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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 divsification 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 thier 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 leassee 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.
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