Tenant In Common Real Estate Investing

An overview of Tenant-In-Common Investments

With Real Estate values at an all time high and the constant talk of the bubble bursting, savvy real estate investors have turned to an increasingly popular but still relatively unknown series of strategies, to preserve their large gains. As the majority of our country’s population approaches retirement age, these seasoned investors are seeking methods which will allow them to eliminate the headaches of day-to-day management responsibilities, protect their tax-burdened assets while preserving their nest eggs, and establish a steady cash flow to carry them through their retirement years. With these goals in mind, a tax-deferral strategy known as a 1031 Exchange – Tenants-In-Common (TICs) have become a sought after tool.

Tenants-In-Common

Tenants-In-Common or TICs allow small to mid-size investors the ability to upgrade their real estate assets into direct, fractional ownership of much larger, geographically diversified, institutional quality real estate holdings. These investors may pool their real estate equity and utilize pre-tax dollars to magnify the purchasing power on high quality real estate investment acquisitions. TIC properties are brought to the market and are literally oversubscribed to within days, sometimes even hours. These replacement properties may consist of Office Buildings, Multi-Family Housing, Industrial Warehouses, Collegiate Apartments, Retail Centers, Assisted Living Facilities, Oil & Gas Royalties, Public Storage Units, Marinas, Hotels and even Golf Courses. What’s unique about the structuring of TIC properties is that the majority of the offerings are packaged as “securitized” real estate transactions, sold through the securities community, rather than through the traditional methods of using a real estate broker.

TICs where given a “green light” in March 2002, when the IRS issued Revenue Procedure 2002-22, which set forth guidelines for a Tenancy-In-Common ownership to be a qualified replacement property for 1031 Exchanges under federal tax law. Rev. Proc. 2002-22 distinguished the differences between partnership interests versus real property interest. The procedure also established rules that permitted every TIC property up to 35 investors, each investor with their own voting right. This procedure opened the doors for attorneys to issue favorable tax opinions and set the foundation for the industry’s governing body, The Tenant In Common Association (TICA).

Today there are currently about 100 firms that serve as TIC “sponsors”. These sponsors are responsible for acquiring the properties, gathering the investors, paying out the distributions, obtaining non-recourse financing and putting the professional management into place; making it a turn-key process for the investor. In 2005 the TIC industry accounted for an estimated $4 billion in equity and raised approximately $10 billion when including the leveraging of the assets. Some projections suggest that the industry could see $7 billion in equity, by 2007.

In review, TICs allow the investor to take advantage of pre-tax dollars by relinquishing the built up equity of a duplex, apartment building, single-family rental, office building, raw land or even a small shopping center and pooling it into the likes of an institutional quality replacement property. In a TIC property, not only may investors receive the competitive monthly cash flow distributions and management relief, but they may also receive the tax benefits of a new depreciation schedule. Also at death, the investor’s heirs inherit the TIC at a stepped-up basis and there may be NO capital gains taxes owed.

Depending on the investor’s goals and objectives, the TIC strategy may be a viable alternative for those who no longer desire to actively manage their real holdings, yet seek to attain potential growth and income in a tax-deferred manner.