What is a Tenant-in-Common?
Tenant-in-Common (TIC) investment is a structure of property ownership where multiple investors pool their funds to purchase and own larger properties. A TIC owner has an undivided fractional interest in the property and shares in their portion of the net income and appreciation. Each TIC owner receives a separate property deed and title insurance for their portion of the property investment.

Are TICs used in §1031 Exchanges?
Yes. The IRS’ Revenue Procedure 2002-22 published in 2002 changed the way TICs are defined and sold today—TIC investments are considered real estate investments. Furthermore, in today’s market, the selling of TICs as securities is the outcome of a landmark decision in 1946 by the U. S. Supreme Court
(SEC vs. Howey). The Court determined that any investment packaged and sold with professional management in place is as a security.

Since 2002, TICs have become a more attractive option as replacement property in §1031 Exchanges. Real estate investors and retiring baby boomers interested in removing the burden of actively managing their real estate investment may now acquire a fractional interest in institutional grade assets, preserve or increase their wealth and simultaneously defer up 100% of capital gains taxes. 

 
What other advantages do TIC properties utilized as Replacement Properties in §1031 Exchanges have?

 

 

 

 

 

 

 
The reasons for TICs ever increasing popularity are many
Passive management. Cash flow. 

Ability to exchange multiple times.

 Direct participation available.
Occupied by national credit tenants. Easily identified and closed timely.
SEC extensive due diligence and disclosure requirements. Prearranged financing.
Portfolio diversification into multiple asset classes in multiple markets. Non-recourse loan reduces risk to the investor.
Potential for increased appreciation. Come in flexible sizes.
Favorable exit strategy from relinquished property. Recover the tax benefits of owning real estate.
Investors undergo a suitability process. Great estate planning tools.

 

 

 

 

 

 

 
 
What are the risks in utilizing TIC properties in §1031 Exchange transaction?
It is important to note that TIC Investments are only available to accredited investors as defined by Regulation D of the Securities Act of 1933.  Income and net worth minimums apply.
As with any real estate investment, there are inherent risks associated with TIC Investments that need to be considered including, but not limited to:
  • Value fluctuations
  • Occupancy and rental trends
  • Lease structures  and tenant quality
  • Limited liquidity—no secondary market.
  • Fees and expenses different from other real estate investments. 
  • LiquidityIssues—TICs are not short term investments.  Most involve longer term holding periods.
  • Tax Structure—To qualify as a securitized §1031 TIC exchange, an investor should ensure that the sponsor obtained a legal opinion letter indicating the property should satisfy usage as a Replacement Property §1031 Exchange. 
  • Projections—TICs like any investment are structured on best effort projections.  There are no guarantees that cash flow projections or appreciation are met.  The sponsors’ past performance and experience, though not an indicator of future performance, should be analyzed. 

This is the reason why it is important to partner with a firm that has the experience, knowledge and professionalism needed to navigate the TIC market with you and your clients.   

 
 
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Securities offered through Welton Street Investments LLC, 4600 S. Syracuse Street, Suite 530, Denver, CO 80237, 888.569.1031. This is neither an offer to sell nor a solicitation of an offer to buy a security. Such an offer may only be made by means of a private placement memorandum. As with any real estate investment, there are various risks including, but not limited to: loss of principal, variations in occupancy which may negatively impact cash flow, limited liquidity, and limits on management control of the property. Grisenia Matos is a Registered Representative of Welton Street Investments.