Large Sample Valuations of Tenancies-in-Common
By: Tim Husson, Craig McCann, Edward O'Neal, and Carmen Taveras (Oct 2013)
Published in the Journal of Real Estate Portfolio Management, Vol. 20, No 2, 2014.
In this paper, we value a large sample of tenant-in-common (TIC) investments based on cash flow projections found in 194 private placement memoranda. Our sample of TIC offering documents covers approximately 20% of the TIC industry from 2004 to 2009. Based on the sponsor's projections, we find that the TICs on average were worth 83.6 cents per $1 paid by TIC equity investors. However, we have found that sponsors' cash flow projections overstate likely returns to investors by assuming unrealistically high rental growth rates and unrealistically low vacancy and caps rates.
Adjusting only the sponsors' cap rates alone to rates reflecting market conditions lowers the average valuations by 9.5 cents to 74.1 cents per $1. Adjusting the sponsors' unrealistic rental growth rate and vacancy assumptions lowers the average value further. These low valuations are consistent with average upfront fees and reserves equal to 28% and 12% of equity. Our results suggest that private placement sponsors have considerable latitude in their projections, and that investors should view projected returns with skepticism.
Private Placement Real Estate Valuation
By: Tim Husson, Craig McCann, Edward O'Neal, and Carmen Taveras (Sep 2013)
Published in the Journal of Business Valuation and Economic Loss Analysis Volume 9, Issue 1, January 2014.
As a result of the Securities and Exchange Commission's relaxation of its prohibition against the marketing of private placements, investors will soon be exposed to a broad array of syndicated commercial real estate investments. Private placement commercial real estate investments are illiquid and so cannot be easily valued by reference to frequent transactions in the same asset in active markets.
We have reviewed over 200 syndicated commercial real estate private placement memorandums and find that virtually all include projected cash flows. This study explains how investors and their advisors can use these projections to develop estimates of investment value. We determine a lower bound for discount rates applicable to the cash flows derived from commercial real estate and apply the methodology to an actual commercial real estate private placement investment. Our findings suggest significant overvaluation by commercial real estate private placement investment sponsors even when using conservative estimates of discount rates.
What is a TIC Worth?
By: Tim Husson, Craig McCann, and Carmen Taveras (Jan 2013)
Published in the PIABA Bar Journal, 19 (3): 373-392, 2012.
Tenants-in-common interests are passive real estate investments which are sold based on two claimed benefits: stable "cash on cash" returns and deferral of capital gains tax through 1031 exchanges. The "cash on cash" returns are found in financial projections in TIC offering documents. Using a stylized TIC cash flow projection based on our review of these materials, we show that TICs use aggressive assumptions to inflate the apparent returns to investors.
Projected cash flows must be discounted to determine whether a TIC investment is reasonably priced or not. A TIC's projected cash flows should be subject to sensitivity analysis to determine the risk of unrealistic projections. This traditional risk-return analysis, as part of a reasonable basis suitability analysis, would have determined that TICs had expected returns which were insufficient to compensate for the risk of their leveraged investments in undiversified real estate and that the claimed tax deferral benefits were small compared to the mispricing in TIC offerings.
A Primer on Non-Traded REITs and other Alternative Real Estate Investments
By: Tim Husson, Craig McCann, and Carmen Taveras (Mar 2012)
Published in the Alternative Investment Analyst Review, 2014.
In this paper we provide a brief overview of the ways to achieve real estate exposure and focus our analysis on alternative real estate investments. The term alternative real estate investment, as used in this paper, refers to real estate securities such as non-traded Real Estate Investment Trusts (REITs), private REITs, and Tenants-in-Common (TICs), which are often sold to but may be unsuitable for most retail investors. Some common problems of alternative real estate investments are: 1) their illiquid nature allows them to give investors an illusory sense of low price volatility, 2) their high fees and significant conflicts of interests may lead to a loss of shareholder value, and 3) their reliance on leverage to fund current dividend payments may hide their inability to pay future dividends. Limitations on publicly-available data oblige us to concentrate much of our discussion on non-traded REITs. Our analysis is relevant for the even less transparent private placement REIT and TIC market.
Rethinking the Comparable Companies Valuation Method
By: Paul Godek, Craig McCann, Dan Simundza, and Carmen Taveras (Nov 2011)
This paper studies a commonly used method of valuing companies, the comparable companies method, also known as the method of multiples. We use an intuitive graphical presentation to show why the comparable companies method is arbitrary and imprecise. We then show how valuations can be significantly improved using regression analysis. Regression analysis is superior to the comparable companies method because, by using more of the available data and imposing fewer unreasonable assumptions, it is more accurate and can value more firms.
