The TIC replacement property market provides a liquid venue for the tax-bound investor who wishes to exchange into a proportional interest in larger, institutional-type properties, professionally managed, with triple-net cash-on-cash yields often significantly higher than local alternatives.

 
What is Tenant-in-Common Ownership?

Tenant-in-common ownership is often initially mistaken for a limited partnership, blind pool, or other real estate syndication structure common in the later 1980's.

A TIC is a deeded interest, representing a proportional interest in a specific property.  This interest has voting rights and can be purchased, sold, gifted, bequeathed by will, or inherited, and is subject to property taxes, gift tax, estate and inheritance taxes in the same manner as a sole ownership property.  The TIC owner receives an income statement for the property each year.

Why a Tenant-in Common Property?

• Simplify your estate.  The older investor in particular may worry about the ability of surviving family members to manage property, should the investor suddenly pass away.  A TIC simplifies property ownership to a triple-net check every month.  And, upon the death of the surviving spouse, the children inherit the property interest, and receive a step-up in basis.  As such, the TIC can provide a tax, investment, and succession solution to a difficult estate problem.

• Passive Management.  Many investors desire a real estate investment, but are simply exhausted by the headaches of property management.  A TIC is a viable solution.

• Diversification.  The typical real estate investor is overexposed to a local market.  A TIC offers diversification into different geographical markets, and upmarket into larger, institutional tenants with longer leases, and non-recourse financing.  The value of such diversification will become more apparent as interest rates increase and local market conditions change.

• Yield.  California investors, in particular, often suffer poor net cash flow yields as compared to the value of the property.  An exchange into a TIC property, offering market cash-on-cash yields, may mean the difference between retiring and continuing to work.

Anatomy of a Tenant-in Common Structure

The TIC industry is fairly new and very fragmented.  Many local real estate developers have rapidly created TIC structures to accommodate the current high volume of exchange money desperately searching for replacement property.  Such deals often contain highly favorable developer terms, and are indeed reminiscent of those dreadful real estate limited partnerships from the 1980's.  The sophisticated investor will closely examine the property AND the deal terms.

All TIC properties structured and sold as securities require each co-owner to be an accredited investor, defined as 1) individual adjusted gross income of $200,000 (married couple adjusted gross income of $300,000) for each of the past two years; OR, 2) net worth of $1 million.

 Real estate structure: 

• Properties are managed to maximize total return (yield plus capital appreciation)
• Sponsors historically sell a typical property within 4-7 years, upon vote of the co-owners.
• Properties are currently conservatively leveraged, ranging from all-cash deals to about 65% debt/value.
• Debt on property is generally non-recourse to individual co-owner.
• The typical TIC minimum investment is typically $300,000-$500,000.
• The maximum investment depends on size, terms of particular property.
• A TIC can be used to satisfy the entire proceeds of an exchange, or to place just the remaining piece of a larger exchange, instead of paying tax on boot.

Finance/refinance risk deserves additional emphasis.  Often a very desirable property, with a prominent tenant and long lease, may be unacceptably risky due to the bank loan terms on the property.  The best loans are amortizing, longer term, with a fixed rate of interest.  A short-term, interest-only, or variable rate loan carries considerable refinancing risk, as interest rates will almost certainly be higher in the future.  In particular, many deals offering an above-market yield will often contain such refinancing risk.

Tenant-in-common agreement

• TIC investor has voting rights, specified in Offering Memorandum
• Anti-holdout provisions prevent a small minority from thwarting the will of the majority.
• Capital calls are relative to percentage ownership.  If a co-owner cannot meet a capital call, the property manager generally will lend the investor the funds.
• Individual deeded interest can be sold at any time, subject to certain restrictions.
• Maximum number of investors allowable in any particular TIC is 35.

Property management agreement

• Property manager charges annual fee, contract subject to annual renewal
• Co-owners purchase 95%-99% interest in the property.  The property manager purchases (with their own cash) the remaining percentage.
• The deals are structured as securities, not real estate transactions.  As such, the disclosure, initially and ongoing, is exhaustive.
• Properties are marketed within a limited subscription time period.  Demand can be overwhelming for the best properties from the largest TIC sponsors.  Early planning and preparation is critical.
• The real estate sponsor is a critical component of a successful TIC venture.