COVER STORY, JANUARY 2008

TIC OWNERSHIP
Is tenant in common ownership the right move for you?
Gary DeSanto

As the Tenant in Common market continues to mature, a growing number of investors are considering the real estate strategy as a way to boost a portfolio and increase net worth. Whether they are electing TICs because of the tax benefits, flexibility in investment size, potential cash flow or other advantages, it is undeniable that the approach is on the rise.  As the industry expands and successes are evaluated, it might be tempting to jump right into TIC investing. But, as with any financial decision, the investor is wise to carefully weigh the option of a TIC transaction to ensure it is right for them. 

There is no doubt that TICs, which offer a group of up to 35 investors the ability to purchase a share of institutional quality real estate, are the perfect way for many educated investors to enhance a portfolio. It’s an attractive arrangement: each investor owns an undivided fractional interest in the property and shares in the net income and potential growth. There are several benefits to explore when considering TIC ownership. But is such an investment right for you?

The Tax Factor

If you’ve just sold an investment property and are looking for a way to defer capital gains tax while continuing to maximize on your return, it just might be.

Because TIC properties offer management-free ownership and flexibility in the amount invested, they’re a popular choice for those looking to utilize section 1031 of the federal tax law. A 1031 exchange provides for the capital gains taxes from appreciated real estate to be deferred if the funds are put back into another real estate investment of like kind. By deferring the tax, the investor has more money to put into another property, allowing them to maximize on the return. Under the 1031 exchange, TIC transactions provide an avenue to mitigate risk while gaining access to high-quality institutional real estate.

Flexibility, Buying Power and Convenience

Perhaps one of the most desirable features of a TIC is the absolute flexibility it offers investors.  For example, let’s say you have a half-million dollars to invest in a like-kind property.  Traditionally, you would search for an asset that fits your budget, while possessing the potential to generate revenue and a solid return. TICs allow the investor to make that search process much easier. While most offerings have a minimum contribution per person, the investor can choose to buy into the property in a flexible denomination. This allows the investor to match their available funds dollar for dollar, maximizing on their resources without compromising on the quality of the property.

This takes us into another strong benefit of TICs: the remarkable buying power they afford investors. Properties typically offered by TIC sponsors include office, multifamily residential, retail, medical and beyond. Many investors wouldn’t have the funds to obtain a multi-million dollar, Class A property on their own. The TIC structure makes ownership of those kinds of high-return properties more attainable to the average real estate investor.  As a result, investors are typically able to increase their income potential and have real estate stake in a desirable location.

Additionally, TICs are an extremely convenient option for those under a time crunch. In order to be in accordance with the federal guidelines for 1031 exchange, the investor must follow a specific timetable. An exchange property must be identified within 45 days of the sale of the appreciated real estate. The investor then has an additional 135 days to settle on the exchange property. So it’s obvious that those in the position to employ a 1031 exchange don’t have an abundance of time to finalize their transaction. Since TIC sponsors have the responsibility of locating properties, securing financing and facilitating the overall transaction, the deal is relatively headache-free for the buyer and can be carried out in a matter of days.

We Due Our Diligence

One of the biggest factors in finding success in real estate is ensuring that your investment is sound and will appreciate while delivering cash flow.  That requires the investor to put forth ample time in researching the property, its market, demographic predictions, etc. What if there was a way to pass off those duties to the experts?  That’s essentially what happens when you work with a TIC sponsor that has a history of success and a proven eye for assets. The sponsor carefully selects each offering based on a handful of key characteristics, including location, economy and population trends.

At DeSanto Realty Group, a team uses experience to explore properties in markets with stable economies that are conveniently located near prominent metropolitan hubs. Upon locating potential offerings, a thorough due diligence process is carried out to fully understand the property and its market. The exhaustive due diligence ensures that the offering will have stable yields and lower downside risks, while offering the investor the opportunity to truly enhance a portfolio.  This process takes significant burden and responsibility off the investor’s shoulders.

Are There Risks?

In a perfect world, every investment would be risk-free. But, in reality, every real estate transaction carries drawbacks.  It is the goal of the sponsor, however, to minimize risk during a comprehensive due diligence process. Aside from the gambles that are assumed in any real estate transaction, including the potential for property value decrease, investors should be mindful of some unique characteristics that TICs possess. 

Because TICs have a typical holding period between 5 and 10 years, the investor must be comfortable with illiquidity during that time frame. While the investors receive periodic installments of their share of profits, the sale of the property happens in unison with the other investors at the end of the holding period.

One characteristic of TICs that could be seen as a benefit by some and a shortcoming by others is the passive management role assumed by the owner. Because TIC sponsors hire third-party management companies, each owner does not have control over day-to-day decisions. However, TIC co-owners vote on all major issues, such as selling the property, giving each investor a hand in the larger decisions. This absence of management responsibility is thought to be a plus for most. TIC owners don’t have to worry about collecting rent checks, maintaining the property, etc. But for some, particularly those who enjoy all the small tasks involved with owning an investment property, this aspect could hinter the appeal of a TIC.

In general, the benefits of this dynamic investment strategy outweigh the weaknesses. TICs are here to stay because of the myriad benefits they generate. The opportunity to add high-quality property to a portfolio without worrying about daily headaches is a combination that seems to be a perfect fit for many savvy investors.

Gary DeSanto is a principal and CEO of DeSanto Realty Group, a national sponsor of Tenant-in-Common real estate transactions.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.