Benefits and Risks of TIC Ownership

What are the benefits of TIC ownership?

• Easy and convenient for the 1031 Exchanger to comply with IRC 1031: IRC 1031  requires 45 days to identify replacement property and 180 days to close. The 45 days is a short amount of time to locate a specific property that has the right purchase price, the correct debt ratio, and closing timetable. With a TIC property, you can specify exactly the amount of equity investment you want, and you will have a proportional ownership of the whole TIC property. The TIC property sponsor has already done most of the work that you individually would have to do to close on a specific, individual replacement property. They have purchased and closed on the property; financing is already in place; and property management is in place.

• Access to institutional grade properties: By pooling with the equity of a number of other real estate investors, a TIC property buyer is able to purchase institutional grade properties that were only available to the largest of real estate investors. These types of properties are able to attract high credit quality tenants that can ptentially provide stable and reliable income, higher percentage returns, and growth potential.

• Freedom from day-to-day headaches and time commitment of daily property management: Because of the size of these properties, professional property management is usually included as part of the 1031 TIC property offering. An exception would be a property leased to a single tenant on a NNN basis where the tenant is responsible for all of the operational up keep. Third party professional property management frees the investor from the headaches and time commitments of being a direct landlord.

• Potential income stream: As with the great majority of investments, there is no guarantee of a specific income stream.  The TIC Offering Memorandum contains historical and projected future cash flows.  Click here for the difference between a capitalization rate and a cash on cash return.

• Opportunity for diversification: Depending upon how much equity an investor has to exchange for replacement property, the investor can spread the amount over more than one TIC property for diversification purposes. For any specific TIC program, the investor must meet the minimum investments requirement, which can be as low as $100,000, but is generally in the $250,000-$500,000 range. There are choices of retail, office, industrial, hospitality, and residential apartment properties. There is also added opportunity for diversification by geographic area.

• Capital appreciation: TIC property programs generally have a 5-10 year holding period.  There is opportunity to participate in capital appreciation of the property when it is sold.
 

Risk Factors

As with any investment there are risk factors of which investors should make themselves aware.  Potential investors should be on guard against preconceived ideas and simply do their homework.  Many of the risk factors inherent in TICs are inherent to real estate in general.  We recommend that you consult your tax and/or legal professional before investing any money.  Risk factors may include but are not limited to:  
 

• Real estate interests including TIC interests are generally illiquid.
• There is risk of decline of real estate values.
• Tenants can default which can cut off cash flow to investors.
• Purchasers will be required to rely on a third party manager to operate the property purchased, and will have little control over the compensation paid to the third party manager.
• The sponsors and manager of the real estate purchase may have conflicts of interest of purchase that may adversely affect the investor.
• The prices for properties being sold in 1031/TIC programs may not be the result of arms length negotiations. 
• Use of leverage/borrowed funds can increase risk.
• There can be significant tax risks from acquiring property as replacement property in a section 1031 tax deferred exchange.
• There are substantial costs associated with a 1031 investment and can offset the benefits of an exchange.
• Changes in IRS 1031 tax code could impact future 1031/TIC exchanges.