TIC Investments - Posted by J Duffin

Real Estate Investing
1

Posted by JT-IN on January 02, 2007 at 16:59:44:

Brian:

Your answer has forced me to do more reading about TIC interests, than I cared to… but similar reading has forced me to learn many things, over the years… One of the benefits to me, of this forum.

While I am about a 30 minute expert on the TIC Offering, (or interest), I am inclined to believe (or guess) that the business structure that they use must be that of an S-Corp. Repeatedly I have read that these interests are limited to 35 investors or less, which is a red hearing giveaway for that of an S-Corp filing; Not more than 35 shareholders. Also, I can’t believe that the structure could be a true T-I-C investment, or else how could they protect against any party holding an interest who might create a title problem, due to lawsuits, judgment liens, tax liens, etc…? Would create a gigantic legal mess, in reality.

What seems to be the case is that they have acquired some tax loophole which affords these TIC offerings, (not to be confused with a true T-I-C ownership, in fee simple), the same status as a direct investment, therein allowing the 1031 tax code treatment of funds in and out. I also read that Congress is in the process of reviewing this loophole and it may close. (hard to say, but that is what I read).

So my thought is, and this is merely a hunch more than a firm statement, is that these TIC offerings, or interests, are merely a hybrid which is skirting along with favored tax treatment of a direct investment. These holdings are not that of a fee simple investment, but a fractional share in a company, which somehow has qualified for 1031 status; either by smoke, mirror or both…

But I could be wrong… If so, please direct me to the exact document which proves that each investor is a fee simple holder of real property… The legal nightmares would doom these in a matter of no time, if that were the case, IMO.

Just the way that I view things…

JT-IN

2

TIC Investments - Posted by J Duffin

Posted by J Duffin on December 30, 2006 at 16:36:46:

just read article on tic investing: http://www.tweedfinancial.com/files/15468/REJ1204TICroundtable.pdf

curious what everyone thinks about tics. good, bad, average?

thanks

3

WOW-Lots of Misinformation - Posted by William L. Exeter

Posted by William L. Exeter on January 15, 2007 at 11:09:23:

Hello everyone. I just read the original post and all responses, and there is lots of misinformation here. Sorry JT, but have to disagree with you quite a bit.

First, just to be clear, we do not sell TICs nor are we compensated by any TIC related offering in any manner, but we are one of the few Qualified Intermediaries (Accommodators) that are considered experts in TICs because they have exploded in terms of popularity and about 10% of our 1031 exchange clients are now buying into TIC Investments, which I would expect to increase as the “wealth transfer effect” continues and more baby boomers retire and want to get rid of the property management headaches.

TICs absolutely ARE tenant-in-common ownership interests. They are not general partnership, limited partnership interests or S corporations. References to such are completely mis-informed. These transactions must be structured pursuant to IRS Revenue Procedure 2002-22 in order to qualify for 1031 exchange treatment.

You have a sponsor or syndicator that puts the transaction together. There are upfront load fees and costs that investors need to review carefully.

The investors will each take title to a direct fee simple interest in the real property itself via a single member limited liability company, which are disregarded entities for Federal income tax purposes. This means that if you have 35 investors you will have 35 single member limited liability companies (i.e. 35 individuals) that own a direct fee simple interest in the TIC Offering.

Although they are real estate interests, the majority of the TIC Offerings are sold as security interests because of the way they are packages and distributed. There are some firms that sell them as real estate offerings (not securities).

Investors need to be careful. There are good Sponsors and not-so-good Sponsors. This is real estate, so as we all know, there is good property and deals that you should avoid. TIC investments need to be evaluated like a real estate transaction, but there are also other issues that should be reviewed in addition to your standard real estate due diligence.

There is actually an attorney in the Northern California marketplace that specializes in reviewing TIC Investment Interests for investors and not for sponsors. You can visit his website at: http://1031ticlawyer.com/index.html.

4

Misleading from word One… - Posted by JT-IN

Posted by JT-IN on December 31, 2006 at 19:55:31:

The name: TIC stands for Tenants in Common. The investment is anything but a Tenants in Common investment. It is kind of like an oximoron… This is a Limited Partnership interest and it is almost impossible for such an investment to compare with direct participation investments.

As has been identified by the others who have posted previously on the question, these are limited partner units, wherein a General Partner is front loading the deal with fees, etc. Why not…? This is how they get paid. I am not saying that this is bad, but it is NOT for the investor here on this board. These are for the guy who is ready to invest in equity or debt instruments, (stocks and bonds), and hopefully seek a 10% return on investment, average.

The TIC investment is certainly NOT creative… These investments were commonplace back in the 70’s and early 80’s, until they were basically run out of Dodge due to high front-loaded fees and expenses, that heavily favored the Gen’l Partner and management. I suspect that with the mkt going full cycle in that time frame, they are about due to come back into favor (for some).

