Saturday, September 06, 2003
Copyright © Las Vegas Review-Journal

Real estate agencies take part in trend

Partial-ownership deals known as tenant-in-common grow popular

Curt Sallender, shipping and receiving clerk for Creative Ceramics, stocks new inventory at Silverado Distribution Center in North Las Vegas. Argus Realty Investors bought the center on Pecos Road last year as a tenant-in-common investment. Photo by John Gurzinski.

Commercial real estate experts are saying that tenant-in-common investment is the perfect vehicle for investors who want a fluid cash-flow stream without the headaches of property management.

"You don't have to worry about the four T's -- tenants, toilets, trash and turnover," Tim Snodgrass, president and chief operating officer of Argus Realty Investors, said Thursday at the CB Richard Ellis World Conference at Paris Las Vegas.

Argus, with its main office in San Juan Capistrano, Calif., purchased the 165,000-square-foot Silverado Distribution Center in North Las Vegas last November for tenant-in-common investors for $9.8 million.

The property has a 9.5 percent cap rate, a calculation that compares income from the property to the investment amount.

One of the fastest-growing segments of the real estate investment industry, tenant-in-common, or TIC, gives investors an undivided, fractional interest in a commercial property.

It's considered to be one of the best ways to take advantage of Section 1031 of the Internal Revenue Code, which defers taxes on capital gains accrued from commercial real estate by reinvesting in replacement properties.

Snodgrass said Las Vegas is an attractive market for these types of transactions.

"What we like about Las Vegas is it's a lot like San Diego was pre-1991," he said. "What we've seen is (economic) diversification within a sector. Las Vegas used to be mostly gambling. It still is, but now you've broadened it with entertainment, and entertainment brings a plethora of new companies and that's why building and housing has gone out of control."

More companies are coming here to do business and they need warehouse space, Snodgrass said.

Duke Runnels, managing director of CB Richard Ellis Investors and a conference panelist on TIC investment, said it's important to check the credibility of sponsors, or the people who line up the financing for a particular TIC deal.

"Some sponsors are very credible and responsible and others are just interested in doing the deal regardless of what the benefits are, what the yields are for clients," he said.

Runnels said TIC provides an avenue for people who may be unfamiliar with real estate investment and don't want to get into property management. It also allows for regional diversification; for example, taking equity gained in California and moving it to Florida or Texas.

"It's a passive investment and it's a packaged investment," he said. "All the due diligence is already taken care of."

Runnels said TIC investors run a risk just as they would in the stock market, and he usually puts together a five-year exit strategy.

"At the end of five years, how much can a property go down in value and you still make money? How elastic is your investment?

"If someone doesn't have an exit strategy and if you haven't determined when you're going to sell, who knows what you're going to get or how much or when," he said.

Vance Maddocks, president of CB Richard Ellis Investors Strategic Partners, said the real estate investment market is going to shift from private funds to institutions as interest rates continue to rise.

The high yields produced in real estate over the last several years can't be sustained, he said, and that's going to be a problem.

"My investors have looked at Las Vegas as a high-beta market, very risky," Maddocks said. "You need to get very significant returns to be in this market. There's a lot of money in the market. You have bifurcation in the market -- properties everybody wants and the leftovers -- so that bifurcation is going to increase."