The following is from a brochure we distribute to commercial real estate brokers, for clients evaluating their tax and reinvestment options as they reposition in the current market: 

The Tenant-in-Common industry has exploded since the IRS clarified the guidelines for a 1031 exchange.  Each year, an increasing volume of TIC properties are marketed through the securities industry to individual property owners.  Investors have responded en mass as replacement property is sought within the 45-day identification period.

TIC industry participants believe the tax-shackled investor now has a compelling alternative for yield, diversification, and relief from active management.  Other real estate professionals accuse sponsors of overselling fee-laden property through unschooled brokers eager for a commission.

Why we diversify

Money managers counsel diversification for the prudent investor, as every asset class is influenced by ever-changing economic and market cycles.

In some respects, real estate is unique.  It is inherently risky and illiquid.  The dollar cost is quite high.  It is often leveraged.  Such capital-intensive investments are particularly vulnerable to macro-economic conditions, i.e. those outside our control.  

When the economic winds blow in our favor, it can be wonderful.  When the winds change, it is not.  And the tax law offers compelling incentive to reinvest our capital gains into more real estate.

In every market cycle, there is a time to take risk, and a time to protect capital

Many investors now have the predominance of their net worth in a single asset class, often in a specific geographic location.

Real estate – they’re not making any more of it.  Maybe not, but even the most passionate investor must anticipate the inevitability of rising interest rates and the effect on property valuations.

Simply another tool

Wall Street designs financial products to address investor needs.  In this respect, a TIC is no different than a mutual fund or REIT.

A mutual fund or REIT has broad managerial discretion.  A TIC is far more transparent and offers more control to the investor.  All fees, terms and conditions are fully disclosed, including property issues, tenant and lease terms, financing terms, etc.  The owners vote on all material decisions, including the annual management contract of the sponsor.

Dozens of TIC sponsors now offer a multitude of properties.  Many are quality properties from reputable firms, many more are not.  As in any investment, due diligence and even common sense are still required.

Strategic application

Money managers diversify by balancing risk and reward among many asset classes, and often engage other managers to access expertise in different market segments.

The property owner has significant tax incentive to reinvest in real estate, but the necessity for diversification remains the same.  

As such, a TIC may be a preferable alternative to sole ownership or a local partnership.

•    A national sponsor may be in a more favorable position to re-lease or refinance.
•    Institutional properties may offer more stable value in a difficult market.
•    Annual net cash yield may prove more certain than capital gains.
•    Relatively small investments can be diversified in many markets.
•    No lender recourse, no management.

Other basic investor goals are also addressed:

•    Simplify estate.  Property ownership is simplified to a monthly triple-net check.  Children inherit property interest, receive step-up in basis, providing a tax and investment solution for difficult estate problems.
•    Passive Management.  Many investors are simply exhausted by the headaches of property management.
•    Yield.  California investors, in particular, often suffer poor net cash flow as compared to the value of the property.