Tenants in Common Ownership – TIC’S
The Tenants in a common ownership structure have become increasingly popular for owners of an income property. Tenants in common ownership allow investors to own and acquire a deed for an undivided fractionalized interest with other co-owners of a large “institutional-grade” property. Some of the more attractive offices, retail (shopping centers), and industrial buildings have national anchor tenants with long-term triple net leases. The benefits of selecting the TIC ownership structure may be examined in terms of the following.
A TIC typically offers a method intended to successfully complete a 1031 tax-deferred exchange transaction. Management is performed by experts who can provide economies of scale because they manage dozens of properties. Many of these properties are located near each other, which results in decreased management and operational costs and more efficiently managed properties. These reduced management fees equate to additional equity buildup for the investors.
TIC investment eliminates the daily management headaches of listening to nagging tenants, property maintenance issues, and paying and accounting for all expenses. It provides an opportunity to invest in a variety of investment types of “institutional quality” properties that normally would not be available to the smaller investor. It also provides an opportunity to be diversified into more than one property.
TIC ownership also benefits the investor because top, full service real estate companies are in the market on a daily basis looking to purchase “off market” transactions that meet the specific investment criteria necessary to produce quality investments. These TIC investments can potentially generate steady income, tax benefits, and appreciation. Other benefits of the TIC structure include; the ability to identify and close in a timely manner; flexibility of timing and identification of multiple property types; and diversification by investing in different real estate properties which offer different investment size flexibility (generally $100,000 to $10,000,000 or greater which can exactly match the equity of the relinquished property and the necessary debt to assume to completely defer capital gains tax).
Due diligence is conducted on each property offered as a Tenant in Common. The lender is the most important entity that scrutinizes the property in terms of, whether the property can sufficiently debt service, whether the structure of the TIC offering is complete and whether the property works financially, economically, and the structural condition is not compromised, all permits are in place, with Environmental Impact Reports, building inspections, roof inspections, mechanical & engineering inspections, appraisals & all contingencies of purchase, etc. have been removed and are acceptable. Additional independent layers of due diligence are performed by the real estate company, the Broker/Dealer, and other agencies.
In summary, the key components and benefits of a Tenant in Common ownership are:
- No management hassles and headaches; Professional management provides loan acquisition/finance activity, asset management, leasing, property maintenance, collection of rents, and account reporting to each TIC owner, which results in a passive role by the TIC owner.
- Potentially greater leverage; typically 60 to 65% loan to value
- Stepped up tax basis;
- Property consolidation;
- Potentially improved cash flow.
- Tax sheltering is approximately 50 to 70% relative to the property selected
- Appreciation, depending on the market
- Investment can often be diversified into more than one property;
- Ability to acquire “institutional quality grade” properties; with National Tenants/long term leases that are “deliverable” and a successful 1031 tax deferred exchange can be completed, if the offering and exchange are properly structured.
- Low cost prearranged, assumable, financing is obtained that is fixed rate and often nonrecourse to investors.
- Replacement properties can be identified and closed in a timely manner
- In-depth due diligence by real estate company/sponsor, lender, and the Broker/Dealer on each TIC investment property.
Remember, all investments, carry an element of risk. 1031 offerings have the usual risks of most real estate transactions; such as, possible loss of principal, economic risk due to vacancy rates, risk of default if unable to make payments on leveraged properties, or potential lack of geographic diversification among others.
These comments are for general educational purposes only, and do not address the entire topic. Programs such as these are for ACCREDITED INVESTORS ONLY. Prior to implementing any strategy, taxpayers are urged to seek the advice of their tax advisors. For more specific information on investment risks, you should consult the offering’s prospectus.