Tenant In Common 1031

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"10 Questions & Answers, TIC Tips"

Some Tips on Tenant In Common Properties and Transactions

Right now there is a debate on whether a tic investment is considered real estate or a security. Stay tuned for more information on this SEC ruling.

1. Is your TIC sold by a Real Estate Broker or by a licensed registered representative who works for a Securities Broker Dealer?

I would be very cautious of any TIC offering by a Real Estate company or Broker. Currently Real Estate TICs have very little regulation and usually their due diligence and cash flow projections are not as accurate or complete. All of the top, well known, TIC sponsors have taken the position that a TIC is a security as well as Real Estate and certain laws and regulations apply.

2. Will you always meet the other investors of a Tenant In Common?

Get accustomed to the idea that you may never speak to or meet your TIC partners. A TIC investment can have up to 35 other investors at one time, for any given property. A group vote will take place on any material changes that need to be made in the investment. As a group you will have the final say on what is the best course of action.

3. What type of tenants do you have in the property?

When evaluating a potential piece of property, you may want to ask your registered representative these questions: Are they national corporations or local mom and pop shops? Are they credit worthy and what is the level of risk that they will default on their lease pavements?

4. If there are current tenants involved, when do their leases expire?

Again, when evaluating a potential piece of property you may want to ask the sponsor these questions: Does the current property have tenants who have a staggered lease arrangement on your property, where tenant leases are due over different times in various years or do all the leases come due at the same time? When a lease does come due, what's the likely hood of renewing? If not, is there possible replacement tenants for that unused, un-leased space?

5. Do your own due diligence on fees involved by inquiring about the total purchase price by speaking with your registered representative.

Find out exactly what the sponsor paid for the property and find out how much they are selling it to the TIC investors. Even though a TIC sponsor may get a very good deal on a property and the financing they can get is usually much better than what an individual can get on their own, an investor has to make sure that they feel comfortable with all the fees involved and the total purchase price.

6. Is there a possibility for extra cash flow or "Phantom Income"?

Is the property in position to generate extra cash flow (reserves) or "phantom income" for the possibility of defaults, or unexpected repairs? This includes tenant or lease improvements, leasing commissions, capital improvements and any unforeseen emergency. This will be income to the investors and its a non deductible expanse which means you will pay taxes on it.

7. Prior years property performance.

How has the property performed in the past few years verse what the projections are in the first year you own the property? Projections, in some cases, are not worth the paper they are printed on and even if you were misled on the projections (of a property) you would have no legal recourse due to the fact a projection is just that, a projection.

8. Is an increase in cash flow for the particular property likely in coming years?

When evaluating a potential piece of property, you may want to ask your registered representative these questions: Is the property expected to increase its cash flow in later years and what needs to take place before that would happen? Also check the financing that's in place, is the loan an interest only loan or does your principal get paid off as well and if its a combination of the two, when does it switch from one to the other.

9. Is the TIC investment part of a Master Lease agreement and who is that agreement with?

Check the history and track record of the sponsor themselves. Are they going to be the property manager or do they outsource that side of the business? What are the management fees as well?

10. How to know who is the right representative to help you.

Consult with a licensed, experience individual who knows the industry and consult with someone who is looking out for the best interest of their client. Get a second opinion from them and make sure that person is knowledgeable in the industry. Don't work with a person who handles TIC investments as a side job or on a part time basis. Ask your consultant if he/she has ever did a deal before. Make sure you consult with someone who asks you what your needs are and what's your risk tolerances. Also it would be helpful to find someone that is licensed in both Real Estate and Securities, which is very hard to do. In this type of relationship the advisor can truly give an un-biased opinion on what's in the best interest for the client.

Please contact your accountant or a 1031 exchange professional for more information.