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    TIC Advantages  

TOP 10 Advantages of TIC Ownership versus Sole Ownership

In a TIC, investors pool their money to allow the group to buy high quality properties that are typically available only to institutional investors with loads of cash and great buying power. The advantage is that a small investor can now participate in a project that would otherwise be out of his economic reach. A TIC allows a small investor to magnify his purchasing power.  Rather than putting $500,000 down on a small franchised restaurant worth $1,500,000 for example, an investor can purchase a $500,000 ratable portion of a $25,000,000 office complex in a downtown metropolitan area.

Revenue Procedure 2002-22 issued by the IRS allows up to 35 TIC owners in any one property. Minimum purchase requirements are structured to meet this limitation and can be as low as $150,000 equity.

TICs are put together by a team of replica watches uk real estate professionals called a “Sponsor.”  The Sponsor is the key to making the program work because they perform tasks and make decisions that the ordinary real estate investor finds difficult and time consuming.  The Sponsor, to be competitive with other Sponsors, must: 

  1. Find the right property in the right area.
  2. Negotiate to buy it at the right price.
  3. Arrange the financing.
  4. Gather the investment group.
  5. Arrange all the appropriate paperwork to allow the group to work at its most efficient.  This includes the formation of an LLC for each investor to hold title to the TIC.
  6. Arrange for professional management to continue to operate the asset.

Finding the right Sponsor who can maximize the returns for his client/investment group, as well as provide safe and effective management for the group’s asset is critical to the success of any TIC.  Sponsors have access to a much broader range of information about what constitutes a “right location” or a “right price” or the “right terms in financing.” Most Sponsors want to keep their “investors” happy because they are building a portfolio of individuals who are happy with their returns.  To keep investors happy they must find properties that are competitive and provide returns that are stable yet worthwhile.

On the other hand, a sole owner has total control over his property.  But he also carries with it a heavy burden of accomplishing all these critical tasks by himself. While the sole investor can hire people to accomplish these tasks for him (attorneys to review the purchase contract, lease, loan, entity formulation, etc.—accountants to review the tax consequences of the transaction—brokers to find the right property at the right price) coordinating all these events and paying for all these services even if the investment does not pan out can be problematic. In addition, if the investor is in a 1031 exchange, he must accomplish most of these tasks within a very short time period or lose the ability to defer his capital gain.

TIC owners receive monthly rental payments from the management group who collects the rents, pays all the bills, sets aside appropriate amounts for capital improvements and makes all payments to the lender.

While this may appear to be the same with a single-tenant triple net lease property, it can be quite different, because the stability of the cash flow is entirely dependent upon the reliability of the decision to entrust the property to a particular tenant.  Responsibility for a difficult tenant (slow pay, bad business sense, bankruptcy, other creditors, etc.) is the sole responsibility of the investor/owner.  A triple net lease is only as good as the person who signs it and the business that supports it. Often those “true colors” are not apparent on the surface, and if the tenant fails, the owner must still pay the bank for the loan on the property.

TIC Sponsors have the knowledge and experience to find good tenants, negotiate good lease terms, and handle problems as they arise. All receipts and expenditures are accounted for on quarterly reports sent to each TIC owner.

TIC owners share ratably in any increase in equity when the property is sold. The equity would increase as a result of debt reduction or market appreciation.  Since most of the properties have built in escalator clauses in the leases, rents will gradually increase thereby causing the value of the property to increase. However, with a larger asset percentage increases in value generally mean larger dollars to the investor.

TIC Sponsors deal with many properties and have great leverage in dealing with lenders. This generally means a better rate and better terms.  Though all investors will sign a note to the lender, the lender cannot look to the personal assets of the investor for recourse in paying off the note. The lender’s sole recourse is against the property itself. This is called Non-Recourse Financing.

On the other hand, individual investors, who do not have large portfolios and do not deal with lenders on a regular basis, will find lenders unwilling to negotiate favorable rates.  In fact, lenders will often require small individual investors to sign personal guarantees that allow lenders to reach beyond the property itself and into the pocket book of the individual investor.

All owners share in the depreciation benefits that the properties afford on an individual basis.  Because an individual’s tax basis carries over to the new property in an exchange, each owner’s tax benefit will be different. Many owners find that between 20% and 40% of their income is sheltered as a result of this deduction.

TIC properties allow for greater flexibility in locating a replacement property. Often with sole ownership, the down payment requirements do not quite match up with the amount available in the accommodator’s account.  At times this can result in unwanted taxable boot to the owner. TIC’s generally have minimums but no maximums for the amount of investment.  This allows for all of the available funds in the accommodator’s account to be used effectively.

The due diligence process of purchasing replacement property can be time consuming, confusing and expensive.  For example, what if an investor identifies a single tenant triple net property. Then, after his identification period expires, the investor finds that the tenant is not as strong as he thought financially, or the tenant is not willing to personally guarantee the lease, or the franchise agreement with the tenant is about to expire, or the long-term lease he will assume has numerous loopholes that allow the tenant to get out of the lease.  The investor can be placed in a difficult situation having lost his leverage to deal with the Seller of the triple net property.

TICs eliminate these uncertainties.  By the time a TIC property becomes available for investment, all lease, title, financing and other issues have been resolved.  As a minimum, it would probably be wise to include a TIC property as an identified property. It can be your primary choice or a backup in case some other preferred replacement property acquisition cannot be completed.

The low minimum investment for TIC ownership makes it easy to purchase two or more replacement properties so the investor can easily diversify property type, property location, tenants, industries, etc.  Sole ownership properties on the other hand as previously mentioned usually require a larger minimum cash injection.  This usually causes investors to put all their eggs in one basket, so to speak, which in most cases increases risk especially when dealing with a single tenant triple net lease property. 

With TIC properties the costs associated with the purchase of an investment property such as due diligence research, attorneys fees, brokerage commissions and loan fees are paid upfront by the sponsor and factored into the investment package equity requirement.  This means that the investor does not have to come up with these costs out of pocket as they would when purchasing a sole ownership property.  This allows the investor to use all monies to go toward the investment which will produce a return rather than eating up that money in upfront costs. 

However, not all upfront costs of TICs are alike.  Fees and commissions will vary from project to project and from Sponsor to Sponsor.  The investor must review the material information on each package to insure that the upfront costs do not eat up a lot of the equity in the project.  That is where Connect Investments can make a difference.  We help the investor by prescreening packages and properties so that the investment decision is can be made with the best information available.

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