Tenants in Common (TIC) Industry Overview   

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Tenants-in-common (TIC) ownership is a popular choice among real estate investors seeking replacement property for their IRC section 1031 tax deferred exchange.  Tenants-in-common is a co-ownership structure under which multiple investors pool their funds to own one entire property.  Therefore, a single investor may own an undivided fractional interest in an entire property and participate in a proportionate share of the net income, tax shelters, and growth.

A tenants-in-common owner receives a separate property deed and title insurance for his or her percentage interest in the property and the investor has all the same rights and privileges as a single (fee simple) owner. Tenants-in-common properties are often available as "turn key" prepackaged investments with management and non-recourse financing in place and therefore offer superior efficiencies in the identification, acquisition, financing, closing, and operating stages of real estate ownership. These efficiencies are especially helpful and often critical given the strict time restrictions confronting an investor if he or she is funding the investment through an IRC section 1031 tax deferred exchange. 

TIC Industry Overview

As depicted in the following graphic, there are four basic steps in structuring a TIC property offering.  The four steps involve the participation of five basic parties as follows:

1. The Sponsor (a national real estate firm with a track record of acquiring, managing and divesting commercial properties),
2. The Lender (major institutional lender such as Bank of America, Countrywide, Wells Fargo, etc...),
3. The Attorney (large reputable law form such as Baker & McKenzie, Luce Forward, Hirschler Fleischer, etc...)
4. The Broker Dealer (FINRA, SIPC member securities brokerage), and
5. The Investors (may be an accredited individual, partnership, LLC, S corporation, and C corporation).

STEP 1:  A TIC offering is initiated after a significant due diligence process that a sponsor conducts before it acquires or contracts to purchase an institutional grade property.  A sponsor is a national real estate firm with a significant track record in acquiring, managing and divesting commercial real estate. There are approximately 75 sponsors in the United States which structure TIC investments.  Through a discriminating due diligence process, we have approved approximately 50 of these sponsors to be admitted to our selling group .

STEP 2:  Once the sponsor identifies a property for acquisition, the sponsor will arrange non-recourse debt financing with a major lender such as Bank of America, Countrywide, Wells Fargo, and others at competitively low institutional interest rates.  The loan is typically for an amount equal to 50% - 60% of the fair market value of the property. The lender will also perform due diligence on the property before lending the majority of the purchase price. The loan is made in whole to the sponsor and eventually assumed by the TIC investor according to his or her proportionate share of the offering.  Except for typical carve outs for environmental damages and investor fraud the investor is not personally liable for the repayment (non-recourse) but receives title deed for his or her total investment, represented by both the cash investment and the portion of the debt assumed.  If the investor is utilizing a IRS section 1031 exchange and a larger amount of debt is assumed with the TIC investment than the amount the investor was liable for on his or her relinquished property, then the additional debt assumed may be added to the tax basis of the investment.  This larger tax basis may provide for a larger shelter from federal and state income taxes due to a larger deduction for depreciation expenses (please note that depreciation is an accounting concept and is allowed even if the property (as in most all cases, is appreciating in value). Loan repayments are made by either the property manager or the sponsor (the asset manager).  The sponsor and/or property manager also conducts the day-to-day management of the property so that the investor enjoys a truly passive investment, responsible only for cashing the net rental payment check each month (or arranging for direct deposit).

Once the debt side of the offering is negotiated, the sponsor will then structure the equity side of the offering.  The equity (i.e. cash investment) will comprise the remaining 40% - 50% of the offering.  The sponsor will divide the amount of money that will need to be raised for the offering by 35 to arrive at the minimum amount of investment to be offered to individual TIC investors (the IRS will allow no more than 35 investors in a TIC offering in order to qualify for IRC section 1031 exchange treatment per Revenue Procedure 2002-22).  The offering to the investors is regulated not by the department of real estate for the state in which the property is located but rather by the federal government under the 1933 Securities Act as applied by the SEC (Security and Exchange Commission) and the FINRA (Financial Industry Regulatory Authority).  Therefore, a major law firm must be retained by the sponsor to write a Private Placement Memorandum (PPM) which discloses all risks, material facts, and contains all pertinent leases, agreements and contracts.  Per Regulation D of the 1933 Securities Act, each accredited investor must be provided with the PPM in advance of making a decision to invest in the offering. The law firm must also perform due diligence on all disclosures made in the PPM.  In addition, the law firm will also issue a legal opinion published within the PPM on weather the offering as structured will meet the provisions for Rev. Proc. 2002-22 and qualify for section 1031 exchange treatment.  Both OMNI Brokerage and the Tenants-in-Common Association require a "should" level opinion for an offering to be acceptable.           

STEP 3:  Once the PPM has been prepared by the sponsor's retained independent law firm, the PPM together with all information used in the underwriting of the offering are presented to a FINRA member securities broker dealer.  The brokerage conducts a significant due diligence study on the sponsor and the property before signing a selling agreement.  On average the our brokerage due diligence department rejects approximately 30% of the offerings presented by the selling group.

STEP 4:  Once the selling agreement is signed by the broker dealer then the offering may be presented to perspective investors (in the form of the PPM) by licensed registered representatives of the broker dealer. 

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