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 The TIC investment is a fantastic
vehicle for purchasing high quality, institutional grade properties.
Up until now, small real estate investor could only dream of acquiring
Class A properties because they were competing with the insurance
companies, pension funds and REIT’s. These "Class A" properties are
purchased by the sophisticated corporate investors because they hold
their value so well in the real estate cycles, the income is secured by
the leases with large creditworthy tenants, and the locations are
usually excellent. These are the same reasons the smaller investor
would like to invest in these more secure properties rather than take
the risks in class “B” and “C” product.
The TIC Program: Is
your investment a Real Estate Investment or Securities Investment?
In 2002 in response to group
investors wanting to pool their money and trade up on their investments,
the IRS came out with Revenue Procedure #2002-22. This Rev Proc gave 15
guidelines for structuring the investment so as to reduce the likelihood
of them ruling that the investment was a different type of ownership for
tax purposes.
Real Estate
TIC Real estate entrepreneurs saw an opportunity
to acquire properties and sell them to investors as deeded, fractional,
undivided interests They reviewed the IRS guidelines, researched how to
structure the deals as real estate transactions and started a new
segment of the commercial real estate industry.
Securities
TIC Since this financial transaction involves a
group of investors coming together to pool their money to make an
investment, the security dealers also saw an opportunity to create a new
segment of the securities industry with a new product involving real
estate which has become one of the hottest segments of the investment
industry. They researched the requirements and packaged the investments
as securities and also began offering them.
How to identify a Real Estate TIC
Probably the most critical concept in identifying a Real Estate TIC is
the amount of control a TIC purchaser has over the property
purchased. If someone other than the purchaser has the real and legal
control over the property, the ownership interest turns into an
investment contract and thus a security. If the purchaser has the
ultimate right to control the property and the ability to
control the property, and is not relying on another and, thus, is not
dependant "on the efforts of others, the TIC offering may be considered
a Real Estate TIC investment."
The four strongest investor
groups The 4 major investment groups that are
finding TICs to be attractive are older real estate investors,
professionals, wealthy investors and foreign investors. Small time real
estate investors, as they approach retirement, may be finding themselves
trapped in aging properties that are becoming more management intensive
and troublesome than they desire. If the properties are sold, the
IRS returns to the picture with two taxes: capital gains and deprecation
recapture. The other alternative is to do a 1031 tax-free exchange into
another property. TIC investments work very well with 1031 tax-free
exchanges as a way to make an investment into a less management
intensive vehicle or as a way to finish off an exchange if the first leg
of the exchange involves a property of less value than your exchange
calls for and may involve boot.
| Five Steps to
insure the TIC investment is treated as a Real Estate TIC.
Here are the five steps to insure that a
TIC program has sufficient controls retained by the TIC
owners to be treated as a Real Estate TIC and not subject to
securities regulation. |
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1.
Verify that the TIC investment is
being sold as a Real Estate TIC. Because
this type of investment structure is relatively new, conduct
thorough due diligence and obtain detailed and sound legal
opinions from respected law firms regarding the Real Estate
TIC. Before investing, ask the Real Estate TIC
sponsors for copies of their opinion letters and
documentation, along with other due diligence material. |
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2.
Get a deed to
the real estate for your investment and copies of supporting
due diligence information for the real estate.
In every TIC program the purchaser should
receive fee simple title to the property in the form of a
deed. In any other form of indirect ownership where a
purchaser does not receive a deed to the property, the
transaction is probably a security. |
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3.
Retain the
real control over the property.
As stated above, purchasers must have the
ultimate right to control the
property they purchased. Think of the rights of a property
owner compared to the rights of a property manager. A
property owner assumes the risks and rewards of property
ownership and through an agreement, hires and relies on
another to handle the day-to-day responsibilities of the
property.
The owner is able to vote changes including who manages the
property or to sell the interest to the property outright.
The same holds true for Real Estate TICs. Just like any
transaction for the purchase of real property, Real Estate
TIC's include various agreements between the parties which
may include a purchase and sale agreement, a
tenants-in-common agreement, a lease agreement, and an
assumption of the existing loan. These documents allow a TIC
investor to retain basic control over his investment,
usually by vote, with the other investor or partners in the
investment. |
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4.
Use real
estate professionals to acquire a TIC ownership.
All TIC programs should insist
that investors and purchasers meet certain qualifications or
that they are represented by qualified professionals.
Always check with your real estate attorney and/or tax
accountant as to the merits of a real estate investment
prior to committing assets. The real estate TIC may be
a great investment but not meet your particular investment
needs or criteria, so investigate the sponsor's due
diligence and see if this investment meets your needs. |
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5.
Receive property management
information and have readily available management
alternatives.
Any owner of real property should
receive information about the management of
their property if they are to really control the property.
A Real Estate TIC owner must receive that same kind of
information in order to control his property.
Alternative property management options must be readily
available. If not, then the owner might
have no choice but to rely on only the promoter which could
create "reliance" as defined in the
securities rules and regulations. |
In Summary: All
the investor co-owners have invested in the TIC for the same reasons and
goals: maximize cash flow and improve the value of the asset. The
creation of tenants-in-common (TIC) real estate investments may meet the
needs of many smaller investors. The challenge today is for this
investor to learn about TIC's and develop a comfort level with the
product to make the investment decision if this is an investment that
will work for them.
The TIC industry did over $2 billion in 2003 and is
expected to close more than $7 Billion in 2007. Yet this method of
investment and ownership is not for everyone. The National Law
Journal's article on TIC investments gives more insight into the
advantages and the challenges of a TIC investment.
Prime Source is seeing more and more TIC offerings in Las
Vegas on highly desirable properties. While we do not, at the
present time, act as a sponsor of these investments, we do work with
sponsors that are well qualified and we can introduce you to like
investments at no cost to you. Our fee is paid by the sponsors.
If you would like to look at this type of investment opportunity,
contact us for more information. |
