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SIZE MATTERS
When Purchasing A TIC
(Tenant-In-Common) Interest
The
big rage in real estate these days are TIC interests.
TIC stands for "tenant-in-common," which is the legal
title that these types of interests hold title to property.
TIC interests are program investments similar to the
partnership tax shelters of the 1970s and '80s, in that
they pull together a group of investors to purchase
one large property.
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by
Author Gary Gorman
Founding Partner,
The 1031 Exchange Experts |
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There
are two major reasons for this great surge in these
type of investments: the first is that the IRS approved
TICs as suitable replacement properties for 1031 exchanges
in 2002. Prior to that date it was uncertain whether
a TIC interest could be purchased as the replacement
for a 1031 exchange because their structure so closely
resembles a partnership. As a result investors were
wary of them. Today, however, approximately 70% of the
TIC interests are purchased by such investors.
The
second reason for their popularity is their desirability
to aging baby boomers. Because a TIC interest lets them
own a piece of a property large enough for a professional
management team to care for, the busy investors is relieved
of that chore. It also allows them to invest in large
multi-million dollar properties that would otherwise
be beyond their means. Approximately 30% of the TIC
interests are currently purchased by investors as an
alternative to other types of real estate investments
such as Real Estate Investment Trusts (or "REITS"),
which are similar to mutual funds, but only own real
estate.
Because the TIC industry is so new, it still has a number
of rough edges that you need to watch out for. The most
important thing to watch for is the size of the sponsor.
Approximately 10% of the sponsors (people or companies
that put together a TIC offering) are large companies
that have multiple properties available for purchase
at any one time. The other 90% are small sponsors that
may only package one property at a time, and many of
them may only ever sponsor one property.
The
reason that size is so important is that you need to
have an exit strategy for your TIC investment. While
most of the projects have a stated investment timeframe
of, say five years, there is no guarantee that the project
will be sold at that time because market forces dictate
such sales and you have no way to predict when the market
will be right for the sale.
Because your own situation may require that you get
out of the investment before the date the property is
sold, finding someone to buy your interest may be very
difficult. This is where dealing with a large sponsor
is important large sponsors have good investor relations
programs, because they want you to reinvest with them
when your building is sold. And because of their size,
they always have a very large pool of potential, and
usually willing, investors. It is to their advantage
to line you up with another investor that will buy your
interest.
Lastly, because of their size, these sponsors have excellent
"due diligence" departments that thoroughly analyze
each property they sponsor -- they can afford to avoid
a law suit.
You can find these sponsors on the internet by searching
for "TIC" or for "Tenant In Common." Your search results
will make it pretty obvious who the big players are.
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