TENANTS IN COMMON PROPERTIES OVERVIEW

TENANTS IN COMMON (TICS) PROPERTY OVERVIEW

Many investors want the utmost quality, safety and stability.  Others want maximum possible income.  Still others want the maximum potential gain upon final disposition.  With TICS (tenants in common properties) you get all of this, plus absolutely no management or ownership hassles.  You enjoy the advantages of sole ownership plus all the advantages of co-ownership, with top-professional property management and asset management auditing and oversight.

With TICS, what you own is a fee simple, deeded, title insured and undivided interest in an institutional class investment property.  It is the perfect form of ownership for an ever-increasing number of investors.

Because of the many advantages, this ownership structure has had more than a 20-fold increase ($1 billion to $20 billion) in purchases from 2003 to 2007 since the IRS acknowledged them with their publication of IRS Revenue Procedure 2002-22.  Link to IRS 2002-22

Co-ownership as tenants-in-common is neither a partnership nor a syndication.  In most cases, neither the sponsor nor any other owner-entity receives anything but their exact pro-rata share of income, tax benefits and profits according to their ownership interest. 

The property manager and the asset manager (which provides auditing and oversight) are generally third-party professional organizations, not affiliated with the sponsor.

With most tenants in common (TIC) structures, no owner-party can exert any more control than that to which their pro-rata ownership percentage interest entitles them.  Thus, TICS are the most transparent and equitable ownership structure for real estate.

DIVERSIFICATION OPTIONS AND EXCHANGE CONSIDERATIONS

You can reserve and purchase one or several of the currently available properties in any exact-dollar/odd-dollar amount you choose (ex: $123,456.78 or $1,234,567.89).  All equity purchases come with their pro-rata share of assumable debt.

Today, most sponsor’s typical equity/debt ratio is 45/55.  Thus, a $1M equity investment comes with about $1.2M in debt, for about $2.2M of total property purchased.  In most cases, this enables tax deferral of every penny of your exchange funds, and tax deferral of any debt relieved from the sale of your down leg property, by the assumption of replacement debt.

When the investor's down-leg property had higher leverage than the new TIC, most investors choose to add cash to the exchange in order to assume more debt, enough to avoid capital gains taxes on the debt relieved of the down leg property.

While you own your new TIC property, you'll receive your precise pro-rata share of the monthly income and annual tax benefits, and upon final disposition, each owner receives their exact pro-rata share of the net profits.  In about five years time (estimate hold time) your sponsor will provide you with a range of choices to exchange into at that later date.

Depending on your exchange equity or your new-money investment dollars, our low minimum equity requirements ($300K to $500K depending on property size) means that you can also achieve diversification in your exchange and/or your portfolio by purchasing two or more different types of properties, or purchase the same types of properties but in diverse markets.

GENERAL PROPERTY TYPE COMPARISONS

Multifamily properties are considered to have the lowest risk of vacancy because of the very large number of tenants.  They generally produce somewhat higher yields than credit tenant retail, because higher turnover rates result in more frequent rental rate increases to market rates.  Of course, returns vary not only by property type, quality and location, but also by market type (primary, secondary or tertiary market).

Campus properties do well for the same reasons as conventional multifamily properties, with the added bonus of a premium charged for per-room occupancy.  Class-A student housing is a win for both tenants and owners because the tenant gets luxury living quarters (class A location, quality and amenities) for the same or less rent than a campus dormitory bed or a shared condo, townhome or single family home.  Campus-close locations mean that owners enjoy strong demand, high occupancy rates and pricing power in their markets.  Please see this third-party article about student housing investments from National Real Estate Investor Online:

Credit anchor/credit tenant retail properties have slightly lower yields because of the outstanding credit-worthiness of the tenants and their very favorable long term triple-net leases.  The best and safest retail centers have a predominance of credit tenants both by gross leaseable area percentages and by percentages of total income.  As well, the larger the retail center, the greater the safety - If possible, one wants to own at least a neighborhood or community center, and at best, a true regional retail center.

Retail and multifamily properties are dissimilar in risk and return characteristics and can offer portfolio diversification.  That said, many investors prefer only retail to multifamily, and vice-versa.  Fortunately, TICS are offered in all the popular types of investment properties.

MANNER OF HOLDING TITLE - THE SP-SMLLC

To take possession of your fee-simple, title-insured deeded interest, your current ownership entity forms an SP-SMLLC (special purpose, single member limited liability company) that the sponsor enables for you (a Delaware entity).  The SP-SMLLC is a bankruptcy-remote entity that lenders require for all owners, for co-owners' and lender's protection.

Virtually all entity types can form an SP-SMLLC.  The SP-SMLLC is a "disregarded entity" per the IRS, and files no tax returns.  All income that flows to the SP-SMLLC from the property flows to you, the tax-paying entity, and is accounted for on your IRS form 1040, Schedule E, Supplemental Income and Loss from Rental Property.

You will receive your excess monthly rent checks automatically in the account you yourself will open under the new SP-SMLLC entity name that the sponsor assigns to each-co-owner.  These checks are deposited electronically into your designated deposit account by your property's property manager.  You will also receive detailed monthly property management reports by regular US mail.

When the TIC sponsor uses segregated cost accounting, you will also receive a copy of the segregated cost accounting report from a top third-party accoutancy firm that gives detailed and accurate accelerated depreciation schedules on all fixtures and capital equipment on the properties so that you have total sheltering of income derived from the property.

