A popular choice for 1031
replacement properties is the Tenants-in-Common (TIC) ownership program.
This provides buyers with monthly rental income, advantage of a triple net lease
(NNN), with the appreciation advantages of multi-tenant property. Buyers can
own an interest in several properties and have the advantages of diversification
that is not possible with single properties.
Diversification:
Normally entrance into the whole building, income-producing real estate market
begins at about $1 million, preventing many 1031 exchange owners from
participating in this market. But a TIC ownership allows the average buyer to
participate with others in ownership of larger properties through a minimum
purchase as low as $150,000. Whole property purchases are also available.
Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC
(Tenants-in-Common) owners in any one property. The quality of the tenants
attracted to these larger projects is much better than the smaller individually
owned .
NNN Lease Partner: The
company generally contracts with the same lessee. The TIC owner saves the time
and headaches of the day to day property management and sublet responsibility.
The tenants in common receive 6% of their investment in the monthly rental
payments. The lessee makes the payments whether the building is making money or
not. He has the incentive to do well as he is able to pocket the excess after
all maintenance, tax, etc. Fixed annual rent with automatic increases each
year. All debt expense is carried by the lessee.
Financing: Due to the
nature of a 1031 the funds from your exchanged property are held by the
qualified intermediary. The TIC debt structure generally allows the debt
financing to be assumed. Assumption usually occurs without the need for
qualification or loan assumption fees, and no closing costs..
Speed and Simplicity:
1031 rules allow 45 days after the sale of the relinquished property to
identify the replacement property. Identification can follow the 3 property
rule, 200% rule, or the 95% rule. Closing must be within 180 days of the sale
of the relinquished property. If not capital gains tax is due. Due diligence
of the buyer should consume more time than any normal red tape of property
transfer.
TIC owners: The
individual Tenants-in-Common receive deeded interest. If the individual TIC
needs to sell, the lease management normally assists. On a decision requiring
unanimous vote, such as a sale decision, a 60% - 75% (depending on your TIC
agreement) vote by the TIC owners will be sufficient to initiate the impasse
resolution procedure. This procedure allows the TIC owners with 60% - 75%
(depending on your TIC agreement) or more of the property to make an offer to
buyout the dissenting owner with 25% or less of the property. The dissenting TIC
owners can either: (1) accept this offer, (2) buy out the 60% - 75% (depending
on your TIC agreement) TIC owners at the same price per percentage ownership, or
(3) change their dissenting vote to a consenting vote.
