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Tenants in Common Basics - Podcast

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Tenant In Common (TIC) Investment Properties

Welcome to the 1031 Alternatives Group podcast on Tenant In Common (TIC) Investment Properties

A Tenant In Common (TIC) investment represents co-ownership of real estate by two or more investors and is a form of holding title to real property. TICs permit small to mid-size investors the ability to own an undivided fractional interest in large, institutional- quality properties, such as office buildings, medical office, shopping centers and apartment complexes. TIC investors are on the deed and considered a direct owner of the underlying real estate. However, each Tenant In Common (TIC) investor or co-owner is not involved in the day-to-day management of the property. Each TIC investor enjoys his or her “pro rata” share of the net income, tax shelters, appreciation, and share of the proceeds at the property’s resale. Tenant In Common (TIC) properties are passive income vehicles that typically provide a monthly cash flow to investors. These are not partnerships and TIC investors have voting power on key decisions.

Even though a large amount of equity has been placed into Tenant In Common (TIC) investments to date, in various ways TICs have been an unknown investment option to many investors. Many of the earlier investors resided on the West Coast of the United States, but more and more investors across the country are becoming aware of the potential benefits TICs have to offer. The most powerful reason TICs have grown in popularity can be attributed to a 2002 Internal Revenue Service (IRS) Revenue Procedure ruling. This ruling (Rev. Proc. 2002-22), essentially set forth the guidelines whereby a TIC would be recognized as real estate, not as a partnership. Hence, it could be used in a 1031 tax-deferred exchange. TICs have become the preferred investment vehicle for real property investors who wish to defer capital gains and depreciation recapture taxes via a 1031 exchange and own real property without the management headaches.

Potential Benefits of Tenant in Common Investments:

Defer 100% of capital gains tax
Defer depreciation recapture tax
Relief from property management headaches
Upgrade to potentially institutional quality real estate
Potentially increase current income & capital appreciation
Diversify real estate investment holdings by asset class
Identify quality replacement property solutions during the stringent 45-day window
Geographically diversify real estate holdings
Non-recourse financing in place to meet 1031 leverage requirements
Cash flow from properties may be partially sheltered by new depreciation schedule.

Risks of Tenant in Common Investments:
As with any investment in real estate, there are risks associated with TIC ownership, including fluctuations in the real estate market that may impact the value of the property.

The following risks may also be associated with investment: illiquidity, economic risks due to vacancy rates, default if unable to pay mortgage and possible loss of principal.

TIC ownership requires unanimous approval to take major action, such as a re-finance or sale. Obtaining unanimity may be difficult when 10 or 20 investors are involved.
It is not possible to address all relevant risk factors in this forum. Risk factors are outlined in the Private Placement Memorandum for each offering. Investors should thoroughly understand all risk factors and discuss them with their financial representative prior to investing in a 1031/TIC offering.

With proper planning and by working with an experienced industry professional well versed in the niche field of 1031 exchange tenant in common investments an investor has the ability to develop a well-diversified, less-management intensive real estate portfolio, and is able accomplish these objectives all in a tax-deferred manner.

We thank you for tuning into the 1031 exchange podcast with the 1031 Alternatives Group on Tenant In Common (TIC) Investment Properties.

Watch our new 1031 exchange video on - What real estate professionals need to know about the National Association of Realtors (NAR) Recent Exemption Request to the SEC on Securitized Tenant in Common (TIC) Transactions

Listen to our latest 1031 Exchange Podcast on What Real Estate Professionals Need to Know about the National Association of Realtors (NAR) Recent Exemption Request to the Securities and Exchange Commission (the SEC) on Securitized Tenant-In-Common (TIC) Transactions.

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- Since 2002, when the IRS issued official guidance in Revenue Procedure 2002-22 on how Tenant In Common investments would qualify for replacement property under Section 1031, the TIC Industry has exploded into a multi-billion dollar a year business. However, ever since 2002, the vast majority of TIC investments have been sold through the securities industry by licensed securities representatives and broker-dealers, not though the traditional means of licensed real estate professionals.

» Continue reading "What Real Estate Professionals need to know about Securitized TIC Transactions"

Are you interested in learning about the 1031 Exchange process? Our new podcast series will educate you on the 1031 Exchange process.

