Q. What is a tenants in common (TIC)?

A. It is the purchase of an institutional grade property, in different types and or geological locations, where the investor buys an undivided fractional interest in a property. The title and deed are held by each owner with the same bundle of rights, as if he owned the entire property. This structure allows the smaller investor the ability to purchase an interest in a significant real estate asset. The TIC owner receives passive rental income and traditional real estate tax benefits.

TIC ownership allows each owner the same rights regardless of the equity invested. This keeps each owner in direct control of the property, giving the investor the benefit and security of a large commercial asset. TIC properties attract tenants with greater financial strength than is possible for most individual landlords. The value of a TIC property typically increases yearly due to escalations inherent in most tenant leases. Capital appreciation upon the sale of a TIC property is commonly experienced as well.

Q. What types of properties are available in TIC's?

Triple Net lease properties
Office (single and multi-tenant properties)
Retail (single and multi-tenant properties)
Shopping centers
Industrial
Distribution Facilities
Multi-family housing, Apartment Complexes
Drug and Grocery Anchored Shopping Centers
Corporate Centers
Oil & Gas Drilling Ventures

Q. What is a Property Memorandum?

A. A Property Memorandum discloses all of the information about a TIC property that an investor needs to know in order to make an informed investment decision about purchasing a particular TIC property.

Q. What is a triple net lease property?

A. A triple net lease property is a property in which the owner of the property leases to a tenant and the lease responsibility for the tenant is to pay all of the ongoing operating expenses of the property. These expenses include taxes, utilities, maintenance, repairs and insurance premiums. Most net leases are long term (10-25 years) with increases for cost-of-living built into the rent. Triple net lease properties are most favorable with investors because of the credit-worthy tenants that are attracted to these types of properties.

The attraction for the quality, credit-worthy tenants to this type of property is due to the fact that most successful regional and national companies would rather lease a building for their trade or business than own it. They don't have their moneys tied up in a building and it frees them to use their capital for further business expansion.

The triple net tenants usually put their name and logo on the property and the public perception is one of ownership. Thus, the tenants have a vested interest in making sure the taxes are paid on time, the building is kept in good repair and the grounds and facilities are clean and maintained. Companies leasing buildings in this manner are beneficial for the property owner as well as giving the lessee the control they desire over the physical environment of the property.

Q. What are my risks in purchasing a TIC?

A. Each property has different risks involved and is explained thoroughly in the Property Memorandum specific to each TIC property. Those risks are:

• Potential for property value loss;
• Possible change of tax status;
• Potential for disclosure;
• Illiquidity;
• Potential reduction or elimination of monthly cash flow distributions;
• Impact of fees and expenses; and;
• The loss of management control.

Q. What is a TIC sponsor?

A. A TIC sponsor is the real estate investment company that acquires, operates and manages the commercial property that is offered for sale to accredited investors for their 1031 exchange replacement property.

Q. How is a TIC structured?

A. A TIC is a fractional interest in real estate with an undivided interest as a tenant in common. It is considered by the regulatory body,the NASD (National Association of Securities Dealers), as a security. The ownership structure on a TIC property is typically structured with a master lease, whereby the TIC sponsor leases the entire property on a triple net lease basis from the fractional owners. There is then a management agreement between the TIC owners and the TIC sponsor.

Q. How many co-owners will there be on a particular property?

A. The maximum allowable is 35 according to the IRS guidelines for TIC properties to comply with Section Code 1031 for a tax deferred exchange. Typically TIC properties have 10 to 20 owners and investments range from $250,000 to $750,000. Investors put in different dollar amounts into TIC's, because their relinquished properties differ in dollar values. Therefore, the exact number is not determinable until all investors have requested their share of the TIC property that is being offered.

Q. How is my share of the rent allocated to me?

A. Each TIC sponsor acts as the manager of the property and receives rent from the tenant. They then deduct the appropriate reserves, pay approved expenses and then forward each owner's pro-rata share of the rent by check or wire transfer. This will be done on a monthly or quarterly basis according to each individual TIC sponsor agreement.

Q. Who handles the day-to-day problems of managing the property?

A. Each TIC sponsor has a management agreement with the owners. The TIC sponsor then acts as manager of the property and handles all of the management duties on the property.

