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Potential Access to Institutional Quality Real Estate

Investors who choose to invest into a TIC program as a 1031 exchange replacement property or as a direct investment are given the opportunity to invest in a caliber of real estate they typically may not be able to acquire on their own. For example: an individual investor with $500,000 may not be able to afford a 500 unit, class “A” apartment complex in a growth market. On the other hand, 25-30 accredited investors with $500,000 each have the ability to acquire such a property managed by an experienced national property management company.

Passive Ownership Investment

Many investors have owned property for a long time, realize the tax savings a 1031 exchange can provide, but are tired of the daily headaches of managing investment property. TIC investors are relieved of the day-to-day management hassles of sole ownership. They may have to approve major decisions such as a lease renewal, but in general TICs are a passive form of ownership that can free up time for other endeavors. The real estate sponsor will find the property, conduct its due diligence, arrange financing, manage the property, negotiate leases, distribute income, provide accounting reports and execute the final sale. Investor will also typically receive quarterly statements, monthly conference calls, and are always welcome to tour the property.

Potential for Income and Growth

Like any form of real estate, there is no guarantee of positive or steady income, but investors should choose a sponsor with an experienced management team with a track record of performance. The primary goal of most real estate investors is to generate income with the potential for growth. Experienced sponsor strive to do increase the investor’s annual yield and increase the market value of the property at same time.

Financing

With today’s difficult lending environment, borrowing money for real estate is harder than ever. Well capitalized TIC sponsors may have the relationships and experience to free an investor from the difficult lending process. The established TIC sponsors in the industry have the ability to secure pre-arranged financing and typically receive more competitive terms than what’s available to an individual investor.

Diversification

Depending on the equity amount an investor is looking to exchange or the cash an investor has to invest, TICs can provide an opportunity to diversify a real estate portfolio. Typically, at any point in time there are several TIC properties available around the country for an investor to consider. It may be possible to exchange into a medical center, an apartment complex and an office building in different geographic locations throughout the country.

Risks
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.

Listen to our Tenants in Common Second Quarter Update Podcast

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.

1031 Alternatives Group has developed an exclusive program allowing real estate professionals to participate in all the benefits of our 1031/TIC investment program with the aid of our qualified team of professionals. Working with a reputable Tenant-In-Common (TIC) broker allows real estate professionals to acquire new listings and generate more commissions.

Deferring taxes encourages clients to sell their properties and build wealth by reinvesting the undiminished gains. With the help of a TIC broker, agents are able to show clients an inventory of institutional grade properties around the country with competitive cash-on-cash returns. Clients may diversify their real estate portfolio geographically and by asset class while avoiding the management headaches, high property taxes, and skyrocketing insurance costs associated with property ownership. TIC investments are a creative way for real estate professionals to motivate would-be-sellers and get them off the side-lines.

Example #1:

Our firm recently worked with a real estate broker who was assisting a client that had a desire to sell his property he owned for 20 years but never did so because he did not know where to reinvest his proceeds sensibly. After reviewing the client’s situation and evaluating his goals, we developed a TIC strategy that benefited all parties. Through our real estate sponsor firms, we were able to defer the client’s substantial capital gains and depreciation recapture tax liability through a 1031 Exchange, increase the clients current income, provide him with more tax-sheltered income via a new depreciation basis, and spread his risk into 6 different properties around the country (i.e. office building, retail, multi-family, assisted living, hotel, and marina). As the result of our TIC investment strategy, the real estate broker obtained an $8 million listing he otherwise would not have received.

Example #2:

Another real estate professional chose to be compensated on both sides of the transaction. Being that TICs qualify as real estate but are primarily sold as securities, the only way to legally be compensated on the 1031 replacement transaction is to obtain a Series 22 license. 1031 Alternatives Group sponsored this real estate professional and assisted him in obtaining a Series 22 securities license. Upon receipt of the license, he was able to list and sell a $2 million property as usual and allowed our firm to handle the A to Z on the 1031 TIC replacement side and received compensation from both sides of the transaction.

These are just two examples of how employing the TIC strategy is a great way to add value for a client, secure a long-term relationship, and resolve matters that benefits all parties.

The amount of investor equity placed in Tenant In Common properties rose 13% in 2006 to $3.6 billion of equity placed, and the growth is projected to continue in 2007. The first quarter of 2007 reported $900 million of equity placed with a 2007 forecast of $4.5 billion for the industry as a whole.

As knowledge of TIC’s has grown, the number of sponsors packaging the investments has increased, which will bring more diversification options to investors both in property classification and geographic location. Quarter one of 2007, for example, deals closed in 22 different states across the country. The top states in number of deals closed Q1 of 2007 were: Texas-10, Arizona-5, Georgia, California and Illinois each closed 4.

While Tenant In Common investments qualify as real estate for1031 exchange purposes, they are primarily sold by Securities Investment Professionals.  Since 2002 there has been a constant debate about whether TICs should be marketed as Securities or Real Estate.  While roughly 95% of the TIC industry believes TICs should be sold as Securities, the debate continues.  The main platform that the Securities side stands on is “full disclosure” to the investor.  By entering into a Securitized TIC investment, investors receive the distinct advantage of reviewing package due diligence materials in the form of a Private Placement Memorandum.  This is in most cases, a duty and expense that the investor would otherwise have to undertake on their own when acquiring other forms of real estate.

Here are some bullets supporting the opinion that Tenant In Common investments are indeed securities and should be marketed as such.

• The court case SEC vs. W.J. Howey Co. 1946.  The test for determining if a particular scheme is an investment contract and thus a security is whether the scheme involved an investment in money in a common enterprise with profits to be made solely from the efforts of others.
• According to the intentionally broad SEC definition of a security. 1. Investment of money or other property 2. The investment in the common enterprise is made with the intent to use the expertise of someone other than the investor 3. The intent is to make a profit.
• Those on the securities side believe that these TIC transactions must be brokered as securities because the investor is passive and appears to derive income from the efforts of others.
• TIC investments are pre-assembled for the investors: TIC sponsors choose the property, conduct the due diligence, seek and negotiate the loan, determine how much debt to put on property, what lender to use, obtain insurance, structure the property offering to investors, provide financial projections to the investors, select and hire the property management and a myriad of other tasks to support the opinion that TIC investors seek to profit using the expertise of another party.
• California, one of the states where the greatest number of TIC interests are sold, issued clear authority that all syndicated TIC’s are securities.

Tenant In Common (TIC) investments represent co-ownership of real estate by two or more investors and are a form of holding title to real property. TICs permit small to mid-size investors the ability to own an undivided fractional interest in a large institutional quality property/properties. TIC owners are on the deed and considered direct owners of the underlying real estate so they share “pro rata” in the income, tax benefits and appreciation of the property. Since the Internal Revenue Service issued guidance in 2002 (Rev. Proc. 2002-22), 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.

Benefits of Tenant In Common Properties:

• Defer 100% of capital gains tax and depreciation recapture tax
• Relief from property management headaches
• Upgrade to institutional quality real estate
• Increase current income & growth potential
• Diversify real estate holdings geographically and by asset class
• Identify quality replacement property solutions during the stringent
   45-day window
• Non-recourse financing in place to meet 1031 leverage requirements
• Cash flow from properties may be partially sheltered by new
   deprecation schedule

To find more about TIC investments contact the 1031 exchange experts or call us at 866-405-1031