Listen to our new edition on 1031 Exchange Explained.

1031 Explained - 1031 Exchange Podcast

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If you have any questions that you would like The 1031 Alternatives Group to answer please email them to podcast@1031alternatices.net.

1031 Exchange Explained - Podcast text

Welcome to the 1031 Alternatives Group podcast on “The 1031 Solution…a tax deferral strategy for highly appreciated real estate.”

If your investment real estate is currently highly appreciated due to years of ownership, and perhaps you have depreciated your property completely. Or maybe, your property is management intensive, you are under or over diversified, and your property is just not providing you enough cash flow….then maybe it is time to consider some options.

As an investment property owner, you have several options to choose from:
You can simply do nothing. You can sell your property, pay the taxes and reinvest the net equity into standard investments such as stocks, bonds or mutual funds. Or better yet, you may exchange your property for “like kind” real property utilizing IRS Section 1031 Exchange to defer your tax liability. Or you can exchange your property via a 1031 exchange into professionally managed property by utilizing a tenant in common 1031 exchange.

Now let’s take a more in depth approach to IRS section 1031 exchange.

» Continue reading "1031 Exchange Explained - Podcast"

Listen to the new 1031 Exchange Podcast

If you would like your questions to be answered on our next 1031 Exchange Podcast email them to podcast@1031alternatives.net.

Thank you for tuning in to the 1031alternatives podcast on 1031 exchange investing. We will be discussing today NNN vs. TIC: Where should your 1031 money go?

There’s a lot of investors out there seeking replacement property for their 1031 exchange, but can’t decide on whether to go with a single-tenant NNN (triple net) property or a Tenant In Common (TIC) property. Some of the arguments discussed below make it pretty clear why TICs are becoming more and more popular.

TICs are passive income properties that require no daily responsibilities and can free up your time to do other things besides fixing toilets and dealing with tenants. Not to mention, they have the potential to give investors a competitive annual income (paid monthly) which could be partially tax-sheltered due to a new depreciation basis and mortgage interest deductions.

Yes, TICs can qualify as replacement property for a 1031 tax-deferred exchange (IRS Rev. Proc. 2002-22). However, many investors who may not be familiar with TICs, or 1031 exchanges in general, underestimate how much easier and simpler they are to acquire than many other types of real estate. Once an investor sells his property, he only has 45 days to “identify” properties that he would like to acquire in a 1031 exchange. And as most seasoned real estate investors recognize, it can be extremely difficult to find, negotiate, study, and buy an investment property and arrange financing in these short time frames. TICs may reduce this dilemma because they are prepackaged and ready for purchase almost immediately.

TICs provide an exclusive opportunity for investors with little equity to get into institutional-grade properties. Some TIC offerings require minimum equity amounts as low as $100,000 to $300,000 (varies from property to property). In most cases, if you wanted to leverage into a single-ownership property with roughly $100,000 to $300,000 to work with, you could probably purchase a commercial property in the $300,000 to $950,000 price range (depending on the tenants in place, the type of building, and your credit for a bank loan). In this kind of price range, commercial properties usually have local tenants or franchises of national tenants, depending on the market. These properties may demand management involvement and are probably not institutional-grade.

NNN (triple net) properties have been common for 1031 investors for a long time and some deem them as viable option of no-management investment property. A NNN property typically has a single tenant such as a Burger King, Applebee’s, 7-Eleven, Starbucks, etc. The lease term is usually long (15-20 years). In a NNN lease, the tenants pay for everything regarding the property including rent, taxes, insurance, maintenance, utilities, and so forth. The guarantee could be corporate (desirable) or franchisee (less desirable but depends on the size of the franchisee). The typical price range is about $1.2 million to $3.5 million. For higher rated tenants, such as Walgreen’s, CVS, Wal-Mart, Best Buy or Home Depot, the price can reach $5 million or higher.

We’ve already concluded the fact that most NNN properties are not going to be institutional quality but they can provide a management-free investment. On the other hand, a lot of investors prefer multi-tenant investments to reduce risk. Think about it. If that single tenant leaves your building, breaks a lease, or goes out of business, you have no cash flow and will need time to figure out what to do while continuing to pay debt service. If one of the “multiple” tenants leaves in a TIC, you may have a reduction of cash flow but all of your “eggs are not in one basket,” like a NNN property.