Q. How are capital expenses/improvements handled?

A. Each TIC sponsor has their own way in dealing with capital expenditures when they become necessary. These terms are spelled out in detail in each of Property Memorandum. But for the most part, it is a similar process with each company. The process is typically as follows:

1. The TIC manager will review and evaluate the situation.
2. He will then get bids and proposals from qualified service providers.
3. A meeting will be held for the co-owners and they will vote on what is deemed most appropriate for the situation.
4. The vote will be cast by the majority of the co-owners.
5. Monies in the reserve account will be used for capital expenditures.

Q. Can the TIC property be sold without my consent?

A. No. According to the IRS guidelines and property memorandum, the entire property must be sold by a unanimous vote of all the co-owners of the TIC property.

Q. What should I do if I need to liquidate my TIC interest in the property before the property is sold?

A. Investors in TIC's should look at their investments as long-term holdings. Most TIC properties are held for a three to ten year period and have specific business plans. However, if you need to dispose of your TIC property before the agreed upon sale date with fellow TIC owners, there are several options available. Individual TIC sponsors have their own guidelines and strategies for internal liquidation of a property, but for the most part it is a similar process with each company. The process is as follows:

1. Sell or offer his TIC interest to the other owners first. Very often fellow co-owners of the property are interested in acquiring additional interests and can serve as a ready market.
2. If none of the other TIC co-owners are interested, he may then offer his interest to outsiders. The TIC property can be offered to other vendors or qualified intermediaries whose clients need quality replacement property.
3. Many of the TIC sponsors will make every effort to purchase your interest in cases of extreme hardship.

The investor, a Co-Owner in a TIC property may, subject to applicable securities laws and the terms of the Co-Ownership Agreement, the Loan Agreement and the Lease.

Q. If I die, who owns my portion of the TIC property?

A. If you have written a will, all of your property passes in accordance to your Last Will and Testament. If you die without a Will (Stepped Up Basis), the distribution of your property is determined by state law.

Q. Do I receive anything at year-end to assist me in my tax preparation?

A. A statement of income and expenses on the TIC property will be given to each co-owner at year-end. This will assist the owner in completing IRS Schedule E. Each owner will need to calculate his or her own depreciation deduction.

Q. Will my taxable income from the property be considered passive income source?

A. Yes. It can also be offset by an investor's other passive losses.

Q. What is the minimum purchase?

A. The investment required by the TIC companies typically averages $250,000 to $700,000. In some cases TIC sponsors will allow a $50,000 to $100,000 minimum. This small minimum investment may be available once the TIC "pie" has been cut. Once the "pie" is cut, because of some investors putting in more money than the required minimum, there may be some openings for smaller dollar amounts.

Q. How long is the closing process for my purchase of a TIC interest?

A. Once a TIC property has been determined, it generally takes approximately 30 to 60 days to close on a property.

Q. Can I add cash to meet the minimum investment required in some of the TIC companies? What does that do to my basis?

A. Yes you can add cash to meet the minimum investment requirement. For example if the minimum investment required on a TIC property of your choice was $450,000 and the money coming out of your relinquished property was only $350,000, you would be able to add $100,000 of your own money to meet the $450,000 requirement. If the TIC property you are interested in receives larger purchases by others, the minimum purchase may be reduced. The addition of cash to your equity increases your basis and is a way for you to meet the minimum purchase price.

Q. Will there be debt on the property?

A. Yes, in most cases. Many real estate investors' previous properties were encumbered by debt and therefore for income tax purposes, replacement properties must have equal or greater debt in order to qualify for a 1031 tax-deferred exchange. In a TIC interest, each co-owner is treated, for tax purposes, as having assumed a portion of the liability for the TIC property. This is non-recourse debt based on his or her pro rata share of the TIC interest in the Property.

Q. With my investment, what liability do I have?

A. Since the debt on the pro rata share of the TIC interest in the property is non-recourse, the lender can only look to the co-owner's interest in the property for payment of the debt and not to the individual owners. Each TIC sponsor has their own guidelines agreements relating to carve-outs and co-owner Indemnity Agreements.

Q. Am I responsible for any out-of-pocket costs associated with the purchase of the TIC interest?

A. Yes. There are some fees and they vary with each individual TIC sponsor. They are typically fees for the lender who is looking to qualify a prospective purchaser and/or fees to establish the LLC or TIC agreement. The costs can normally be funded from the 1031 exchange escrow held by your qualified intermediary.

