What is tenant-in-common ("TIC")?
Tenant-in-common (TIC) is a form of direct real estate ownership in which multiple investors each hold an undivided, fractional interest in a property. TIC owners typically have different percentage interests, and each is entitled to their pro rata share of the property’s net income. Each TIC owner has a separate deed, reflecting their unique ownership interest in the property. Unlike joint tenancy (with right of survivorship), in which a deceased owner’s interest passes directly to the remaining owners, TIC ownership provides continued control to the owner’s estate.
Strength in Numbers
TIC ownership allows multiple purchasers to combine their investable dollars, thus providing access to largerand potentially betterreal estate. Larger properties often entail thorough due diligence, professional property management, sophisticated asset management, and a higher quantity and quality of tenants.
Not a Partnership
TIC ownership is not a partnership interest. There is no general partner and the sponsor (the organization that structures the offering for investors) does not participate in the profit of the property. All of the net income must be distributed proportionally to the TIC owners, and the TIC owners ultimately must approve changes in management, leases and loan terms.
Individuals or Entities
Virtually all types of owners may invest in a TIC. These include individuals, married couples, limited liability companies (LLCs), family limited partnerships, corporations and trusts. However, securitized TIC investments are available only to accredited investors.
Real Estate Taxation
Like any real estate investment, TIC ownership offers the benefit of depreciation, as well as capital gains deferral in the form of 1031 exchanges. In most cases, TIC income is treated as passive. Heirs of TIC interests may be able to claim a discount for estate tax purposes.
Always consult your tax advisor for specific tax information. Tax-deferred exchanges require strict compliance with the rules and regulations under 1031 of the Internal Revenue Code.
What types of properties can I acquire as a TIC investor?
Almost any type of real property can be sold as a TIC investment. Most TIC investors, however, are seeking high-quality commercial real estate, with relatively stable income and potential opportunity for appreciation upon sale.
What are some of the benefits of investing in TIC properties?
For many investors, a TIC property represents more than a new building it can bring about a profound lifestyle change. After the initial purchase paperwork is complete, TIC investors are freed from the day-to-day management hassles of sole ownership. Aside from the occasional lease approval, TIC participation is typically limited to receiving an automatic monthly deposit.
TIC Sponsors will find the property, conduct its due diligence, arrange financing, manage the asset, negotiate tenant leases, distribute income, provide accounting reports and execute the final disposition all for the benefit of its passive TIC investors. In addition, conference calls, are often offered to investors in order to keep them fully informed regarding their property.
Income and Growth
One of the primary benefits of owning investment real estate is the potential to generate income and growth. The goal is to not only seek properties that provide income today, but strives to produce greater income in the future. Like any real estate, there is no guarantee of positive or steady income.
Access to Higher Quality Real Estate
TIC programs offer investors the opportunity to invest in a caliber of real estate that they may not be able to acquire on their own. For example: a new downtown Class A office complex, containing credit-rated tenants and managed by a top national property management firm, simply is not available to an investor with $500,000. However, 30 investors with $500,000 each and financing can acquire such a building. Better real estate, better management and better tenants together they represent a better chance for financial success.
Depending on an investor’s budget, TIC programs may allow access not only to better and bigger real estate, but to more real estate. This selection may include up to five different asset classes in seven different geographic regions. Thus, it may be possible for an investor to own TIC interests in an apartment complex, a medical center and an office building located in Texas, Florida and Oregon. This diversification across multiple asset classes and locations may serve to mitigate one’s overall investment risk compared to investing in a single property. However, diversification does not guarantee against loss, and cash flows are not guaranteed and may fluctuate.
Borrowing money for real estate investment is a difficult proposition. Thankfully, TIC investors are spared most of the pain and difficulty associated with the lending process. 1031 Sponsors pre-arrange the financing, seeking the most competitive terms available, before the first investor enters each TIC program. In some cases, these loans subject the investor to minimal personal recourse (if any) in the event of default, provided that the investor is not in violation of the loan covenants (e.g., bankruptcy or failure to maintain a business entity).
Can I buy a TIC interest to satisfy a 1031 exchange?
Yes, not only can you invest in a high-caliber, income generating, professionally managed TIC property, you can defer your capital gains taxes, too. In 2002, the IRS issued formal guidelines for structuring TIC offerings to satisfy the “like-kind” requirements of 1031. Since then, thousands of real estate investors have used TIC properties as an alternative to sole ownership for 1031 exchanges. Each TIC offering is designed to meet IRS requirements and accommodate the needs of virtually all 1031 exchange investors who meet applicable suitability requirements. An in-house team of professionals stand ready to ensure a smooth and efficient exchange process for all TIC clients.
What are some of the costs and risks of TIC ownership?
Most TIC sponsors, offers their TIC properties as “private placement” securities. Per Securities and Exchange Commission (SEC) regulations, these types of securities are available for sale only to “accredited” investors, which include individuals/married couples with net worth in excess of $1 million, individuals with income greater than $200,000 ($300,000 for married couples), or trust/business entities with net worth of more than $5 million. (See SEC Regulation D, Rule 501.)
General Real Estate Risk
TIC investments carry the same risks inherent in sole ownership of real estate. Commercial property can suffer physical damage, economic downturn, occupancy loss, problem tenants, unforeseen maintenance or repair, neighborhood blight, rezoning, eminent domain, or premises liability regardless of whether the property is owned by one person or 20 people. Real estate investing is speculative and involves a high degree of risk; investors should be able to bear the complete loss of their investment.
No Guarantee of Income or Performance;
Some Recourse Liability
Sponsors do not guarantee the income distributions or overall performance of any of its TIC investments. Income distributions will vary during ownership. In the event of a shortfall of revenue, net income may be subject to a “sweep” by the lender, and TIC owners may be required to supplement debt service payments.
There is no secondary market for TIC interests, and there are lender restrictions on the transfer of interests. TIC interests are not liquid; investors should be prepared to hold their interests until disposition of the property.
Leverage may increase volatility and may increase the risk of investment loss.
1031 Exchange Risks and Tax Issues
There are a number of significant tax risks and tax issues involved with the purchase of an interest in a TIC property. Investors should consult their tax advisors and legal counsel.
If an investor does not comply with the detailed requirements of 1031, they may lose the tax benefits of an exchange.
Sponsor-Related Expenses and Fees
While sponsor-related expenses and fees vary per offering, they generally fall into three categories: initial use of proceeds (up front), management fees (ongoing), and disposition fees (upon sale). Initial use of proceeds includes organization and marketing costs, selling commissions, marketing and due diligence costs, acquisition fees, financing fees and costs, closing costs, and reserves. These various charges are calculated either as a percentage of equity or purchase price, and are impacted by such factors as the loan-to-value ratio, broker commissions and loan-related fees. Total acquisitions costs (not including reserves) are typically nine to 11 percent of purchase price. Management fees include both property management (facilities supervision) and asset management (lease negotiation, investor communications). Total management fees typically are four to six percent of a property’s gross revenue.
Disposition fees usually inclusive of any selling broker fees and all efforts to market and ultimately sell the property range from two to six percent of the sale price. Collectively, the fees paid to a sponsor and its affiliates are significant, and may offset profits related to the ownership and operation of the real estate.
The direct or indirect purchase of real property involves significant risks. Investors should consult their own tax advisors and legal counsel. Always remember that each property is unique and past performance is no guarantee of future results.