TIC Properties

Q:  What is a “TIC” ?
A: Tenant-In-Common (TIC) ownership is the common name for what the IRS recognizes as “fractional ownership,” or “co-ownership”  and is simply a description of the relationship between multiple owners of a single property. Further explanation of this structure and it’s benefits is available below.

Q: What is co-ownership of income property ?
A: A co-ownership purchase refers to real estate owned by more than a single owner, with each owner enjoying an undivided, fractional interest in the asset.  Each co-owner receives an individual deed at closing for his or her undivided percentage interest in the entire property. TIC co-owners are not required to own equal interests in the property, and ownership interests can be sold or inherited. The TIC co-ownership structure enables the average person the opportunity to own larger institutional-quality commercial property and get the benefit of professional management of what they own.

Q: What are the benefits to co-ownership of income property ?
A: The individual TIC co-owners enjoy a fractional interest in an institutional-quality real estate asset that provides them stable cash flow and long-term appreciation potential without day-to-day management issues. Co-owners also benefit from the same tax and wealth preservation benefits of sole-owned real estate, resulting in a higher quality of life and frequently better income than they had been receiving on their previously owned properties.

Q: What additional liability is associated with co-ownership ?
A: Real estate, either single buyer or co-owner properties, have many commonly identified risks typically originating in the performance of the property, local/national market conditions, etc.  The co-ownership properties offered by TREC are offered with non-recourse mortgages already in place when sold to TIC investors from a nationally prominent financial institution. This form of debt structure allows for the debt financing to be assumed by future buyers, so at sale, the buyers of a fractional interest or the entire property remove the current owners from any continued obligation to repay the loan.
 
Q:  How large is the co-ownership (TIC) industry?
A: In the 4 years since the IRS issued guidelines that clarified how undivided fractional TIC real estate qualify as 'like-kind' replacement for 1031 Exchanges (Rev. Proc. 2002-22), the industry has approximately doubled year-on-year, with approximately $10 Billion of investor equity invested in TIC properties annually.  

 Q: What is the Revenue Procedure 2002-22?
A: Rev. Proc. 2002-22 is a set of guidelines from the IRS that outlines how fractional-deed co-ownership can be structured to avoid being considered a partnership when completing 1031 exchanges.

Q: What is a Qualified Intermediary?
A: A Qualified Intermediary (QI) is an independent party who facilitates tax-deferred exchanges as required by and referenced in Section 1031 of the Internal Revenue Code (IRC). The property seller signs an agreement instructing the QI to receive sale proceeds and hold those proceeds until they are used to purchase the replacement property, completing the exchange. The seller must never handle the actual proceeds himself/herself or the option for an exchange and complete tax deferral will be voided.

Q: Is foreign property considered like-kind?
A: No. Only property located within the fifty United States and the U.S. Virgin Islands is considered like-kind and eligible for a 1031 Exchange.

Q: What is "like-kind" property?
A: All real property is 'like-kind' and can be exchanged for other real property, such as vacant land for an apartment building or a rental home for a retail center.

Q: What is the 'downleg'?
A: The “downleg” represents the property to be sold as part of the 1031 Exchange.

 Q: What is the 'upleg'?
A: The “upleg” represents the property to be acquired to complete the 1031 Exchange.

Q: How do I take ownership in a TIC?
A: As a TIC owner, you have a fee simple ownership interest in the property.  This means you are on title and own a deeded portion of the property.  This form of ownership entitles you to all of the benefits of owning real estate; such as your pro-rata share of income from the property, future appreciation and depreciation of the asset, as well as most other tax related benefits of owning real property.

Q: What are my timeline requirements if I am doing a 1031 exchange?
A: An exchanger has 45 days from the date of sale of the downleg property to identify a like-kind replacement property (the upleg). An exchanger has 180 days from the close of the downleg property to complete the purchase of the upleg, and this includes the 45 day period for identification. The identification period terminates at midnight on the 45th day following the downleg close date, regardless of Sundays or holidays.