So, getting back to that same $100,000 to $300,000 in equity, you have the capability to own a piece of a Medical Office Building or a Class “A” Apartment Complex, that can have nationally-known tenants in place instead of relying on only one single tenant. . Unlike a NNN deal, the TIC property would be ready to purchase, all the due diligence would be completed for the investor to review, and all the financing would be in place. You simply work with your advisors and then subscribe into the TIC deal that best meets your goals, objectives and risk tolerance. TIC ownership has given everyday investors a right of entry into an investment vehicle that has been historically dominated by pension funds, insurance companies, or ultra high net worth individuals.

Thank you for tuning in to the 1031alternatives.com podcast on 1031 exchange investing. If you have any questions that you would like us to discuss please send them to podcast@1031alternatives.net You can also visit us at www.1031alternatives.net. We look forward to hearing from you.

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; illiquidity, and limits on management control of the property. For an additional listing of risks, view the sponsor’s memorandum/prospectus.
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1031 Alternatives Group has recognized that a major issue facing real estate owners and occupiers of commercial properties today is the increased attention on measurement, containment and reduction of greenhouse gas emissions. Our investors can feel comfortable knowing that several of the sponsor firms we work with are doing their part to help protect the environment and reduce their impact on global warming. We provide our clients with the opportunity to deal with real estate sponsors that choose to operate with a “Green” philosophy with some of the following attributes listed below.

- Understanding the real estate issues our clients are facing today in the areas of energy efficiency, sustainability and other smart building practices.

- Recognizing the importance of treating the environment with care in all that they do. They believe it is their responsibility to treat natural resources with the greatest respect so that they will be available to future generations the world over.

- Recognizing that their actions speak louder than words – for the offices that they occupy, and on behalf of our clients, the locations they seek, the projects they construct and the buildings that they manage.

- Recommending to our clients sustainable building alternatives and build out strategies to extend their corporate culture in an environmentally responsible manner.

- Operating their buildings to maximize energy efficiency, to recycle materials, to limit waste, and we use green cleaning practices to limit the impact on the surrounding community and environment.

- Believing that as stewards of our clients’ assets and as a responsible, caring employer, it is to their mutual benefit to act responsibly to preserve and protect the environment for all to enjoy.

Demographic Investing is a strategy designed to target the regions around the country with the greatest potential for growth and invest in the goods and services that the country’s largest population groups are likely to consume.

There are 3 major population groups to take into consideration when discussing Demographic Investing:

1. Seniors – represent about 12% of the US population (roughly 34 million Americans).  These individuals are 65 and older, the parents of the Baby Boomers, and are living much more active and longer lives than the generations in the past.  According to the Society of Certified Senior Advisors, “The population aged 85 and over is currently the fastest growing segment of the older population…this is of great importance because of additional assistance needs and healthcare that is required.”


2. Baby Boomers – represent about 27% of the US population (roughly 78 million Americans) and are born between 1946 and 1964.  Baby Boomers are now starting to reach retirement and control about ¾ of the financial assets in the US.  They are spending a great deal of money on preventative and elective healthcare (i.e. cosmetic treatments).  The children of this generation are approaching adulthood, so condos and luxury apartments are common places for these empty-nesters to move into.  According to the Department of Health and Human Services, “From 2010 to 2030, the population aged 65 and over is expected to grow by 75% to over 69 million.”


3. Echo Boomers – represent about 26% of the US population (roughly 76 million Americans) and are born between 1982 and 1994.  These are the children of the Baby Boomers.  They are now just starting their own households and bring a strong demand for apartments.  According to Multi-channel News, “Within the next few years, Echo Boomers will take over 25% of household purchasing budgets.”

Where are these groups going?

According to the US Census Bureau, “Between 2000 and 2030, 88% of the nation’s population growth is projected to occur in the South and West.”  The Southern and Western United States has seen the largest population increases for seniors.  The Echo Boomers are fueling new demand for apartments in the South as they are starting new households and enter adulthood.  The top ten fastest growing states are Arizona, Nevada, Idaho, Georgia, Texas, North Carolina, Colorado, Florida, and South Carolina.

