About a year ago, my company's founder was quoted in the press, talking about real estate and sex. Before I had a chance to read the paper, there were six messages on my voice mail. Customers and competitors laughing hysterically, asking how he had the guts to say something on the printed page. He left me mortified, wondering how a grown man and business leader could compare real estate to sex. But, compare it, he did. At the time, I thought he was acting the buffoon, looking to shock and amuse a bored readership, or, himself. The furthest thought from my mind was that he might have meant what he said. Jumping into real estate is like jumping into sex, nothing happens on the sidelines. Even further was the idea that he might have been right.

The reporter called to ask him about investing in TICs. In last year's economy, TICs still were safe bets as passive real estate investments. They promised a return like a REIT but instead of owning small pieces of stock representing snippets of a large real estate portfolio, TIC owners actually owned property. It might have been with 30 or 50 other people but TIC investors owned dirt.

Our founder claimed that real estate, like sex, is not a spectator sport. Interesting comparison, possibly compelling, but most likely stupefying to the casual reader or non-investor. However, the meaning behind his words have been born out in the past couple months.

Real Estate is a hands on project, whether your own or those of an accomplished, manager for both facilities and income stream. When the fortunes of economy change, a Landlord/owner/developer needs to see the change, anticipate an slackening of income and potential blow to the profit and loss statement. As a TIC owner, one generally has a limited amount of input into the management of a property. Decisions are made by a minority representing the majority. While the decision makers may keep you in the black through a recession, it isn't likely. It's not likely because they work with consultants who are paid employees, receiving a paycheck each week regardless of the property's performance.

Individual landlords or partnerships are more likely to be proactive in a changing market. They are paid when the bottom line balances on the plus side. Vacancy in recession is a Landlord's true enemy. Suddenly maintenance of the space, as well as advertising, marketing fees and operating expenses populate the negative side of the balance sheet. The bottom line does not love money flowing out. The wise Landlord mitigates vacancy.

Whether the owner of a large retail shopping center decides to suspend percentage rents for a period of time, or revises "go-dark" clauses in the leases to allow tenants to reduce employee costs is entirely up to the individual owner.

The list of proactive solutions to tenancy go on and on, for instance a Landlord in Illinois whose largest distribution tenant is Schneider Electric, the world's largest maker of circuit breakers, may negotiate a rental abatement, credit or brief reduction in rental payments. Headquartered in France, Schneider exports large quantities of product to the Emerging Market countries (BRIC - Brazil, Russia, India China). Emerging Markets have been taking a beating in the global credit crisis like everyone else. China which has expanded 10% every year for the past five years is slowing down. The Russian government has pledged $200 Billion to stop the bleeding in its worst banking crisis since 1998.

Ultimately, a landlord may be wise to renegotiate a lease with a leader in world manufacturing if the Landlord understands the world markets and the reality that Europe was increasingly exporting goods to Emerging Market Nations since 2000. Real Estate holders whose soul investment are in TIC's stand to lose in this market, not the same way that shareholders in REIT's with under performing portfolios will ache, but the inability to be proactive and think outside the box to maintain a positive income stream and return on equity will cause the average TIC holder sleepless nights and a knock to the wallet. As it turns out, Real Estate is not a spectator sport.

-kristin

October 27, 2008