Problems arose as the market cooled. Some areas saw an increase in vacancies and a decrease in rents. The restricted cash flow has meant that some investors find the income is not sufficient to make their mortgage payments.

In part, this dilemma has been caused by the way many, but not all, TICs were arranged. Often, syndicators bought properties and then resold them to the TIC investors at an increased price. Many used short-term loans that required only interest payments to make the initial purchase. They were banking on the property appreciating in value, with an accompanying increase in rents, which would allow them to refinance.

Unfortunately, the value of the properties and the increases in rent failed to happen. Most markets have seen vacancy rates rise. In addition to impacting the TIC’s ability to meet expenses, this meant that little or no equity was being built. Lenders became more leery of financing properties for investors. They began to demand investors maintain an equity position of at least 25 percent and in some cases as much as 50 percent. This has led many investors with the need to increase their equity by sinking more cash into the properties in an effort to protect any equity they might already have.

Some syndicators have been forced into bankruptcy and dissolution, including two of the largest ones, DBSI and Sunwest Management. This has many question whether TICs have a future. While the verdict is still in doubt, trends indicate that the TICs offered by realtors will likely disappear, replaced by securitized Tenant in Common investments. Many advisors are already recommending clients invest in TICs only if they are securitized. While TICs can be classified as either securities or realty investments, securities require greater disclosure. Many companies that are still offering real estate TICs have changed their policies, amassing enough in investments to purchase the property outright, with no need for financing and no debt burden.

How well and how quickly the market recovers will determine whether TICs survive and how they will be structured. Until the issue is settled, many investors are opting for alternative methods. These include making substantial down payments, purchasing properties in foreclosure, and purchasing notes from lenders that need to improve cash flow.