These statements are generalizations, without specifically evaluating the exact numbers and priority of return to Limited Partners. I have never seen a dog capable of watching the hen house yet, but maybe this is the first, who knows… but I doubt it…

JT-IN

5

Re: TIC Investments - Posted by Dave T

Posted by Dave T on December 31, 2006 at 18:49:14:

TIC investments behave like REITS in that they generally have a fixed rate of return on your investment – usually in 6% - 7% range.

TIC investments are not very liquid, so they can be difficult to sell. TIC investments are better suited to long term holding, if you don’t need quick access to your money any time soon.

TIC investments are being touted as a suitable 1031 exchange replacement property for those investors who don’t want to deal with the trials and tribulations of landlording.

TIC investors usually need to be “accredited” investors, meaning that they must have a high income or high net worth to be eligible to participate. Minimum participation may be as much as $100K.

6

Re: TIC Investments - Posted by Rich Bigelow

Posted by Rich Bigelow on December 31, 2006 at 18:44:48:

I have been examining the TIC investments for a while now. Basically these are partnerships where each partner owns a share of the Real Estate asset as a “Tenants In Common”, which is where the TIC comes from. There is a general partner or syndicator who puts together the deal and then sells “shares” in the partnership. There are several advantages to this arrangements:

  1. You can get involved with larger properties than you normally could on your own,
  2. You can use a 1031 exchange to buy into these or to sell out of them,
  3. You do not manage either the properties, tenants or the books,
  4. In most cases there is a payout or return associated with the investment taking into account the management overhead and syndicator’s profit margin,
  5. They are regulated as securities so you have some protections you do not get with a regular partnership.

The down side and why you won’t find much on the TIC on this board is that the syndicator and manager eat up a portion of the profits that most people who frequent here want to put into their pockets. BUT for the investor (and investment is all about return for your money and not how its done) who finds they are not the “landlord” type or the kind of person who can do some of the things people talk about here, its a much lower risk (and the return reflects this) kind of investment.

A friend and mentor of mine who has recently sold off about 75 houses in Phoenix (by recently, I mean starting in 2004) is big on these, but they are investing in TICs where the price of admission is $1 million and up. And they are fed up with 15 years of calls on everything from plugged toilets to stove fires to tenants moving out in the middle of the night. And, of course, chasing rents.

7

Re: TIC Investments - Posted by Jack

Posted by Jack on December 31, 2006 at 11:29:03:

Few if any on this board invest or even know what TICS are. I don’t. Few if any on this board will bother to read more than 2 minutes of that article/sales pitch before they realize it has nothing to do with what they do. Why don’t you compare and contrast?

8

Re: Not a LP interest - Posted by Brian (NoCA)

Posted by Brian (NoCA) on January 02, 2007 at 16:03:27:

Technically not a limited partnership interest because you would not be able to 1031 into or out of it. But I agree with the rest of the post. If you read a TIC agreement it is esentially as limiting as a LP interest, though the language usually makes it clear in bold letters up front that it is indeed a TIC agreement. And no doubt you will waive your right to partition the property, among other things.

9

Re: Misleading from word One… - Posted by Tim_Cleveland

Posted by Tim_Cleveland on January 02, 2007 at 08:28:14:

As JT mentions these old vehicles were terribly expensive from a fee standpoint. I remember hearing some where these GP’s would contribute no cash to the deal but sell his expertise in RE management for something like 25% or more of the partnership units plus management fees.

And the “sugar” that laced the bitter medicine of all of this was the fact that there was a time when you could offset earned or active income with passive losses. Included in this was the LP unit owners allocable portion of the depreciation of the underlying real estate. So you go to your dental practice and have AGI of $180,000 from drilling teeth, you could offset this in part by the depreciation for the 150 unit appartment building that you were an LP owner of through these partnerships. This could be substantial as they would always use the most aggressive depreciation schedule they could get away with. This all went out the window with the Tax Code “simplification” of the early 80’s. Now days, passive losses only offset passive gains. And depreciation schedules were standardized at the same time. The end result, is very much like my father in laws experience. He paid $2,000 in the late 70s for soem LP units in such a partnership. The market for these units is extremely thin, and the most recent bid price for them through the avenue st hat exist was somethign south of $100. A lot of financial planners who sold these units were sued silly and soem went to jail for their practices. The E&O insurance for financial planners went throught ceiling from all of these suits.

Moral fo the story, don’t invest in ANYTHING with your primary motivation being the tax impacts. Invest because it is a good fundamental investment, and any tax benefits are gravy.

But that said, I think I remember hearing about somebody who made some good money by finding properties that he liked that were in these LPs, buying as many of these units they could at these heavily discounted prices, threatened the GP with mismanagement lawsuits until he messes his pants (because he is PERSONALLY liable for his actions) and begged him to take over as GP. At which time he would dissvole the partnersip and sell the real estate, sometimes to himself. Havent heard much of this lately though.

Best Regards,

Tim