An Explanation of Tenant-in-Common Ownership with "The TIC Marketplace"®

Disclaimer –The following is not to be taken as legal advice. It is not to be taken as accounting advice. Consult your attorney and accountant before entering into any transaction involving the issues and investment vehicles described below.

Tenant in Common (TIC) ownership is a form of ownership in which there are more than one owner, each of whom own a piece, or a "fractional interest" of a property. The interests do not have do be equal. They can be purchased and sold separately from each other. All of the interests added together add up to a total of 100%. The benefits of TIC ownership include the ability to purchase a larger property by pooling money with other Buyers. Purchasing into a property that is professionally managed, trading the phone calls in the middle of the night to unplug the stopped up toilet for a "hands off" monthly check.

A 1031 TIC merges the tax benefits of a 1031 and the leverage / management aspects of the TIC. When an exchanger wishes to complete a 1031 exchange, but does not want to exchange into another management intensive property, one option available is for the exchanger to invest in a portion property along with several other investors.  This is an investment structure called “Tenant in Common” or TIC.

Who sells TIC properties?

TICs are sold by Securities Dealers as if they were securities. Because they would like to self regulate, they abide by the rules of the Securities and Exchange Commission. Those rules include disclosure and the "qualifying" of purchasers. These Offerings are considered risky by the S.E.C., therefore one method of insuring that the purchasers are "sophisticated" is the requirement that they have a net worth of at least $1,000,000.

TICs are also sold by the Real Estate Brokerage community. The Real Estate Brokerage community is regulated State by State.

There are advantages and disadvantages to each source of the TIC. The major disadvantages to buying into a TIC are:

Loss of Control - With a TIC the Exchanger subjects himself to a management agreement to which he has virtually no say in the operation of the property.

Fees - the fees involved in purchasing, sponsoring and creating the legal documentation for these deals typically add 15 - 20% to the purchase price of the property, thereby making the property 15 - 20% overvalued in the event it needs to be sold in the "sooner than anticipated" future. The loans for the initial 2 - 5 years are often interest only, giving the illusion that the cashflow from the property is "good." 

 Liquidity - Typically, the Exchanger is 100% at the mercy of the Sponsor as to when he can get his money out. Especially with the Broker / Dealer offerings. The Sponsor may decide to sell at an inopportune time, bad market....( interest rates just went up to 20%), bad time in relation to work ...... (just got transferred to Hong Hong,) etc. On the other hand, most have a proposed hold time of 10-20 years. What if you want your money out earlier? The "Offerings" will generally state in bold type that no market currently exists, or is anticipated to exist for the resale of these interests.

Blown Exchange (1031 TIC) - Typically the "Offerings" are just that. The properties that are offered are not yet owned by the Sponsors. There is the possibility that if they do not achieve the subscription rate they had anticipated, they have the right to call the deal off. The Exchanger gets his deposit back but is most likely past his 45 day identification period, and therefore has no choice but to pay the Capital Gains.

IRS Audit Risk – If a TIC is not structured properly, and you are audited, the IRS may disallow the claim for Capital Gains Deferment. You will have to pay the Capital Gains AND you are stuck in an illiquid deal. The IRS has published very specific guidelines in a publication  “IRS Procedure 2002-22.” Consult your accountant, consult your attorney, do not rely on the “Opinion Letter” presented by the Sponsor stating that “in their opinion, the transaction falls within the IRS guidelines of Procedure 2002-22. Read the guidelines yourself – understand what you are getting into.

Issues particular to Securities Dealers - 

1. As an exchange of a 4 unit rental property for a vacation house is not "like kind," would the exchange of a 4 unit rental property for a "Security" like kind? If the Security is really real estate, shouldn't the Securities Dealer be licensed as a real estate broker?

2. Although the Securities Dealers offer a "Prospectus" detailing the due-diligence and projections for the "Offering," demonstrating "transparency" to the deal, the Offering often comes with a warning, perhaps not spoken as implied, that if this deal is not acted on "right away" it will be fully subscribed and you will have missed your chance. All of the information in the prospectus is window dressing because there is no time to truly analyze it.

3. There is no public exchange or listing service where one can go to shop for Offerings.

4. A Buyer needs a net worth of $1,000,000 to be able to participate.