are in place for ownership to act decisivelyas well. Exit strategies vary from firm to firm, but generallyrequire a unanimous vote of all owners to make major decisions suchas leasing or selling the property. This provision can makeexpedient reactions to market conditions nearly impossible. Whenreviewing the contract, investors should weigh the benefits of asuper-majority that ensures a cohesive decision without the delayof unanimity.

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Upcoming demographic shifts and economic policies will make thisinvestment strategy increasingly attractive to investors. The firstbaby boomer received Social Security benefits this year. This agingdemographic will continue to look for methods by which to maintainan interest in real estate investments without the responsibilitiesof day-to-day management. The ability to defer capital gains taxes,which may rise under increasing national budget pressures, willcreate a growing market for this strategy in the coming years.

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For many TIC sponsors, however, the projected growth period forthis strategy will not come soon enough. There will almostcertainly be fewer TIC sponsors in 2009 than there were in 2008,but those that remain will have proven their commitment to theirinvestors and to this investment strategy, demonstrating theirability to weather our generation's greatest economicchallenge.

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Runnels is president and CEO of Los Angeles-based 1031 firmFort Properties. Opinions are the author's own.

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