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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.