1031 Strategies Using Tenant in Common Programs (TIC)

There have been numerous articles written describing a popular market in real estate today, 1031 exchanges involving Tenant in Common(TIC) programs. Instead of discussing the mechanics and “how-to’s” of 1031 exchanges, this article will delve into a different discussion, strategies available to the investor using TICs and also considerations for using TICs as a 1031 option.

As some investors know quite well, one of the main stumbling blocks to a 1031 exchange is the 45 day period to identify replacement properties.If you sell your property and are unable to identify new properties within 45 days, you receive a tax bill from the IRS. Or, if you are fortunate enough to identify a property(s), but the replacement property(s) are less in value than the original property, you will likely receive a tax bill for a portion of the taxable gain.

Of course, I am assuming that after the identification period ends, the investor will close on the replacement property. It might be a concern to the investor that, once the 45 day period has ended, the seller might become somewhat less flexible in the sale negotiations and could possibly take somewhat of an adversarial position. This may cause enough problems in attempting to close the sale that it may not happen and then taxes are due on your sale.

Although Tenant in Common programs may be a solution as a replacement property because the investor has the opportunity to identify and possibly close on the replacement property within 45 day period, there are other considerations for using TICs.

Geographic Diversification: TICs provide the investor with the opportunity to invest in real estate in different parts of the country. The potential advantage is the realization that a real estate slowdown in some parts of the country may not affect other parts of the country.

Institutional Properties: TICs provide the investor with the opportunity to invest in institutional properties that might not otherwise be available to an individual. Advantages of institutional properties include lower cost of financing and professional management.

Master Lease: Some properties use a master lease. A master lease contractually obligates the sponsoring company to pay the rental income for a specified period of time as stated in the Private Placement Memorandum thus adding additional protection for the investor.

Due Diligence: The sponsoring real estate company as well as the broker dealer will spend a tremendous amount of time reviewing all aspects of each project. Properties are underwritten by the sponsoring real estate firm and diligently reviewed again by independent outside firms in an attempt to fully disclose all potential risks to the investor. These disclosures are made through a Private Placement Memorandum.

Eliminating direct dealings with tenant and insurance negotiations are certainly other reasons to consider using Tenant in Common strategies. However, every investor has his/her own particular circumstances and should consider all options before deciding what is most appropriate for them. For the appropriate investor, a Tenant in Common program offers a viable option in a 1031 exchange.

David s Fisher is a registered representative with AFA Financial Group LLC. He can be reached at 310-351-0373. His email address is dfisher@fisherequity.com