How can you capitalize on these trends?

There are great opportunities for investors to reap the benefits of these trends by matching up the needs of these groups with the best growth markets around the country.  Housing and healthcare are basic goods and services consumed by these groups and continue to provide opportunities to capitalize on these major demographic trends. 

Class A apartment housing is in great demand for these populations groups in certain regions of the country and the children of the baby boomers (echo boomers) will be coming of age in next decade and enhance the demand for rental units.  In areas experiencing rapid growth, the supply of housing will be unable to accommodate the rising number of young households.  There is an even bigger increase in the number of older renters (55 and up) than younger renters (under 35) and the majority of this demand will take place in the South.

Healthcare is another essential industry with long-term fundamentals.  As America’s population continues to expand and grow older with baby boomers entering their 60’s, investor can find ways to take advantage of this shift.  Since these boomers are living longer than generations in the past they are more likely to use more healthcare services. 

Many investors are zoning in on these trends by investing in demographic-favored products and services by purchasing stock in related companies or by owning the buildings in which they operate.

Remember all investment strategies carry elements of risk. Demographic investing is no different and carries with it market risks as well as specific investment risks.

An investment into a 1031 Exchange – Tenant In Common (TIC) should only be made after careful evaluation of the TIC Sponsor. After all, it is the TIC Sponsor who usually negotiates the purchase of the property, obtains financing, manages the property and distributes income to the investors. There are several key elements to consider before you choose which Sponsor to turn your money over to for your 1031 Exchange replacement property.

Experience and Track Record

The experience of a TIC Sponsor is extremely important. Typically, a Sponsor with a solid track record and several years of experience can give an investor a greater level of confidence than a new Sponsor just now trying to tap into this growing, competitive market. An investor should also examine the experience of the key personnel of the company to determine how effective these individuals have been in acquiring, managing and eventually selling institutional quality properties in various real estate climates. In most cases, Sponsors are going to be private companies and may limit the amount of data it discloses to the public. So the evaluation of the key principals can be crucial in determining the strength of the Sponsor. Currently there is only one Sponsor, Grubb & Ellis, which is a publicly traded company.

Location and Asset Class

It is important to choose a Sponsor who knows how to select appropriate markets for investing and has the experience to avoid those with too much risk. A good Sponsor will look to acquire quality assets that have solid credit tenants in markets where there is low or declining vacancy and strong demand for space should a tenant leave.

The Accuracy of Projected Returns

If you looked at the projected returns of all 1031 Exchange - TIC offerings in market place, you may find some properties that appear similar can have significant differences in their projected returns. It is important not to simply choose one over the other based solely on a higher projected return. It can be much more beneficial to an investor to choose a property generating a 6% cash that actually produces that 6% than being mislead into a TIC showing an 8% cash flow that is really only generating 4%. Some sponsors will attempt to inflate first-year cash-flows in order to compete in the marketplace. An experienced sponsor should be able to justify their pro-forma assumptions by presenting investors with their multi-year track record for accurate projections and performance.

For further information on 1031 Exchange – Tenant In Common investments or to receive a PPM on current TIC offerings, please contact 1031 Alternatives Group at 866.405.1031.

As the Tenant In Common (TIC) industry enters into its sixth year, many investors remain unaware of the success of one of the fastest growing sectors of the U.S. real estate market. Since TICs were revolutionized following official IRS guidance in 2002 (Revenue Procedure 2002-22), the majority of the business and equity raised for these vehicles have been primarily driven by west coast investors. Though the industry has grown tremendously over the past six years, East Coast and Midwest investors are now just beginning to understand and become educated and comfortable with what a TIC is and how they can benefit investors. As an effort to further educate investors on the ins and outs of Tenant In Common Investments, I thought it would be beneficial to list some of the most common factors from the prospective of an experienced TIC broker in which I have come across since entering into the TIC industry from the ground floor and riding the TIC wave from coast to coast.

