| WHAT IS A TIC EXCHANGE?
A TIC or "Tenant-in-Common" exchange,
is a form of real estate asset ownership in which
two or more persons have an undivided, fractional
interest in the asset, where ownership shares
are not required to be equal, and where ownership
interests can be inherited. Each co-owner receives
an individual deed at closing for his or her undivided
percentage interest in the entire property.
Only "Qualified Investors"
are eligible for a 1031 TIC exchange investment
- a natural person who has individual
net worth, or joint net worth with the person's
spouse, that exceeds $1 million at the time
of the purchase;
- a natural person with income
exceeding $200,000 in each of the two most recent
years or joint income with a spouse exceeding
$300,000 for those years and a reasonable expectation
of the same income level in the current year;
or
- a trust with assets in excess
of $5 million , not formed to acquire the securities
offered, whose purchases a sophisticated person
makes.
- Please read
the important note about TIC Risks on this page
The TIC exchange has several advantages
over a traditional 1031 property exchange that
provide "valued-added" to the real estate buyer.
Selling in a sellers market and
buying in a buyers market with TIC Exchanges
The best time to sell has always
been in a "sellers" market, so to capture
that appreciation many investors will sell their
properties. But because of IRS rules on capital
gains, if those properties are not replaced with
"like kind" properties, most investors
will face a large tax bill. To defer that tax
bill, most investors will replace their properties
with something that is equal or greater in value.
The problem is that then the investors become
"buyers" in order to replace that property.
Buying investment property in a "sellers"
market is not the best investment strategy.
One solution to this problem is
simple. We want to sell in a "sellers"
market with high prices and find replacement properties
in "buyers" markets with low prices.
But how is that possible?
Finding the "buyers" markets
can be a difficult task even for the most seasoned
real estate investor. This task is made more difficult
because we must explore markets that are sometimes
many miles away and we just don't have the time
to spend researching properties in unfamiliar
markets. Taking into consideration the time constraints
of a 1031 Exchange with its 45 day replacement
property identification rule, the race to find
suitable replacement property and perform due
diligence on those properties seems impossible.
All of that research takes time and is often not
possible in just 45 days.
There is a new option for investors
to own investment real estate properties that
has emerged in the last several years. It is called
Tenant in Common or 'TIC' Property. These properties
are usually *Triple Net Leased and/or have
professional management in place. TIC properties
are large institutional Commercial properties
in all asset classes and multi family apartments
with market values of $10,000,000 to over $150,000,000
with investment amounts starting from $150,000
to over $2,000,000. They are usually found in
"buyers" markets nationwide. The properties
have a non-recourse loan (no personal liability
to the investor) already in place. TIC properties
have 3 or more levels of due diligence completed
which usually exceeds that which is done on typical
real estate transactions. TIC properties usually
have a first year cash on cash flow of 6-8 % -
add to that appreciation and the depreciation
schedule and you're can often shelter 30-50% or
more of your cash flow depending on the property
chosen.
*Triple Net Lease defined-
A lease in which the lessee pays rent to the
lessor, as well as all taxes, insurance, and
maintenance expenses that arise from the use
of the property.
Access to higher grade properties
normally available only to REIT's and/or Pension
Fund buyers - The typical entrance in an institutional
quality commercial building can begin as high
as $5 million, but through TIC ownership, the
average person is able to enjoy ownership in these
properties with a lower required minimum purchase
amount in the $300,000 to $500,000 ranges and
up. In addition to reliable rental income and
growth potential, these properties are able to
attract tenants with greater financial strength
and stability than possible for the individual
landlord. Corporate tenants or multiple tenants
reduce your overall vacancy risks and cash flow
disruptions.
Better financing terms and ease
of closing - You do not have to qualify for
a loan or special financing on your own. The property
loans on most of the TIC properties offered through
1031 Horizons are non-recourse. The TIC debt structure
generally allows for the debt financing to be
assumed. Assumption usually occurs without the
need for qualification or loan assumption fees.
The financing is already in place
when you purchase your deeded interest in the
property. You have access to the economies of
scale of a large buyer who can negotiate lower
interest rate terms on a commercial loan. No more
mad scrambling to arrange financing at reasonable
terms in a short window of time.
