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Tenants In Common Investments – What You Need To Ask Before Signing Up
Before crowdfunding for real estate came into the main stream, tenants in common (TIC) was the flagship product in the corner of the individual wanting to get a piece of the pie for properties he would never be able to buy himself. TIC ownership is often arranged by sponsors. Under such an arrangement, every individual gets a title deed stating an undivided share in a property. These properties are usually top grade buildings that everyone can recognize. Property types that are frequently used for TIC schemes include mega shopping malls, luxury condominiums, skyscraper office buildings, etc.
It can be a huge ego booster to tell someone you own one of the landmarks in the city. But here are some drawbacks of such ownership structures. Each investor will be proportionately liable for the debt on the property. All owners much also share and losses and profits proportionately. And even if the sponsor happens to be the biggest player in the real estate market, they are not supposed to use their funds to pay for expenses. Doing that can put the whole ownership into dispute. There will also be a voting process for major decisions where each owner will have a percentage of voting rights according to their share. As there could be a number of investors involved, the vote of 1 owner alone is usually too insignificant to make an impact. There are also tax benefits as well.
But if you are considering putting your money into, hold your horses. Please at least finish this article before moving ahead. Because TIC often concern premium properties, it is expected that you will be paying premium price. And as a gimmick to attract investors, sponsors often offer a guaranteed return (with fine print) for only a few years. In addition to that the promotion of these opportunities are often delegated to salespeople and “gurus” who take a handy commission for the amount of sales they bring in. Let’s not forget the generous amount of marketing budget they pour into online advertising and full-page newspaper advertisements. Surely you know that you will be the one paying for these?
Marketers print out glossy brochures and in some cases, textbooks championing the benefits of owning a landmark. They then invite you to free seminars selling you the concept of financial freedom instead of drilling down on the details on the deals. You might be tempted. Seek the answer to these questions before writing your cheques.
What kind of commission is paid to who? You will probably find that the TIC sponsor will surely take a cut. So does the promoter or broker shoving it down your throat. When you ask these questions, you will often get a laugh out the salesmen. Remember it your right to know where you money is going to in an investment. You don’t want to deal with any party who are not transparent anyway.
What are the costs for managing the project? If you are a smart sponsor, you will be arranging to manage the project yourself. Since there already so many people already financially committed to the project, this is a great side income to take in. They could be priced reasonably, but they may not be the best value available. They might even be a full time department managing the project. Even though you will have little say in how these management companies are appointed, surely you want to know what the employees are being paid and their bonuses. You are the one paying them after all.
If the property in question was purchased recently, how much was it acquired for? You cannot fault a sponsor for being profit-driven because you are the same as well. But you surely want to know if the property is being sold at 25% premium within a month. In this case, you are the sugar daddy making up the big bonuses being paid to executives. Are you comfortable with that?
Are the cash distributions guaranteed and when will they come? This is often the question that someone will choke on. Find out the terms and conditions for cash to be distributed. If the operation runs into losses, you might even have to experience cash outflow instead of inflow.
Where is your money going exactly? You have no right to know where money is ending up in an organisation. But you are now a potential owner. And you have the right to know where the money is going. Don’t be surprised if only half your investment is reinvested into the property. The rest goes to miscellaneous expenses.
What are the options for exit? Promoters will always play up the benefits while quickly writing off investor concerns. You need to know what are your exit options even though they can be as remote as a meteor lighting up the night sky. There could be a buyback plan. But these promises are not always delivered as circumstances can change. If you are insistent on exiting, your best option usually is to find a new owner to purchase your share.
What are revenue projections based on? Ideally the numbers you see are based on existing tenancy contracts that run for years to come and financial performance in the last year. But these will be non-existent when we are referring to a new development with no history. If you have put your trust in industry experts like the sponsor, you should expect comprehensive data analysis from credible sources and not just projections that any college kid can fabricate.