When Your Career Chooses You

All of us have a story to tell. As professionals who’ve had the good fortune to participate in meaningful work in our careers, we recognize our journeys are uniquely our own. Those journeys often took surprising directions we neither expected nor understood. Mine is one of those and I wanted to share it as an example of what happens when your career chooses you.

9/11 and a New Direction

In September 2001, I was a Sales Manager at a boutique Investment Bank in New York City. We were located on Rector Street, just two blocks away from the World Trade Center. Suddenly, the unimaginable happened. 9/11. The towers came down and we were right there, inside of Ground Zero. Everything stopped. For the first time in my life I found myself with no place to go to work in the morning. I obviously wasn’t alone. The market was in turmoil, brokers were adrift and there were few jobs to be had. Not only was this attack on American soil a defining event for our country, but for so many of us who were working in the financial services industry in Manhattan, it was emotionally devastating. For me, however, it was the catalyst I needed. I took a risk and decided to go out on my own. I obtained the additional licensing required to become a Fee-Based Advisor and I joined an Independent broker-dealer headquartered on the West Coast. Business began to gradually return, and I was getting into a groove working for myself. What fascinated me most, were all the different investment products that were available to me through this independent channel.

The TIC Investment

I was receiving plenty of mail from my broker-dealer – yes, “traditional mail” through the US Postal Service! Some of that content related to what was called a 1031 TIC (Tenant in Common) Investment. I inquired and was told that it was an investment vehicle for Real Estate investors looking to defer capital gains tax. I wasn’t in that business, so I paid no attention. Soon after, however, a prospective investor who had attended one of my seminars mentioned she might have money to invest with me and she would know in a couple weeks. I was curious about the timing and why she wasn’t quite certain. She explained that she was in the middle of a 1031 exchange and if she didn’t find a replacement property, she would pay the capital gains tax and invest the remainder of the sale proceeds with me. It was then I realized it would be smart to familiarize myself with these 1031 TIC investments.

I met with the investor and we had a phone conversation with the sponsor, a small firm in California. We presented the opportunity, but the client chose not to invest. In hindsight, this was probably a good thing because the last thing you want to do is invest with a rep (advisor) who doesn’t have any experience and a sponsor that’s either too small or too new to the business. Remember this. I was intrigued and I made it my business to learn everything I could about the 1031 exchange business. I learned that at that time, 85% of all real estate transactions in the state of California were part of a 1031 exchange. That was not the case on the East Coast. I was surprised at how uninformed investors were on the East Coast. There was an opportunity here.

Key Players Emerge

I discovered who the key sponsors were and began to reach out and ask questions. There were perhaps five legitimate sponsors in the business at that time. Passco Companies, a real estate investment firm founded by William Passco is credited with being the innovator of this TIC fractional ownership structure. In 1994, William was the first to assemble a group of random investors to take ownership as “tenants in common” for the purpose of completing a 1031 exchange. In 2001, Inland Group of Companies, a multi-billion-dollar real estate investment firm located in Oak Brook, Illinois, created Inland Real Estate Exchange Corporation to meet the growing demand for the 1031 exchange market. Inland was acquiring investment properties and offering tenant in common ownership on a fractional basis to 1031 exchange investors. These companies were pioneers in what would become a multi-billion-dollar industry. As they grew their businesses, I grew my business right alongside them. Over the last 21 years, Passco has exceeded $5 billion in acquisitions and has 6,154 clients worldwide. Inland has offered more than $5 billion in equity through 231 Private Placement Programs to over 12,500 investors. AEI, in Minnesota, was offering all-cash NNN (triple net) lease properties to TIC investors. They still do today.

A Bubble Bursts

By 2005, I had acquired a deep understanding of the 1031 exchange industry and it had become a central part of my growing business. The TIC business was exploding. It seemed like every day new sponsors were coming to the market. With that, we were seeing new reps, bigger deals and more expensive real estate. It was a bubble in the making. Business peaked in 2006. More than $3.5 billion in equity was placed in TIC investments through 71 documented sponsors. I had placed about $100 million in equity. Industry experts believed there were at least 100 sponsors at the time, many with little experience. The following year was the beginning of the financial crisis.

