TIC Programs: In a Bind Identifying Property?

“Explore Tenant-In-Common Ownership Programs”

THE CHALLENGE

Some investors hesitate to perform a §1031 exchange because the requirement to identify all replacement properties by the 45 th day can be challenging to fulfill. In addition, it can be difficult to locate a second re-placement property of exactly the right equity/value needed for a fully deferred exchange.

 

A SOLUTION – TENANT-IN-COMMON PROPERTY

A potential solution is to acquire a fractional ownership interest in a tenant-in-common (TIC) property owner-ship interest in a large commercial property with multi-ple owners. A TIC interest represents co-ownership between two or more investors. In essence, rather than owning 100% of a smaller property, the investor receives a separate deed to an undivided interest, thus owning a fractional interest in a much larger property. A properly structured Tenant-In-Common is not a joint venture or a partnership. Instead, each co-owner has the same rights as would a single owner. Generally, a “management agreement” or “operating agreement” links the co-owners together. Most Tenant-In-Common properties pro-vide creditworthy tenants and steady monthly income.

Some investors have chosen Tenant-In-Common property ownership because they can enjoy the benefits of appreciation, cash flow, annual depreciation and flexibility without management problems. In many cases, a Tenant-In-Common program provides the flexibility for an Exchanger to specify the exact amount of property that must be purchased to meet their specific exchange requirements. The col-umn to the right highlights the advantages available to the average investor which in the past was previously reserved for large institutional investors.

 

BENEFITS OF TENANT-IN-COMMON OWNERSHIP

  • Geographic Diversification
  • Excellent Value
  • Financial Diversification
  • Liquidity
  • Professional Management
  • Economic Diversification
  • Existing Financing
  • Flexibility
  • Low Minimum Investment
  • Predictable Performance

POTENTIAL RISKS

Great care should be taken so that the TIC arrangement is not considered a joint venture or partnership. A partner-ship interest is specifically excluded from tax deferral treat-ment under Section 1031. An investor considering any Tenant-In-Common program should have their tax/legal advisors thoroughly review the proposed ownership arrangement to assess whether or not the structure will likely meet the require-ments of IRC Section 1031. In addition, the investment itself and property management should be evaluated.