Q: Where do my exchange funds go when they leave my accommodator?
A: When 1031 funds are transferred from an accommodator (QI) in anticipation of purchasing interests in a property, those funds are sent directly to escrow.

Q: Can my partnership, trust, or corporation execute a 1031 Exchange?
Yes, if it is exchanging real property for real property. However, the IRS does not consider partnership interests or stocks as being like-kind to real estate.

 Q: What are the qualifications for participating in a TIC?
A: A qualified investor (i) with respect to natural persons only, has had for each of the past two (2) years and reasonably expects to have during the current year individual income in excess of $200,000 or joint income together with such person's spouse in excess of $300,000; and/or (ii) with respect to natural persons only, has either individual net worth or joint net worth together with such person's spouse in excess of $1,000,000, (iii) with respect to trusts, the trust has assets of $5,000,000 or more.

 Q: How many co-owners are involved in each property?
A: The IRS has stated that it will allow up to 35 co-owners into any single TIC structured deal and still meet the guidelines for qualifying for a 1031 exchange.  We at TREC normally have around 10-20 co-owners per property, depending on the size of the property.

Q:  What is a typical investment amount required for TIC ownership?
A: The Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC owners in any one property. Because of this limitation, minimums vary depending on the size of the property and can range from $250,000 to multiple millions of dollars. This allows the average investor, who would normally need significantly high investment dollars, to purchase an institutional grade quality asset with higher-grade tenants and great cash flow. It also provides an avenue for diversification among different markets and asset types.

Q:  What happens to my TIC ownership if I die?
A: It is treated like any other real estate asset; your fractional ownership will be passed down, pursuant to your will, to your heirs.  The deferred income taxes from your 1031 exchange will be forgiven forever and your heirs will receive a stepped-up basis in the taxable value of the asset reflecting fair-market value.

Q: Who manages the property?
A: A third-party property management company will handle the management and leasing responsibilities of the property.  The co-owners will maintain control in a number or significant ways, for example, approving or disapproving all new leases and voting/hiring management if needed (property management contract renewable annually).

Q: Who will be the leasing agent and how is the leasing agent appointed?
A: The leasing agent is determined before a property closes or soon after the close. This is done through a series of proposal submissions and interviews. The property management company will then cooperate with the leasing agent in the acquisition of new or renewed leases, all of which is subject to co-owner approval.

Q: What is a ‘cash call’ and what happens if there is one?
A: A cash call is the result of the loan on the property not being covered by the property income. This could be caused by tenants defaulting on their rents, unanticipated expenses, etc. A capital call could occur and funds would be required by the co-owners to cover the note until the property income met that requirement again. Along with close attention to the financial situation of the property, sufficient reserves should be set aside for each property to avoid such an occurrence. TREC has never had a cash call on any property it has offered for sale.

Q: What is the exit strategy?
A: Each co-owner is a deeded owner on title, allowing them to sell their interests to other buyers at fair market value. A co-owner who decides to sell must first notify the sponsor who has a right of first refusal.  The sponsor or other co-owners may or may not choose to purchase the available interest in the property, after which, if they refuse, the selling co-owner is free to sell to a third party subject to the lender's approval.

Q: What happens if a co-owner files for bankruptcy, dies, or divorces?
A: In a TREC sponsored co-ownership property, each co-owner holds title within a newly formed, single-member, LLC, commonly referred to as a Special Purpose Entity (SPE) that is normally joint and several.  Therefore, the property should not be affected. The SPE, approved by the IRS in completing a 1031 exchange, ultimately protects the lender and each of the co-owners.

Q: Can I exchange my co-ownership interest into a new property?
A: Co-ownership of real property as tenant in common will qualify as a like-kind downleg in a 1031 exchange, providing all 1031 exchange regulations are followed, so co-owners of TREC properties can exchange out of as well as into a co-ownership property.   

LAS VEGAS PROPERTIES can assist you with locating and negotiating the purchase of TIC Properties in Las Vegas, Henderson and North Las Vegas.  We work with a very experienced company that specializes in these types of investments.  Call us today at 1-888-876-8383 or email terrilvp@cox.net for information about available opportunities.