Tenant In Common
Have you ever driven down the road and noticed a large busy shopping center or a class “A” commercial building and said to your self that you wish you had enough money to buy that property? Do you own a highly appreciated income property that you would like to sell and not pay capital gains taxes or recapture of depreciation but can not identify a quality replacement property for a IRS § 1031 exchange ? Or are tired o dealing with ”Tenants, Toilets and Property Taxes and other property management issues”?
A Tenant In Common Property may be your solution.
Large retail companies with multiple locations or other corporations often choose not to tie up their working capital in real estate so they lease properties on a long term basis. Some of these leases can be 10, 25 or 50 years or more. They lease the property and on a Triple net or NNN basis.
Very often these properties are owned by a group of investors called Tenants In Common.
What is Tenants-in-Common (TIC)?
A TIC is a form of real estate asset ownership in which two or more persons have an undivided, fractional interest in the asset, where ownership shares are not required to be equal, and where ownership interests can be inherited. Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. Through TIC ownership, the average person is able to enjoy ownership in an institutional-type property with a minimum investment.
NNN Lease
NNN PLUS Lease
The NNN PLUS lease is a triple-net lease in which the lessee completely leases the replacement property under an escalating rental payment plan. The lessee takes on the responsibility to sublet the property. In addition to rent, a tax, insurance and maintenance, the lessee also pays the debt-carrying expenses.
TIC interests combined with a NNN PLUS lease provide the real estate buyer with the advantages of ownership in a larger property with appreciation, revenue and annual depreciation benefits without many of the management problems associated with individually-owned rental property.
The triple-net lease ends whenever the Tenants-in-Common (TIC) vote to terminate it or, in any event, when the TIC owners sell the entire property. The lessee is a real estate ownership and management company with an established history of 1031 experience.
FAQ’s
What are the benefits of TIC ownership?
The TIC structure has various features that make it attractive to the real estate buyer.
Access to Higher Grade Properties - The typical entrance in whole commercial building begins at $1 million, but through TIC ownership, the average person is able to enjoy ownership in an institutional-type property with a minimum purchase. Besides reliable income and growth potential, these properties are able to attract tenants with greater financial strength and stability than possible for the individual landlord.
Combined Real Estate Experience - As an alternative to sole ownership of real estate, a 1031 buyer can take ownership in a large commercial property along with other unrelated buyers, not as limited partners, but as individual owners. Each of the TIC owners brings their previous real estate knowledge to the group. Thus, each decision of the TIC ownership will be backed by many years of real estate experience.
Lessee with an established history of 1031 experience in Real Estate - Most of the day-to-day property operations are handled by the NNN PLUS lessee. The lessee has extensive experience in real estate. Thus, situations that arise in day-to-day operations will be addressed quickly and efficiently, and the TIC owner will enjoy the freedom from property management.
Simple Management - The TIC owner avoids the time and frustration of dealing with multiple tenants. You no longer deal with "toilets, tenants and trash," and simply receive your monthly rental income from your mailbox. Enjoy "tennis, travel and time with family."
Exact Dollar Matching - In a TIC property, you can purchase any amount above the minimum. For example, if you have $152,479 of equity from the sale of a previous property you can purchase $152,479 of equity in a TIC property.
Low Minimums - Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC owners in any one property. Minimum purchase requirements are structured to meet this limitation and can range as low as $150,000 equity.
Non-recourse Financing - The mortgages on most of the TIC properties offered by FOR 1031 are non-recourse. The TIC debt structure generally allows for the debt financing to assumed. Assumption usually occurs without the need for qualification or loan assumption fees.
Diversification - Due to the low minimums in TIC properties, the buyer can decrease risk by diversifying into different properties in various different marketplaces.
Speed and Simplicity - Speed and simplicity are achieved due to the efforts of the FOR 1031 team. The negotiation process is complete, and survey, rent rolls, etc. are already completed and available for your review. After your review of all the due diligence used to acquire your property, and upon your approval, you are ready to close. The closing can be completed in days, not months.
