What are TICs?

A Tenant-In-Common (TIC) or fractional interest ownership is essentially ownership of a piece of a large, institutional-grade property and sharing of the proportional income, tax shelter and appreciation. You have a deed and all rights of a single owner, but there are many owners. You gain monthly (or quarterly) passive income, and there is no management or day-to-day work for the investor. The properties are professionally managed. However, the Tenants in common have certain rights, such as voting in or out the property manager, etc.

TICs as an industry took off after the IRS ruling allowed them to qualify for 1031 exchanges. Revenue Procedure 2002-22 set forth a 15 point ruling to this end.

TICs are ideal for qualified, accredited investors who have smaller funds (such as $150,000 to $300,000) coming out of a trade but wish to purchase institutional-grade properties with passive income. TICs can also be ideal for qualified investors in a 1031 exchange who want passive income, even at larger amounts. 1031 exchanges follow very strict rules, and the hardest rule for investors is to meet the 45 day ID period. The TIC acquisition procedure allows buyers time for due diligence, identification and acquisition in appropriate time frames.

TICs can be ideal for investors who wish to diversify into institutional-grade properties. Because of frequent low minimums in properties ($100,000 to $250,000), diversification is possible.

Typical TIC properties are new retail shopping centers, large Class A office buildings with corporate tenants, and large multi-family apartment offerings (usually Master leased). Other offerings, such as assisted living facilities, industrial properties or sometimes a smaller NNN (triple net lease whereby the tenant pays all taxes, insurance, maintenance and rent - typical retail) properties like a drugstore or restaurant are possible.

Most TICs have non-recourse financing arranged on the property, ranging from 50% to 65% loan to value (some properties go a bit higher). Note that TIC deals have what is called 'load' or upfront fees. The Revenue Procedure 2002-22 stated that payment to sponsors may not depend on the income and profits derived from the property. The fees or load are paid up front at closing, and this load must be reviewed to see the impact on the overall returns, tax benefits and such. One good comparison is to see what the property was purchased for, what the current appraisal value is, and what the price to the TICs will be.

TIC Sponsors find, buy or tie up, and then prepare the properties for market after doing their own due diligence. They arrange the financing, set up all legalities necessary for a TIC, prepare all documentation for investors and coordinate the closings. Most TICs are sold as securities, so there are necessary extra regulatory requirements.

TICs often come to market with a closing target date of several weeks to a month ahead. During that time, investors are reviewing the materials with their registered representative and other team members (such as attorney or accountant), taking a tour of the property, and analyzing and getting any answers needed before finalizing the investment. Closing documents come up to 2 weeks before the actual closing, as there are many details to coordinate. Timing is always an issue for a 1031 buyer, and we are sensitive to this.

Pros & Cons

Disadvantages of TIC Ownership:
Control. You will not be in sole control of the property—all of the Tenants in common own the property and make any pertinent decisions. If you feel that you cannot stomach loss of total control in exchange for the benefits, a TIC is not for you.

Exit Strategy. You should ask the TIC sponsor about the Exit Strategy for the property you plan to invest in—many state a 5 to 7 year hold, but others could be of long duration. But please realize that market conditions can affect Exit Strategies. Kathy does not recommend investing in a TIC should the investor need those funds in a shorter time frame. We recommend going into this type of investment for the duration, until the TIC is resold.

There is not yet any sort of developed secondary market for selling TIC shares. If you are a TIC member and need to sell your share, you could offer your share to your other tenants in common first. Some sponsors could help find a buyer from among their 1031 clients. But remember, real estate is by nature illiquid.

Fees & Costs. Review the upfront closing costs, fees and load which may or may not have an impact on the overall offering, tax benefits and returns.

Re-financing. You cannot re-finance a TIC. You will take on your proportionate share of the non-recourse loan that is in place when you acquire your TIC.

Risk. Remember that there is risk in any type of investment, including risk of reduction or loss of cash flow or principal.

Summary - Advantages of TIC Ownership:
Low Minimum Investments. Small minimums are possible to invest into institutional grade properties that many investors would not be able to do alone.

Flexibility for the 1031 Exchange. By identifying a TIC property as one of the replacement choices, the taxpayer’s entire proceeds can be applied to a TIC or TICs ; or if the taxpayer has some funds leftover from another single owner transaction, those funds could go into the TIC.

Decreased Risk for the 1031 Tax Deferred Exchange. If a deal collapses among other properties identified for a 1031, the TIC in a backup position could take all proceeds, placing the investor in a more secure position for the trade. General closing dates are known for the TIC properties, thereby also aiding in the 1031 timelines.

Speed and Simplicity. By eliminating the full loan search and qualification process, the negotiation process, and due diligence studies (and the related fees involved), TIC closings can easily take place in the shorter time frames than if buying a property on your own.

Diversification. In a typical 1031 exchange, the taxpayer normally will identify 3 potential replacement properties and subsequently purchase only 1. TIC investing makes it feasible to identify and acquire ownership in 3 properties, thereby diversifying the portfolio. Partial ownership in properties in different geographic areas or different property types also adds diversity.

Passive Income. Many investors choose TICs because they want passive income. TICs are management-free properties—professionally managed with no day-to-day issues for the investor. Investors will also share in the proportionate tax deferrals on the investment.

Securities World vs Real Estate World. Instead of the atmosphere of 'caveat emptor' (buyer beware) typical in real estate transactions, securities offers operate in the world of full disclosure. There is added scrutiny on several levels because the sponsor does due diligence and discloses all, the lender does independent due diligence and the broker/dealer reviews the materials before agreeing to proceed. Granted, there are more rules and more paperwork than in a pure real estate deal, but it is seen as a positive.

Due Diligence. Due diligence will have been done by the Sponsor before acquiring the TIC property, and these studies will be available to you. You can see the appraisal, leases, phase I studies, site inspection or any report that has been done on the property. This is worth time and money, as investors know.

NOTE: Kathy has authored the first and only book about TICs, entitled Effortless Cash Flow: the ABCs of TICs (Tenant in Common properties) which will be out in May 2006.

This is neither an offer to sell nor a solicitation to buy a security. Such an offer can only be made by means of a Private Placement Memorandum.