Tools and Investment

In 2002, the IRS issued guidelines (Revenue Procedure 2002-22) for the structure of Tenant In Common (TIC) property investments. These guidelines dictate that a Tenant In Common ownership, also known as (fractionalized) co-ownership of real estate (CORE) or other investment properties, i.e. Planes, Yachts, Oil & Gas, etc. should follow certain protocol to qualify as a tax deferred 1031 Exchange. This article will focus on Real Estate Tenant in Common (TIC) tax deferred 1031 Exchange guidelines.

A smaller investor doing a 1031 Exchange can now enter into ownership of properties that previously they could not obtain because of large financial requirements and needed real estate expertise.  TIC ownership has the same features as sole ownership where the interest in the property can be purchased, sold, gifted, bequeathed, or inherited and is subject to substantial tax write-offs, potentially increase your net cash flow, and, like any real estate, potentially give you appreciation, all without the time commitments of active property management.

Each owner receives the benefit in proportion to its ownership percent share and the title is held individually by each owner. This is not a form of a partnership, corporation or Limited Liability Company (LLC) or Limited Liability Partnership (LLP).  With the TIC ownership, the individual real estate investor enjoys the same rights of ownership as a sole owner of the entire property.

With the 1031 Exchange into Tenant in Common properties, an investor who previously did not have many choices to acquire quality property in the time allocated now has a much wider range of investment products. This provides the investor more flexibility to complete their exchange in the allocated time of identifying the property for acquisition in 45 days and complete the transaction within 180 days. These time restrictions have proved insurmountable for many investors who lost their opportunity to defer their taxes ending up losing a large chunk of available funds waiting for better investment products.

The TIC investment is an excellent method for purchasing high quality properties that the average real estate investor would normally not acquire because they had to compete with the insurance companies, pension funds and REIT’s.  But now the smaller investor no longer has to settle for inferior products and can actually participate in the real estate investment market through premium, higher-end properties.

These quality investment properties are usually acquired by the bigger corporate investors because they hold their value well in all real estate cycles, the income is secured by the leases, with better tenants in better locations.  Now, the smaller real estate investor can invest in these more secure, more lucrative properties rather than take a risk with smaller sole ownership properties.

With the higher appreciation of commercial real estate in recent years, smaller real estate investors who had previously purchased these properties have become equity rich.  These properties, although cash flowing, are also becoming more management intensive and troublesome.  By utilizing a 1031 Exchange in a TIC property, the property owner can leverage the capital gains and recaptured appreciation from one property into another property, while maintaining management and hassle free cash flow.

With the alternative of investing into a large TIC 1031 Exchange the investor is able to afford professional leasing, management and in some cases even asset management while still earning good returns on the cash invested.  All the while, cash flow problems, property issues, tenant issues and capital improvements are now in the competent real estate professionals’ hands, advising him of the issues and making experienced business recommendations and handling them.  Investors also have the benefit of his fellow co-owners insights to the major decision-making process.  Most all investors who have invested in the TIC have done so for the same reasons and goals: to maximize cash flow, to improve the value of the asset and to decrease hands-on management.

The professionals who are building their careers and do not have the time, knowledge or the large resources now has the opportunity to invest in solid, stable commercial real estate just like some of their high profile clients.  All the management issues are taken care of by professionals just like them without interrupting their busy schedule and receiving excellent advice just as they provides to their own clients.

Investor who also finds the TIC transaction attractive is the well diversified investor lacking real estate in their portfolio.  With the real estate becoming main stream investment product that offers security, profitability, and now showing more liquidity, real estate provides for greater diversification.  In addition to a return on their cash investments, they are able to benefit from the deprecation and the appreciation of the property and have control over their investment. The secondary market for the TIC is becoming acceptable.

Foreign investors are also finding the TIC fractionalized purchase of real estate in American a viable proposition. In the past these investors bought either condominium units or small commercial properties like apartment buildings, shopping centers or office buildings.  These investments requires constant cash investments for fees, taxes and insurance, dealing with unprofessional condo boards of directors and the small commercial properties require business decisions far away from their home and knowledge.  Local professional advices are sometimes not able to solve the issues of the properties purchased.  The TIC investments include all the costs and issues of ownership and provide a good worry free return on their investment. They get professional advice and can learn from the experience and advice of local co-owners.

TIC investment is not for those investors who must have absolute control over their investments.  TIC investment is a major change for the investor who has been the only decision maker for their real estate.  They make all the decisions including to whom to rent the property to what color the bathrooms should be.  They have all the control and responsibilities of addressing changing market conditions, capital improvements, rent collections, maintenance and tenant issues. They do not like being in the position of having little or no control over their investment.  Investing on their own does limit the size and quality of the investment they can make, but they are happy to do so because they will not have to deal with other decision makers.  This limits their ability to have a lot of free time or the choice of good properties. 

TIC sponsors often look at properties across the country to find the reasonably priced, well located, and well tenanted, cash flowing properties that they eventually acquire – a service few individual investors can afford.  Individual investor has to pay for the costs of the due diligence for all properties they pursues, paying for the environmental inspection, building inspection, engineering review, title report, financing fees and other costs, often only to find out that the property is not suitable for them to purchase or they must spend additional fees to make it suitable. These fees and costs are not recoverable from the properties they do not purchase. TIC sponsors has already paid for these costs when the TIC property is offered to potential investors, who gets all the benefits of the due diligence without having to pay for it up front and is usually a portion divided between all the co-owners and built into the cost of the purchase. There is no cost if the investor decides not to purchase.

Real Estate industry is growing by leaps and bounds with the incorporation of the Tenants-In-Common real estate investment for the 1031 Exchange requirements filling the needs of many smaller investors.  The investor is fast learning about the benefits of Tenants in Common and 1031 Exchanges while developing a comfort level with the product to make sound and profitable Real Estate investment decisions.