No Closing Costs - Absent seller default or other items outside the control of FOR 1031, closings are met within the agreed upon time frame. FOR 1031 does not charge the TIC owners any closing costs.
Deeded Interest - The TIC owners buy the property and receive a deeded interest. You can transfer this interest by gift, sale, inheritance, assignment, etc. Such transfer does not need to coincide with the transfer of all TIC interests in the property. DBSI Housing, if requested to do so by the TIC owner, will assist in the marketing of any TIC interest.
No Special Allocations - All the TIC owners receive monthly rental payments, sale proceeds and the depreciation tax benefits in proportion to their percentage ownership in the property.
Impasse Resolution Procedure - On a decision requiring unanimous vote, such as a sale decision, a 60% - 75% (depending on your TIC agreement) vote by the TIC owners will be sufficient to initiate the impasse resolution procedure. This procedure allows the TIC owners with 60% - 75% (depending on your TIC agreement) or more of the property to make an offer to buyout the dissenting owner with 25% or less of the property. The dissenting TIC owners can either: (1) accept this offer, (2) buy out the 60% - 75% (depending on your TIC agreement) TIC owners at the same price per percentage ownership, or (3) change their dissenting vote to a consenting vote.
Disclaimer: The above brief description is not to be construed as legal or tax advice and is qualified in its entirety by the actual closing documents. In case of any discrepancy, the actual closing documents will control.
We have relationships with the companies that purchase and manage these first class properties and sell Tenant In Common ownership and would be pleased to provide more information to you regarding these opportunities.
Tenants-in-Common FAQs
Question: In a nutshell, what is TIC ownership? Answer: TIC ownership combined with NNN leases provide the real estate buyer with the advantages of ownership in a larger property, revenue and annual depreciation benefits without many of the day-to-day management problems associated with individually-owned rental property.
Question: What purchase amounts are ordinarily required for TIC ownership? Answer: Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC owners in any one property. Minimum purchase requirements are structured to meet this limitation and can range as low as $150,000 equity. The typical entrance in whole commercial building begins at $1 million, but through TIC ownership, the average person is able to enjoy ownership in an institutional-type property with a minimum purchase. Besides reliable income and growth potential, these properties are able to attract tenants with greater financial strength and stability than possible for the individual landlord.
Question: What happens if fail to close on my 1031 exchange? Answer: You will have to pay your capital gains taxes. Failure to close is the top reason clients reveal as to why they pay capital gains. By identifying a TIC property, you can reduce your potential tax risk, and avoid a failed closing. If you fail to close on other identified properties, you are able to move all your proceeds into the TIC property you identified.
Question: Is there any liability exposure associated with TIC ownership? Answer: The mortgages on most of the TIC properties offered by FOR 1031 are non-recourse. The TIC debt structure generally allows for the debt financing to assumed. Assumption usually occurs without the need for qualification or loan assumption fees.
Question: What if I want to sell my TIC ownership? Answer: On a decision requiring unanimous vote, such as a sale decision, a 60% - 75% (depending on your TIC agreement) vote by the TIC owners will be sufficient to initiate the impasse resolution procedure. This procedure allows the TIC owners with 60% - 75% (depending on your TIC agreement) or more of the property to make an offer to buyout the dissenting owner with 25% or less of the property. The dissenting TIC owners can either: (1) accept this offer, (2) buy out the 75% TIC owners at the same price per percentage ownership, or (3) change their dissenting vote to a consenting vote.
Question: What happens to my TIC ownership if I die? Answer. Your ownership interest will pass to your heirs pursuant to your will just like any other asset. Currently, the estate tax code provides that they will also receive a stepped-up tax basis to fair-market value, but you should check with your CPA or tax adviser because not all circumstances are alike. The income taxes which were deferred because of your 1031 exchange are potentially forgiven forever.
