As property owners continue to sell, demand for suitable 1031 exchange property also continues to grow. This is in part because investors are not finding other attractive investment options, and also because many investors do not want to pay capital gains and depreciation recapture taxes.
With the growth in 1031 exchange transactions, interest in tenant-in-common (TIC) replacement property has doubled year over year. As such, the significance of finding a qualified TIC advisor has become increasingly important. With that in mind, I have summarized some of the issues to consider when interviewing a TIC representative.
Choosing a TIC Professional
Tenant-in-common investment options are a relatively new choice for investors seeking to complete a tax-deferred exchange. Thus, many investors go through an extensive education process to understand and appreciate the benefits and complexities when selecting a suitable TIC replacement property. The right representative can make a significant difference throughout this important process.
• Is the Representative’s TIC Investment Structured as a Security?
An investment which obtains profits derived predominantly from the efforts of others would constitute an investment contract, and thus is a security under the federal securities law. TIC interests are typically structured by sponsors who negotiate the sale price and loan, and acquire, lease and manage the property. TIC interests are usually investment contracts because the tenants in common combine their resources and obtain an undivided fractional interest in investment real estate. They share the risks amongst themselves and derive benefits from the efforts of others.
Although Section 1031 does not apply to an exchange of investment property for an “interest in a partnership,” “stocks, bonds, notes,” or “other securities,” the federal securities law’s definitions of those terms do not control interpretation of the tax laws. Accordingly, the fact that TIC interests typically are investment contracts under securities laws does not inherently disqualify them as property that may be exchanged under section 1031.
• Is the Representative and His/Her Broker/Dealer TIC Industry Specialists?
The TIC Industry is a dynamic market place with substantial demand. Growth has doubled year after year. This makes timely access to information critical. Awareness of deal structure and regulatory changes is important to protect the investor. Because TIC properties come and go quickly, constant knowledge of property availability is imperative. Thus, having a TIC specialist with the resources to stay abreast of this dynamic market is very important.
Furthermore, a TIC specialist can provide important assistance to successfully complete the 1031 exchange. It is likely that they have experienced situations similar to the client’s or have access to professionals like qualified intermediaries and tax and real estate lawyers who can quickly help answer their questions.
• Does the Representative Represent Multiple Sponsors and Property Choices?
Having a large property selection provides the greatest opportunity to match a client’s needs.
• How Extensive is the Representative And Broker/Dealer Due Diligence?
Your representative should be able to provide deal specific information to you. This can be achieved by a knowledgeable individual or team who evaluates the real estate sponsor by assessing the overall viability of the company and by conducting on-site review of the operations, management team, and financial statements. The program structure needs to be analyzed by reviewing the attributes and disclosures of each TIC offering. Compliance with the IRS and Treasury guidelines needs to be researched with respect to the offering. Finally, the property must stand on its own merits. An analysis of the fundamentals and side-by-side comparison with other available properties, while considering cap rates, property statistics, and debt-to-equity ratios needs to be done by competent representatives.
• Does the representative have a clear approach to property analysis?
The ability to clearly assess the benefits and risks of each TIC investment is important.
Offering documents, intended to provide full disclosure of the investment structure and real estate analyses, can be difficult to navigate. Guidance from a knowledgeable and experienced TIC professional significantly assists an investor to arrive at a suitable property decision.
