1031 Tenants in Common Options

This is a good article re: the benefits of new the tenants in common 1031 options (see Link to 1031 overview for more).  Based on our research, the general points are correct.  However, be a somewhat skeptical reader in that Omni brokerage is a syndicator whose primary business is TIC products.

If you do find yourself more interested in 1031 TICs, we've put together a list of questions to ask 1031 TIC Syndicators. We've seen a real mixed bag out there and it pays to do your homework:  Choosing the right 1031 firm (link)

TIC 1031 Exchange Properties – The High Yield Solution

February 7, 2005

A popular choice among real estate investors seeking a 1031 replacement

property is Tenant-in-Common (TIC) ownership, or fractional interest. As a TIC owner, you have an undivided fractional interest in an entire property and share in your portion of the net income, tax shelters, and appreciation.

(PRWEB) February 7, 2005 -- While many savvy investment property owners recognize this as an opportune time to dispose of their property, they are also discouraged to find that it is an unpleasant market to locate a

suitable exchange property.

Each TIC owner receives a separate property deed and title insurance for

their portion in the property investment. This gives you the same rights of

ownership that a single owner would enjoy. Because TIC offerings are often “packaged” with management and financing in place, TICs simplify the 1031 process for the passive real estate investor.

TIC investments provide simplicity by eliminating active management

headaches. Individuals who are ready to relinquish the day-to-day burdens of being a landlord, or who own land and would like an income-producing property, will benefit from TIC investments. TIC programs provide a "mailbox management" investment that can save you time and money.

Furthermore, TIC ownership allows you the ability to diversify your 1031 exchange into more than one property, and to own potentially larger,

institutional-quality properties.

Cash flow is generally paid monthly and is tax-sheltered via depreciation

pass-through and interest deductions (in many cases a portion of your net

income is tax sheltered.) You may also experience appreciation over the time that you hold your property.

According to OMNI Brokerage, the average cash-on-cash return of TIC

interests was 7.0%-7.5% in the previous quarter. Compare this with Single Tenant Net Leased Properties such as a Walgreens that are currently selling for an average cap rate of 6.50% (according to Loopnet for a new 25 year lease with no increases). Assuming an interest rate of 6.3% fixed (180 basis points over the 10 year U.S. Treasury which was 4.50% at the time of this writing) and a 25 year amortization period, annual debt payments equate to 7.92% of the amount borrowed. Assuming 40% down, an investor’s cash on cash return is a measly 4.37%.

Based on the aforementioned scenarios, the TIC Investment yields 60-72% more cash flow than the investment in the Net Leased Walgreen’s Property. However, investors should take note that TIC investments may pose additional risk depending on additional factors such as lease length and the individual tenant’s credit rating.

With all of the added benefits of TICs, including the elimination of management headaches, diversification, and monthly cash flow, it is easy to understand why the TIC market is attracting so much attention.

The Q1 2005 Edition of OMNI News offers a glimpse of where this market is heading: the securitized TIC marketplace has grown from placing close to $167 million TIC equity in 2001 to placing $1.73 billion in 2004, and it is estimated that over $4.27 billion TIC dollars will be placed this year. This is why seasoned investors, “baby boomers” seeking to build extra retirement income, and others are turning to TICs to meet their 1031 exchange requirements. Further details on the industry are available at www.1031street.com.

About the author - Brian W. Topley, CCIM holds a securities license and

offers TIC replacement properties through OMNI Brokerage, Inc. and is a real estate investment advisor with Arroyo & Coates, Inc.

Comments

[David L. Rumsey]

You may be interested to note Utah State Senate bill, S.B. 64, which was recently passed regarding the sale of TIC property which is NOT registered with the SEC, but rather is to be sold as real estate by real estate brokers.