30 Most Common Things you should know when considering a 1031 Exchange Tenant-In-Common (TIC) Investment

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