Tenants in Common | A Recent Alternative for 1031 Replacement Property

Tenants in Common is a method whereby two or more individual investors can maintain title and own real estate in a partnership. The majority of real estate investment brokers and astute investors are well-informed of the tax benefits of executing a 1031 deferred exchange. When selling an enterprise or property investment, some investors may not be aware of the relatively recent rise of Tenants in Common properties.

Advantages of Owning Joint Tenants in Common Properties

The benefits of employing Tenants in Common interests to conclude a 1031 tax deferred exchange are countless. These fractional interests make it much simpler to identify appropriate replacement properties within the required 45 days, grants the investor a chance at owning a share of an institutional grade property (which usually is far too expensive for a single investor to own) and enables an investor with a limited supply of funds to diversify into several properties. Every Tenant in Common holder obtains a distinct property deed and title insurance for their share of the real estate asset. Since the management, underwriting, and other property particulars are wrapped up together into the Tenants in Common deed, the purchasing procedure is simplified and each holder turns into a passive real estate investor.

Revenue cash flow is usually paid off monthly. Many Tenants in Common selling programs have pre-packaged funding which enables the investor to buy up in value and grant extra basis that can be depreciated to shelter off some of the revenue stream. As with any type of commercial real estate, hopefully the investment will further appreciate in value.

Are Deeds and Tenants in Common Investment For Everyone?

Tenants in Common are not for everybody. Investors looking for very high returns or have the buy and flip mentality have no place in Tenants in Common income investments. They also do require some minimum investment prerequisites. Normally, an investor is required to have a minimum of $100,000 cash to partake in the greatest number of property options. Many Tenants in Common properties are in the $250,000-$500,000 range. Ownership possibilities include high-quality shopping malls, class “A” office buildings, industrial facilities, grocery anchored centers, single tenant triple net properties, assisted living centers and large apartment complexes. Many of the joint tenants in common investment properties have Fortune 500 credit-worthy tenants with leases up to 25 lease terms. For those investors who are not interested in high management problems or the constant responsibilities of being a landlord, this is an attractive form of replacement property and has prompted to the coining of the phrase “mailbox management”. The sole management functions are for the landlord to go outside to the mailbox and collect his rental income check.

Why the newborn interest in Tenants in Common opportunities?

This form of investment alternative has in reality been attainable ever since the early 1990′s. However, since the majority of tenants in common listings were offered by a handful of securities broker-dealers and not real estate brokers, the publicity was negligible. Additionally, the concern that these tenants in common interests would be thought of as a partnership interest and consequently would not qualify for a 1031 tax exchange. However, in March, 2002, IRS Revenue Ruling 2002-22 was published. This decision allowed specific parameters to be structured so as not to be recognized as a partnership interest. Ever since these parameters were published, the quantity of offerings has intensified exponentially although only a small amount of broker dealers and their representatives sell tenants in common property.

Here is an illustration of how a tenant in common can be used to qualify as a 1031 exchange replacement property. A businessman has decided to sell his company business which also has some real estate linked to the operation. He has possessed the real estate for numerous years and has long ago paid off the mortgage. He is looking to retire and does not wish to purchase a different business, but he strongly considers a positive revenue stream from a secure property that could help supplement his retirement income.

The total price value is $1,000,000 with good will and FF&E amounting to $500,000 of the transaction worth. The businessman cashes out this share of the deal and pays the tax on this portion. However, on the remaining $500,000 he contemplates a 1031 tax exchange to defer capital gain taxes on the $500,000 income from the real estate share of the transaction, but he is apprehensive about buying real estate that compels active management. After researching the advantages of a joint tenant in common property, he elects to invest in a fractionalized interest in a 1,000,000 square foot warehouse facility where the United States Postal Service has guaranteed a 20 year absolute triple net lease. A triple net lease means that the post office will be responsible for of all repairs, maintenance, and enhancements to the property while paying rent for the ensuing fifteen years.

Because every Tenant in Common offering is distinctive not all TIC programs are equal. The recent IRS regulations are excellent news for investors who wish to take advantage from a 1031 exchange and escape high management intensive properties, but as with any real estate investment, any Tenants in Common property calls for prudent consideration.

TIC Buyer Beware.

TICs should be offered as a security with appropriate due diligence and transparency of all Sponsor fees.  We recommend you avoid a TIC that is not packaged as a security. Tenants in common structured as securities are offered through Registered Representatives who are appropriately registered through and associated with an actively registered broker/dealer that is a member of the NASD (National Association of Securities Dealers). Offerings are sold by a Private Placement Memorandum only, and are offered solely to pre-qualified Accredited Investors.

Recommended TIC Referral

If looking at TICs we recommend you only purchase TICs from a professional who is both real estate licensed and securities licensed. If you would like to be put in contact with a Registered Representative that has access to tenants in common’s sold as securities nationwide, please contact our office.

Disclosure

Certain real estate professionals affiliated with Westwood are dually licensed and therefore have their securities license to sell TIC properties. These professionals are Registered Representatives with MICG Investment Management LLC.  Westwood Net lease Advisors and MICG Investment Management are not affiliated in any way.

MICG Investment Management LLC Branch office at 5121 Center Street, Suite 100, Williamsburg VA  23188

To be connected to a licensed TIC representative call 866-638-1031 ex 102 (Susan Gitt)