A 1031 exchange allows an investor to sell an investment property and defer capital gains and depreciation recapture taxes by reinvesting 100% of their equity into another "like kind" property of equal or greater value. Investors can potentially upgrade their property holdings (and cash flow) by exchanging their sole owned property for an interest in a Tenant In Common ownership opportunity, which offers all the benefits of real estate investment while eliminating the headaches of day-to-day property management.
What is the difference between investing in a Tenant In Common 1031 exchange and simply exchanging for another sole owned property?
The difference is the financial and lifestyle objectives of the real estate investor. The investor needs to answer the following question, "Do I want to manage property anymore or do I want to delegate the day-to-day management to professionals?" The Tenancy In Common structure allows the investor to have professional property managers take care of the mundane tasks of collecting rent, performing maintenance, etc., while still participating in the major decisions. By exchanging for a fractional interest in a Tenant In Common property, the investor gains access to larger, institutional-grade properties, such as an office building, a drug or grocery anchored shopping center, multifamily apartment community, warehouse/distribution, or industrial property valued anywhere from $5 million to $150+ million. Investors can also diversify their equity among several property types and geographic locations through fractional ownership.
What is the typical size, type, price and location of Tenants In Common properties available for purchase?
Tenant In Common properties are typically institutional-grade properties, such as an office building, a drug or grocery anchored shopping center, multifamily apartment community, warehouse/distribution, or industrial property costing anywhere from $5 million to $150+ million. Property locations vary and are available on a national basis.
What kind of potential returns can be expected from a Tenant In Common property investment?
Initial cash flows range between 5-8% of the initial equity (cash) invested. Overall annual returns are projected in the low to mid teens including cash flow, appreciation, and principal reduction of the non-recourse financing.
What is the typical number of TIC investors in a property, and what is the range of investment dollars required?
IRS guidelines direct that there can be no more than 35 investors. The typical structure has from 12-20 Tenant In Common investors in a property. The minimum equity amount varies depending on the property, the amount of equity being raised and the number of TIC investors. Typical stated minimum investments range from $200K to $650K, though some of the larger properties will have much higher stated minimums.
What types of ownership approvals are required for various decisions (e.g., leasing, refinancing and sale)?
In most Tenant In Common structures, the real estate provider will make the day-to-day decisions allowed under the management agreement or master lease. The Tenant In Common owners make the major decisions such as approving or rejecting leases, a refinance or a sale. Unanimous approval by the owners is required for all major decisions affecting the property.
What due diligence is performed prior to the purchase of a Tenant In Common property, and what is the timeframe for investor review and approval?
Professional due diligence is conducted by experienced members of the acquisition team who investigate and evaluate all aspects of the property, including a thorough assessment of the physical, intrinsic, and financial aspects. Independent, third party due diligence is also conducted by the financial institution providing the non-recourse financing for the acquisition.
Several layers of due diligence are performed prior to the presentation of the investment opportunity to potential investors. The first level is performed by the real estate provider, who evaluates the asset to ascertain that the property can achieve desired return and appreciation potential. Once a lender is selected, the lender performs its due diligence to determine the property's ability to comfortably repay the mortgage obligation.