That’s when things took a turn. There was a steady decline in participation and by 2009 there was little or no TIC business. Property values dropped drastically, and many TIC deals were underwater. Lenders were having a difficult time getting unanimous decisions from 35 TIC investors for loan workouts. Deals were at best, not performing to meet projections, and at worst, failing all together. The tertiary sponsors that were late to the game were out of the business. Investors didn’t know where to turn. This was the worst part. The TIC structure was finished. Lenders would not work with 35 investors—each with individual voting rights—who didn’t know each other. Of the 71 documented sponsors, only three reputable companies were left standing, Inland, Passco, and AEI. I cannot stress enough the importance of working with a sponsor that has seen the worst of it and worked their way through it.

The Emergence of the DST

As survivors of the TIC market collapse, Inland, Passco, and AEI were able to evolve their business models into organizations offering a new co-ownership investment, the Delaware Statutory Trust (DST). How did the Delaware Statutory Trust come about? It was always there! IRS Revenue Ruling 2004-86 recognized the DST as 1031 replacement property. But the DST was used very little prior to the financial crisis. Many in the industry felt that the TIC structure was superior because the investor had a vote. Ironically, it was that singular vote aspect that brought the whole industry down. There always seemed to be one or two people or maybe a handful that thought they had a better way to do things.

In a co-ownership structure, you do not want any individual with little experience or knowledge having a say in the way the deal is run. When you are a passive investor, you want to work with an experienced sponsor with an extensive track record and let them run the deal. The DST proved to be just that type of superior co-ownership structure. In a DST, the sponsor is the Trustee and controls the deal. Only the Sponsor/Trustee must be approved for the loan, not the individual investor(s). The lenders prefer to work with this structure.

Because of my allegiance with the three surviving sponsors of TICs, I readily adjusted my business to focus on providing DST investment opportunities to investment property owners. Activity came roaring back and by 2013, my business was thriving again. I remained adamant about working with Inland, Passco, and AEI and placed approximately $200 million is equity in DSTs with those three sponsors alone. My broker- dealer has since added a few sponsors to the mix but has done so very carefully and with extensive due diligence. Although new to the DST structure, the selected sponsors have long operating histories with investment real estate. One local sponsor in New York City with a 50-year operating history has proven to be a viable option for the more sophisticated value-add investor.

Déjà Vu?

Where are we today? At year end 2019, an industry leader who tracks DST activity reported there were 30 active sponsors and that $3,486,191,291 in equity had been raised in co-ownership structures year-to-date. While this represents a strong and growing market, which is wonderful, it does cause me to think back to the rapid growth days of the TIC industry. And while I don’t believe we’re at the level we were at prior to the financial crisis, a healthy DST industry will certainly attract more sponsors, reps, and other participants. It’s wise, at times like this, for potential DST investors to be very diligent when selecting the advisor and sponsor they want to work with.

Expertise and the Voice of Reason

Just because someone is an exceptional online marketer, doesn’t mean they have exceptional products to offer. Just because some deals promise higher cash flows doesn’t make them sound investments. (Many new sponsors are notorious for paying higher cash flows in order to raise money, but often those higher yields are not sustainable.) One of the greatest lessons I’ve learned over the years is NOT to chase yield. You can mitigate risk by diversifying into different properties, different property types, and different sponsors. Investors should never feel pressured into a deal because it’s going to “close out.” A reputable, experienced rep/advisor can help you allocate your 1031 investment dollars without a lot of pressure and anxiety.

Thank you for taking a few minutes to read ‘my story.’ As mentioned, I have been fortunate to help serve clients with their investment needs for much of my professional life. I have lived through all types of market cycles and have personally weathered the booms and busts that have shaped my journey. When I look back, I could never have imagined I’d be doing what I do today. But I wouldn’t change it for the world. In many respects, my career found me and I’m sure glad it did!