Q. How do prospective owners find a qualified intermediary?

A. Click here to find a qualified intermediary.

Q. Can owners keep some of the proceeds from their relinquished property sale or does it all have to be reinvested?

A. If you choose to keep some of the proceeds, you will generally be taxed on what you keep. The cash retained is known as "boot" in a 1031 exchange. Each individual owner should consult with their CPA or tax attorney as to what taxation rate will apply, a capital gains rate or an ordinary income rate.

Q. What is Revenue Procedure (Rev Proc) 2002-22?

A. The Section 1031 code lists specific properties that are excluded from favorable treatment as a tax deferred exchange, including stocks, bonds, notes and interests in a partnership. For purposes of a real estate exchange, real property must be exchanged for real property. If real property is exchanged for a partnership interest, tax deferral on the 1031 exchange replacement property will not be allowed and the investor will be liable to pay the capital gains tax. Until early 2002, a distinction between a tenancy-in-common interest in real estate, and a partnership interest in real estate, had not been clear. On March 19, 2002, the IRS issued Revenue Procedure 2002-22 to clarify this tax issue. Rev Proc 2002-22, while not a safe harbor, specifies the conditions under which the IRS may consider the purchase of a TIC interest an investment in real estate.

There are 15 requirements that may qualify a particular arrangement as a tenancy in common in real estate, rather than a security or partnership interest. Upon proper request, if a TIC sponsor can meet all of the requirements, the government will agree to issue a Private Letter Ruling. In the Private Letter Ruling, the government will state their position on the exchange of undivided fractional interests, or tenancy in common interests, in real estate for other real property interests.

The 15 guidelines are not intended to be exclusive and an application may still be considered that does not meet all the requirements set out by the Procedure for ruling. For any particular TIC property, the TIC sponsor may either apply for a ruling from the government (IRS), or they may rely upon opinions issued by law firms and accounting firms based upon analysis of existing law.

The guidelines set forth in the revenue procedure are not intended to be substantive rules and are not to be used for audit purposes. Interested exchangers should have their legal and tax advisors evaluate each TIC program and Revenue Procedure 2002-22.

Click here to view the full text of the Revenue Procedure. You need Adobe® Acrobat® Reader® to view this file. If you do not have this program, click the icon below to download.

Q.      Why should I consider a fractionalized interest in a TIC property?

A. Fractionalized interest in a Tenancy in Common (TIC) property can be a good option, since it allows the small to mid-size investor the opportunity to participate in the ownership of commercial-grade assets, normally much too large for him/her. A TIC investment offers the effects of a "triple-net" lease (passivity and security), while (often) allowing a better chance to achieve higher overall returns than smaller, less significant properties. In commercial property investment, bigger usually is better.

Q.      How long will the TIC property be held before it is sold?

A. The holding period will vary by the individual property. Each property investment has a life expectancy that will vary according to the market, investor appetite, leasing activity, available financing terms, etc. The Sponsors will, when compelled, recommend the sale of the asset. All individual fractionalized TIC investors will then have to unanimously agree to the recommended sale. Safe Harbor has made predictions as to holding periods for each TIC investment, but cannot set the sale parameters without unanimous consensus

Q. How much due diligence goes into each property?
A. By the time a TIC investment opportunity reaches you, it has been though multiple levels of due diligence. First, out of the 50-60 national real estate providers that specialize in TIC programs, DWB has selected only the providers with the most experience, best track records, and most highly-qualified management. Second, each aforementioned real estate provider has an acquisitions team that thoroughly underwrites each transaction. These providers have many properties to choose from for each that is purchased, so there is a great deal of choice and opportunity to select the best possible opportunity for the buyer. Third, the lender financing the purchase of the TIC conducts a separate underwriting of both the property and the real estate provider involved before granting its loan approval. Fourth, DWB conducts a thorough due diligence process for each investment property. DWB comes to its own conclusions about the strongest investment opportunities available among its approved real estate providers, and will help you choose the best property to suit your needs.

Q. What type of returns can I expect?
A. Owners receive current monthly cash flow, generally starting at 7-8% per annum, increasing annually. In addition, because exchangers take on a new depreciation schedule, cash distributions are 50-100% tax sheltered. When factoring in appreciation and principal reduction, total annual projected returns generally range from 14-18%.

Q. What is the minimum investment?
A. Minimum investments are determined by the total amount of equity being raised for an investment and the number of investors the lender allows. Minimum investments start as low as $100,000 and can reach as high as $1,700,000. Typically, however, TIC minimum investments tend to range from $250,000 to $700,000.