More travel and time off, less
tenants and trash - The TIC owner avoids the
time and frustration of dealing with multiple
tenants and repairs and maintenance that eat into
your net returns. No more heating calls, toilet
repairs, and general property upkeep and maintenance.
These cost you money and your valuable time. TIC
ownership allows you to become a "Mailbox Landlord"
and simply receive your monthly rental income
from your mailbox. Most properties have "triple
net lease" structures where tenants cover all
of the above expenses. Enjoy your property ownership
benefits instead of working for them.
Experienced real estate owners
offer strong synergies - As an alternative
to sole ownership of real estate, a 1031 TIC buyer
can take partial ownership in a large commercial
property along with other unrelated buyers, not
as limited partners, but as individual owners.
The combined real estate experience of numerous
buyers partnering on a property helps in the future
decision making for the property owned in common.
Two heads are always better than one.
Low Minimums - Revenue Procedure
2002-22 issued by the IRS allows up to 35 TIC
owners in any one property. Minimum purchase requirements
are structured to meet this limitation and often
range from as low as $150,000 to $1,000,000 and
higher.
Diversification - Due to
the low minimums in TIC properties, the buyer
can decrease risk by diversifying into a variety
of property types (Shopping mall, Apartment Complex,
Office building, Single Tenant Home Office, Large
Retail Store, Office Tower etc.)
Ease of Due Diligence - Properties
are offered with a Private Placement Memorandum,
similar to a prospectus. You must be a qualified
invester to participate. The sponsoring real estate
company has done significant due diligence to
purchase the property on behalf of TIC owners.
The experience of these institutional real estate
firms is hard to duplicate by an individual investor.
The TIC buyer has all of the information at his
or her disposal to make an informed purchase decision.
Deeded Interests - The TIC
owners buy the property and receive a deeded interest.
This is not like the Limited Partnership structures
common in the early 1980's. You have a deeded
right to a percentage ownership in the property
and all resulting benefits of monthly rental cash
flows, depreciation tax benefits, and future appreciation
realization potential of the property. You can
transfer this interest by gift, sale, inheritance,
assignment, etc. Such transfer does not need to
coincide with the transfer of all TIC interests
in the property.
TIC Exchange
Risks - Tenant In Common real estate exchanges
involve various risks. A private placement memorandum
must be reviewed before making any decision. Make
sure to consult your attorney and/or a qualified
accountant or C.P.A. before acting. Make sure
you determine whether a TIC exchange is suitable
for your needs.
Investors have generally identified
three main areas of risk that may exist with an
investment in a syndicated Tenant in Common offering.
1031 Horizons works to mitigate the following
risks:
- Tax Risk
- Sponsor Risk
- Real Estate risk
Tax Risk: The risk that the
Tenant in Common interests will be deemed to be
a ‘partnership’ interest, not a Tenant
in Common interest. Appropriate legal guidance
in the structuring of the program can mitigate
this risk. The top-tier structures are receiving
‘Will’ level legal opinions and are
applying for a private letter ruling. The minimum
standard (in our humble opinion) is the ‘Should’
level legal opinion.
Sponsor Risk: The risk that
the sponsor will not treat the investors fairly
and in good faith and/or will not apply the appropriate
resources and expertise to the properties in order
to deal with issues in the best interests of the
Tenant in Common investors. 1031 Horizons carefully
selects our real estate providers and perform
thorough due diligence on each private placement
memorandum that our clients consider for their
exchange.
Real Estate Risk: All real
estate investing contains some element of risk.
Unfortunately, in their headlong rush to defer
the payment of taxes, some investors ignore the
real estate risk and acquire a non-controlling
interest in a property that they would not consider
on a sole-ownership basis alone. By reviewing
or considering several different types of real
estate TIC Interests as well as by geographic
diversification options, a real estate investor
can help to mitigate their risk.
Real estate prices are affected
by numerous variables. These include interest
rates, occupancy rates, location, demographic
growth trends, price per square foot, replacement
costs, the growth or contraction in the US Economy
or in specific regions of the country, and other
variable risks outside the control of the real
estate investor-owner.
TIC Interests are illiquid securities.
The Tenant in Common form of ownership may require
unanimous consent to sell a TIC interest.
As fees charged in connection wit ha TIC Exchange
increase, the money saved as a consequence of
tax deferral will be offset.
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