10 reasons why an investor should consider a 1031/Tenant-In-Common (TIC) investment:

• Defer 100% of capital gains and depreciation recapture taxe
• Current monthly/quarterly cash flow from the time of investment
• Relief from day to day property management headaches
• Upgrade to potentially institutional quality real estate with potential for credit and tenants
• Potentially increase current income & growth potential
• Diversify real estate investment holdings by asset class (office, medical office, retail, apartments, hotels, senior housing, etc.)
• Identify quality 1031 replacement property solutions during the stringent 45-day identification window
• Geographically diversify real estate holdings across the country
• Financing in place to meet §1031 leverage requirements
• Cash flow from properties may be partially sheltered by new depreciation schedule and mortgage amortization

10 risk factors an investor should consider before investing into a 1031/Tenant-In-Common (TIC):

• Fluctuations in the real estate market may impact the value of a property
• As with most real estate investments, TICs lack liquidity
• Economic risks due to vacancy rates may impact a property
• Property may be in default if TICs are unable to pay mortgage
• As with any investment, TICs could experience possible loss of principle
• TIC ownership requires unanimous approval to take major action such as refinance or sale
• Leveraged real estate assets run the risk of foreclosure Investors could become liable for entire amount of debt if the investor violates
• non-recourse loan documents
• Investors may have no control over day-to-day property management
• A TIC sponsor may receive substantial compensation up front for structuring the investment

10 facts you should know about 1031 Exchanges and Tenant-In-Common (TIC) investments:

• Section 1031 has been part of the IRS code since 1921
• Section 1031 permits investment property owners to sell a property and defer capital gains and depreciation recapture taxes at the time of sale assuming reinvestment into “like-kind” replacement property
• IRS Revenue Procedure 2002-22, authorized in 2002, created the opportunity for undivided fractional interest in real estate or Tenants in Common (TICs) to qualify as like-kind properties eligible for use in 1031 tax-deferred exchanges
• TIC owners share “pro rata” in the income, tax benefits, and appreciation of the investment property
• TIC investors are on the deed and considered a direct owner of the underlying real estate
• Equity invested in 1031/TIC exchanges has grown from less than $200 million in 2002 to nearly $3.6 billion in 2006
• Unlike a partnership, TIC ownership entitles each owner to the same ownership rights regardless of the equity invested. This ownership structure puts no individual owner (or group of owners) in direct control of the property over any other investor(s) base on investment values
• Due to the fact that most TIC properties are at least 50% leveraged, most TIC investors use the 3 property rule or 95% rule during their 1031 exchange identification period
• The number of co-owners in a TIC deal may not exceed 35 participants
• It is important to evaluate the character, experience, track record and business infrastructure of a TIC Sponsor before investing into a property

Over the past few months the U.S. debt markets have been extremely volatile. We are all aware of the “Sub-Prime” mortgage debacle that has taken our country’s headlines by storm as it pertains to the residential housing market, but many are unaware of what affect that this crisis has played in the commercial real estate market.

For clarification, the commercial real estate market is extremely strong at this point and runs an entirely different cycle as residential real estate. Many investors believe the phrase “Real Estate Bubble” refers to real estate in general, when in most cases the so called “bubble” pertains primarily to the U.S. housing market. It is important to realize the differences between both sectors and what the driving factors are that differentiate them. In fact, a recent Wall Street Journal article states that “The national office market, which cratered after the tech bust in 2000, has recovered and is the strongest it has been in five years.”

Though the commercial fundamentals still remain positive, the commercial lending market, more specifically commercial mortgage back securities (“CMBS”), have recently experienced some rough waters. CMBS’s are commercial mortgages that are packaged upon origination and sold to investors on Wall Street. The recent instability of the residential markets and sub-prime concerns has positioned many commercial lenders to “tighten their reigns” on the commercial side. Many of these lenders have some sub-prime residential exposure and are increasing their spreads (what they charge for loans), some up to 200 basis points to hedge their risk. These lenders are also doing away with some other benefits that many investors have grown to enjoy, such as higher loan to value ratios and interest only financing. In turn, these factors ultimately affect the yields paid to the investors because the borrowing costs have increased. To improve these issues, sellers will have to lower pricing expectations which will ultimately lead to the reversal of the cap rate compression era that we have seen in recent years. Only time will tell what is in store for the future U.S. real estate marketplace. Many sectors like Medical Office and Multi-Family remain extremely optimistic.