What's A TIC Sponsor Worth?
At the Orchard Securities Conference two weeks ago, Darrel Steinhause (?), a reputable attorney who writes the memorandums for some TIC sponsors, said that some sponsor(s) are using bridge equity financing. Wow! It's hard to believe a sponsor is giving up part of its company to close a TIC transaction. That is expensive financing. This raises questions to me about the value of a TIC sponsor and whether the lack of sponsor equity in the deals they syndicate is the TIC industry's Achilles heel.

I don't think most sponsors are worth much, if anything, if their sole business is doing TIC transactions where TIC investors own the properties. The property management fees are minimal and many are paid to third parties. Real estate commissions are also shared with third parties. Combined, these do not generate substantial value. A sponsor's value is its ability to do deals and earn initial fees. But the initial fee, since it is earned when a deal closes, has no value going forward. In my opinion, a sponsor that relies on bridge equity has no value at all. I am not sure how this can be good for investors.

This was the problem fifteen or twenty years ago. Sponsors stopped raising money and then could not find investors to help with problem properties because they had little equity to offer as an inducement. The only enticement was their back-end participations and ongoing revenue sharing and management fees, which had no value when real estate prices declined.

The outlook for current TIC sponsors is no better. A TIC deal, to qualify as an exchange, cannot have partnership features like revenue sharing and back-end participations. The sponsors of TIC deals have no equity in their deals and by tax code, no participation features. If a sponsor has multiple deals get in trouble the options look bleak.

Not all is negative. The deals today are economic while the deals in the 80s were tax driven. This is an important difference. The financing for real estate today whether through private equity or REIT structures is also improved from fifteen years ago, and would make consolidations of TIC deals better for investors than the crude "roll-ups" of the early 90s.