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Defining a “TIC”

Background: Tenancy-in-Common Transactions Dr. Harold Hunt Research Economist Texas A&M Real Estate Center. Defining a “TIC”. Ownership model based on English common law Undivided fractional ownership in real property Each co-owner receives fee title and a title policy

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Defining a “TIC”

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  1. Background:Tenancy-in-Common TransactionsDr. Harold HuntResearch EconomistTexas A&M Real Estate Center

  2. Defining a “TIC” • Ownership model based on English common law • Undivided fractional ownership in real property • Each co-owner receives fee title and a title policy • Each co-owner receives proportional share of net income, tax benefits and appreciation

  3. Defining a “TIC” • Qualifies for a 1031 like-kind exchange with IRS • Purpose is to defer capital gains taxes • Qualification was clarified by IRS in Rev. Proc. 2002-22 • Lays out guidelines for an advanced ruling request • Private letter rulings vs attorney opinions • States 15 conditions for acceptable TIC structure • Primary concern is avoiding “partnership” designation

  4. TIC Advantages • Property management • Institutional-grade properties • Potential for portfolio diversification • Debt/equity flexibility for 1031 exchanges

  5. TIC Limitations • Liquidity • Exit strategy • Co-owners may not know each other • Costs and fees

  6. The Process • Asponsor acquires/arranges to acquire property • Sponsor then helps facilitate sale of TIC interests to TIC investors • Interests are sold as real estate or as a security

  7. The Process • Sale of securitized TIC Interests: • Subject to Federal & State securities laws • Subject to State real estate laws • Brokered by securities broker dealers • Represent about 90% of TIC interests being sold

  8. The Process • With a TIC structured as a security: • Sponsor or their affiliate remain as property manager • Sponsor or affiliate retainsasset mgmt. function and controls most property decisions, including: • Setting lease rates and TI expenditures • Distributing funds to TIC investors • Recommending when to sell or refinance the property

  9. The Process • Sale of real estate TIC Interests: • Not subject to Federal & State securities laws • Subject to State real estate laws • Brokered by real estate licensees • Represent about 10% of TIC interests being sold

  10. The Process • With a TIC structured as real estate: • Sponsor allows TIC investors to select an unrelated third party to be property manager • Asset mgmt. decisions voted on by TIC investors * The issue of investor control determines whether TICs are real estate or a security

  11. Security vs Real Estate • 1946 Supreme Court case: SEC v W.J. Howey & Co. • Four conditions must be met for the sale of a TIC fee title property interest to be considered a security: (1) The investment of money (2) in a common enterprise (3) where the investor is led to expect profits (4) solely from the efforts of a 3rd party (i.e. the sponsor)

  12. A Few Statistics • TIC Equity Volume (securitized TICS only): 2001: $167 million 2004: $1.8 billion 2005: $3.2 billion

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