Tenants in Common properties (TICS) Are Not for Everyone

Tenants in Common properties (TICS) Are Not for Everyone

As a tenants-in-common industry participant since 2003, I have encountered many real estate investors and 1031 exchangors.  Most of these investors understand the attributes of co-ownership, understand the great value that the structure provides and they proceed to close on a TIC property, complete their 1031 exchange and become big fans of TICS.

In all these years I have never seen anyone unhappy with the decision to become a tenants in common property co-owner.  In fact, without exception, everyone I know has been extremely glad that they bought a TIC, and their only regret has been that they did not buy one much sooner.  Likewise, of the investors I know who own multiple properties, they plan to use TICS for all their exchanges for the rest of their lives and are now educating and encouraging their adult children to do the same.

There are, however, a few investors who did not purchase a TIC property and the following are the biggest reasons why.

The most prevalent reason is that an investor did not have sufficient exchange funds to purchase a TIC.  Most TICS require $250K -$350K of exchange funds.  I have met many investors with $100K to $160K who were not willing or able to add cash to their exchange to purchase a TIC.  This is unfortunate because these investors usually end up with a failed exchange and being forced to pay capital gains taxes in an amount equal to what they would have needed to add, and then their resulting income derived from an after-tax investment is also significantly decreased.  Note: it’s generally possible to buy a TIC for $100K at the very end of an equity offering, or by getting in through a backup reservation list.

The second most prevalent reason that investors do not buy TICs is because of what I call “sole owner bias” and “local bias”.  I mention these together since they are somewhat related.  Sole owner bias has to do with the fact that every real estate investor has been a sole owner in the past.  But the investor with this bias cannot outgrow it - they remain locked into it, unable to consider any other option.  Sole owner bias is about comfort and familiarity and a routine to which an investor has become accustomed.  Sole owners are hands-on investors.  They are accustomed to choosing the tenants, managing the properties, handling the day-to-day maintenance, rent collection, paying the taxes, writing checks for improvements and much more.  In short, they enjoy the work.  And quite often, this is their only life’s activity.  When I first encountered this, I couldn’t believe it.  But after seeing it a few more times I have come to accept that it’s true – Some real estate investors truly love managing properties and they would rather do it more than anything else.

But please be aware of the painful downside of this bias.  Sole owners are not ready to enjoy their lives, take a vacation, relax.  They are not ready to open their mind to a new, more sophisticated form of property ownership.  Furthermore, they are not ready to plan or implement an exit strategy from active real estate investment and ownership.  I think such owners will die with their boots on, so to speak, managing all of their properties until they pass away.  Unfortunately, this leaves a huge tax and management mess for their beneficiaries and adult children to pay for and clean up, but that’s another story.

Local bias is related to sole owner bias.  Local bias is when the owner sells their property and will only consider another local property.  They feel the need to be nearby, to kick the tires, to check on their tenants, to make sure the building is still there.  They simply will not consider purchasing a building that is not drive-by close.

The next biggest objection that I’ve seen regards the unique TIC structure and the “outside-the-box” nature of tenants in common properties.  I have met a few investors who were being exposed to TICS for the first time.  They find themselves handicapped by their own unfamiliarity and ignorance of the TIC property industry.  Faced with a 45-day deadline, they cannot become comfortable enough to commit to a purchase.  This is simply a lack of familiarity with all of the attributes and benefits of TICS.

Such investors fear loss of control, fear group ownership, fear placing their trust in professional third party property managers.  They fear everything about TICS.  Again on the rare occasions when I encounter this, I shake my head, because as I mentioned at the beginning, most investors see great benefits in the above attributes.

People who own TICS absolutely LOVE their professional third party property managers handling the day to day management of their properties for such low fees.  They LOVE the fact that all the important decisions are not theirs alone to make and shared by the co-owners.  They LOVE the fact that they now own a size and quality of property that they could never have owned on their own.  They LOVE the security and ease that this institutional size and quality provides.  They LOVE the great, fully tax-sheltered income that is deposited automatically every month.  They LOVE the fact that they have more time and more money to devote to family, friends, hobbies and travel.

To sum up, as a long-time TIC industry participant and real estate investor, I find all of this quite understandable.  This is why TICS are not for everybody.  TICS are most suitable for:

1. Investors who have sufficient exchange equity or are willing to add cash to the exchange in order to participate

2. Investors who are sophisticated enough to understand that bigger properties are better and safer properties.  Such large size requires many co-owners to pool their assets together, similar to the way institutional investors pool their assets (REITS, pension funds and other very large real estate investment companies)

3. TIC owners are investors that understand that bigger properties cannot be managed alone – They must be managed by a big team of real, full-time investment property management and leasing professionals

4. TICS are only for investors who understand that large, institutional acquisition parameters do not include “property must be within easy driving distance of home”.  They understand that the most important criteria are size, quality, stability, growth market, infill location, credit tenants, potential income growth, potential upside profit potential, top professional property management to reduce costs, increase net income, to add measurable value to the property every month.

5. TICS are for investors who are looking forward to transitioning away from hands-on control of their next real estate investments, who are ready to implement an exit strategy from active real estate ownership.

6. TICS are for those investors who want a real estate investment that provides 1031 tax-deferral, Form 1040 Schedule E total tax sheltering and maximum income.

7. TICS are for those who want maximum protection of equity, maximum upside profit potential and they want and can expect all of this absolutely effortlessly.