TICS SOLVE 1031 EXCHANGE PROBLEMS FOR REAL ESTATE INVESTORS

CERTAINTY OF EXECUTION

When you're in a 1031 exchange, you're very concerned about completing your up-leg transaction, since you risk a very costly taxable event if you do not.  TIC sponsors can assure all co-owners of a completed purchase and exchange.  In our 12+ year history, we have never failed to close for an investor.

If you are an investor and 1031 exchangor today, chances are you have just about given up finding great quality properties with reasonable valuations reflected in a solid and growing, conservatively calculated net operating income.  You may be so exasperated that you may have given up on the idea of selling your investment properties, or if already sold, may have resigned yourself to paying exorbitant taxes and depreciation recapture.

But like most investors, you are probably morally opposed to paying gigantic IRS taxes and depreciation recapture, especially when the IRS itself provides an alternative (Section 1031 of the Internal Revenue Code) for you to use.

TERRIBLE INVESTMENT ALTERNATIVES

If you're a potential 1031 exchangor, you know that if you cannot complete a 1031 exchange, you must pay capital gains taxes and likely also, depreciation recapture.  In such a case, you will be forced to give the IRS all of your hard-earned equity (cash) forever and you will be left with only one-fifth of the income that you could otherwise earn by using a 1031 exchange into a TIC or other high income property.  This is because after the first major defeat of paying these taxes, your after-tax choices are dismal, limited to short-term US Treasury Bills, bank CDs, securitized money market funds, stocks or mutual funds. 

Also, if you do not complete a 1031 exchange, you will lose all FUTURE opportunities to do a 1031 tax-deferred exchange stemming from this equity.  In other words, you give up the tax benefits and income and equity growth for the rest of your life and possibly the lives of your children and grandchildren -- this represents a significant, long-term and permanent loss.

COMPARISON OF TIC PROPERTY & 1031 EXCHANGE VS. TYPICAL AFTER-TAX INVESTMENT

If you do not complete your 1031 exchange and you end up paying capital gains taxes, state taxes and depreciation recapture, even while you earn much less income on the after-tax proceeds, you will also pay much more in taxes on a percentage basis on that income, than if you bought a TIC property and earned tax-sheltered income from it via through segregated cost accounting.  That's because there is no sheltering of interest income beyond standard deductions, but the segregated cost accounting used by some sponsors enables total sheltering of income when you report it on your IRS Form 1040 Schedule E

For an example of the difference in income between paying taxes vs. exchanging into a TIC property that employs segregated cost accounting, consider this exchange example:

$1M EXCHANGE EQUITY & NO 1031 EXCHANGE = $26,000 PRE-TAX INCOME

$1M sale proceeds or new cash – 20% (15% Federal capital gains tax plus an average 5% state income tax) = $800K

$800K x 3.25% (typical 5 yr. US Treasury as of this writing) = $26,000 (pre-tax)

$1M EXCHANGE EQUITY & 1031 EXCHANGE USING A TIC = $70,000 & NO TAXES (TOTAL TAX SHELTERING VIA SCHEDULE E USING SEG. COST ACCOUNTING)

$1M sale proceeds or new cash x 7% = $70,000 (no income taxes)

$70,000 and no taxes vs. $26,000 before taxes -- That's a huge difference and does is simply too much to give away needlessly.  And again, it’s too much to give away every year for the rest of your life and the lives of your children and grand children.

THE BENEFITS OF SEGREGATED COST ACCOUNTING

Segregated cost accounting is a standard practice accepted by the IRS and is used by institutional real estate investors such as REITS, pension funds and other real estate investment companies.  It segregates all 5 and 7 year property from the improvements in total, and details accelerated depreciation schedules for these properties.

Examples of items entitled to accelerated depreciation are heating, ventilation and air conditioning equipment (HVAC)); kitchen and bathroom fixtures and cabinetry; floor, wall and window coverings; electrical switches, wiring and fixtures; parking lot components such as asphalt, slurry coatings, paint and covered parking structures; landscaping, hardscaping, perimeter fencing, walls, gates and more.  Most independent investors do not use segregated cost accounting, and some sponsors do not provide the reports.  But TIC owners that own properties that utilize segregated cost accounting will likely pay no taxes on the income derived from those properties.

TICS HIGHLIGHTS RE-CAP

+ Tenants-in-common properties are the fastest-growing sector of commercial properties

+ Tenants-in-common property purchases went from $1 billion in 2003 to $20 billion in 2007 because they are an ideal solution for most investors

+ Tenants-in-common properties enable you, the co-owner, to own institutional grade, investment class assets for much less.  And owning a tenants-in-common property is simple and easy with professional property management, asset management oversight and automatic electronic monthly deposits with the tax benefits of a 1031 tax-deferred exchange and the depreciation and total tax-sheltering of income enabled by segregated cost accounting.

+ Tenants-in-common property sponsors are not just sellers but co-owners with you.  They believe in their properties, pro forma calculations and their expectation for outstanding performance upon final disposition.

RESERVING EQUITY

Potential co-owners who are in 1031 exchanges should be prepared to "reserve first & ask questions later".  That's because these properties have limited equity available, they reserve-up quickly and there is no risk to reserve equity.

IN CONCLUSION

I am absolutely certain that you will love being an tenants in common property co-owner.  TICS are the best properties that an investor can buy for any given amount of equity, plus they provide great safety of equity, outstanding income, great tax benefits, potentially huge profit upon final disposition and absolutely no ownership or management hassles.