With multifamily capitalization rates hovering around all-time lows, many property owners are finding it tough to resist the temptation to accept a boatload of cash and then … well, then what?

Well, more and more individual investors are opting to “trade up” into larger, institutional-grade assets – and still defer capital gains liabilities – by hooking up with perhaps a dozen or more partners via a tenancy-in-common (TIC) syndication.

TIC sponsors tout the reductions in commission loads that have occurred with this type of investment, as well as the burgeoning sophistication, and even multifamily specialization, of today’s TIC sponsors. Some real estate veterans remain skeptical of investor benefits, in particular the net yields achievable after all of the TIC transaction fees are paid.

Whatever they’re worth, it appears TICs will play a growing role in the multifamily field at least for the near-term future. They remain a popular way to defer capital gains liabilities and to step back from day-to-day property management.

Apartments popular with TICs

Not only do the bulk of TIC investors trade out of multifamily properties, it seems inevitable that TICs will be even more active buyers of larger apartment communities in 2006. As TIC investment activity keeps expanding at a breathtaking clip, the multifamily category is capturing a growing share of acquisitions.

TIC equity investment has been doubling for four years running, with the 2005 total estimated at more than $3.5 billion, according to Omni Brokerage, Inc. Sponsors raised more than $1 billion during the third quarter alone, and spent more than $193 million of it (not including any debt financing) on multifamily communities.

Individuals and families that have just sold smallish residential properties now account for at least half of Omni’s TIC investor clients, maybe even 75%, Omni account manager Brady Flamm estimated. Perhaps more noteworthy, the multifamily sector continues to gain ground on the distant front-runner office category as the “up-leg” property type of choice for TIC acquisitions. Apartments now account for about 20% of TIC investment activity.

Like so many other relatively conservative real estate buyer types, TICs have been migrating toward property profiles with better yields, Flamm and others said. Large-scale TIC syndications earlier in the decade focused more on low-risk, net-leased properties, but corresponding cash-on-cash yields to TIC investors often end up below 5%.

While apartment cap rates aren’t a whole lot better, TICs are increasingly embracing the multifamily sector, with many vying with institutional investors for sparkling new communities. For example, sponsor Passco Cos. just paid $39.2 million for northwest Houston’s just-completed 504-unit Villa Toscana. President William H. Winn noted that Passco-sponsored TICs aim to invest $300 million to buy some 3,000 units by the end of 2006.

Some sponsors have looked to boost yields a bit as they take the risk of buying development projects during initial lease-up. The TIC universe is even seeing a number of new regional sponsors focusing mostly on the multifamily category, Flamm said.

But going head-to-head with deep-pocketed pension funds and the like isn’t exactly an effective strategy for boosting yields these days, cautioned Michael Melaugh, executive managing director of capital markets with Trammell Crow Residential. “We know they have to overpay” to win these deals, he said.

So TICs today are tending to avoid the most competitive metros in favor of higher-yielding stable markets where rent growth is expected to remain steady but moderate, said David Baird, national multifamily director of Sperry Van Ness.

As for individual investors, Melaugh questions the wisdom of paying investment commissions as well as sponsor and management fees, and getting relatively slim net yields, in order to defer capital gains taxes rarely totaling more than 20% (15% federal and no more than 5% in most states).