Tenant-in-Common Property – How Do They Work?

TICs (Tenant-in-Common Properties) are defined as property owned by a group of individuals who each have an undivided interest in the property. In other words, each individual is actually on title to the property and owns a fractional interest in the entire property based on their investment amount. For example, Mary might own 10%, Sally 15%, Gene 31 ½%, Fred 7 ½% and so on. At one time, there were lots of questions as to how TIC investments should be structured and how many people could be involved in ownership. IRS revenue procedure 2002-22 gave TIC’s some rules and guidelines. The IRS procedure indicates that TIC’s can have up to 35 different owners and that, if structured properly, can qualify for a 1031 Exchange. The goal of most TICs is to hold the property for 5 to 7 years and then sell at a substantial gain. For the investor who wants a monthly cash flow without management responsibilities, TICs make a great deal of sense.

Advantages to investing in TICs:

• TICs are great for people who are tired of being landlords but still desire the benefits and safety of real estate ownership. Rather than selling their properties outright and paying a huge amount of capital gains, they can 1031 exchange the entire sales proceeds into a TIC and defer the tax.

• A TIC gives the investor many different types of properties they can purchase such as; apartment complexes, commercial office buildings, malls, multi-use facilities, etc. Tenant-in-common properties offer great flexibility.

• TICs allow an investor to diversify property ownership into other areas of the country where the real estate market and growth potential might be stronger than in their own backyard, with no management concerns.

• A good TIC sponsor who is selective about the prices of properties they pick can provide an opportunity for the investors to obtain a very healthy return on their investment even in a weak real estate market.

• Most TIC investments qualify for funds that are invested in IRAs, 401(K)s and etc…

TIC investments can be very beneficial and offer the investor commercial grade real estate that is normally out of reach for individual investors. As with all real estate, you must do your due diligence. Here are some tips in helping you choose a company that will meet your expectations and limit your downside:

• Invest with a company that has a great track record. A track record is not a guarantee of future performance, but it’s a good indicator.

• Don’t invest with a company that does not provide audited financial statements. An independent financial audit needs to be prepared and distributed on an annual basis to the investors.

• Invest with a company that stays active as an owner alongside you the investor. A responsible TIC sponsor will retain a percentage ownership of the property as well as provide property management.

• Invest with a company that has owners who are both strong financially and are willing to sign the recourse carve outs. Most commercial loans are non-recourse loans which means if the bank forecloses on the property, they can only take the property back, not come after the owners for a deficiency judgment. Often banks want someone responsible if there was fraud or mismanagement. This is where the sponsors of the TIC should be willing to sign the recourse carve outs.

TICs are also a great vehicle to use when doing a 1031 exchange.

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