1031 TIC's


A Tenant in Common (TIC) 1031 exchange is a purchase by an investor of an undivided fractional interest in real property to complete his exchange. The investor receives at settlement an individual deed stating his undivided percentage ownership in the property. He has the same rights as he would as a sole owner.

The TIC property the investor acquires will have a Sponsor, who has either placed the property under contract, built it or purchased it for an exchange. The first rule in purchasing a TIC property is the Sponsor should have the highest ethical standards, a long successful track record and be who you would want, if necessary, to deal with unforeseen circumstances. If the Sponsor does not have these qualities, you should look elsewhere.

Due Diligence

Extensive due diligence is conducted on these properties by the Sponsor, the lender and the securities industry. The Sponsor analyzes leases, ascertains structural soundness, assesses deferred maintenance and conducts in depth studies of market trends, demographics and tenant needs to determine whether or not the property is a desirable investment purchase. The lender in addition to its typical requirements looks for high debt coverage ratios and dictates that sufficient dollars are placed in escrow at settlement to provide for future vacancies and the resulting tenant improvements and leasing commissions. The securities industry requires TIC properties to be sold via a Private Placement Memorandum (PPM) disclosing all legal and financial information regarding the property and the transaction.

Complete the Exchange or Pay the Tax

  • A TIC Property marketed via a PPM can often be identified and closed within the 45-day identification period.
  • The investor can ensure his ability to complete the exchange by identifying a property already owned by a Sponsor as a backup.
  • As the minimum cash required for a TIC property is less because multiple owners are pooling their money, the opportunity to diversify and buy more than one property is realistic. Diversification helps minimize risk.
  • The investor can satisfy his debt and equity requirements between two or more properties.

Illustrative of this is an investor who sold a shopping center for $7,500,000 of which $5,000,000 was debt. Using the 200% Rule he purchased a TIC interest in a Class A 300,000 s.f. distribution center in Texas, in a new 265 unit apartment community in Arizona, in a 80,000 s.f. boutique office building in southern California and in a 165,000 s.f. grocery anchored community based shopping center in northern California. The investor achieved product, geographic and Sponsor diversification. He was able to close on three of the properties within his 45 day identification period and as he was using the 200% rule identify a fifth property as a back up.

Economic Benefits

  • Costs are streamlined in two ways: 1. Economies of scale - TIC properties are institutional quality and range in price from $10,000,000 to $160,000,000. 2. Before a TIC property is purchased there is a business plan and an exit strategy thus limiting multiple contingency costs.
  • Pre-arranged non-recourse loans: The duration of the loan is fine tuned to best coincide with the business plan and maximize current market interest rate options.
  • An investor can anticipate immediate monthly distributable cash flow, quarterly updates and annual reports.
  • An investor can continue to defer the tax with multiple sequential 1031 exchanges. Many TIC properties have a 3-7 year business plan.
  • Heirs receive a one time step up in basis which means if the investor becomes deceased, the deferred tax is never paid.

Review the Mechanics of a Tenant in Common Purchase.

Lifestyle Advantages

No more hassles of tenants, repairs, contractors, first of the month accounting, etc. Take a vacation! The monthly distributions can be direct deposited to your bank. Take pride in owning an institutional quality asset. Keep living! A TIC 1031 exchange is designed to protect investor capital, generate reliable monthly distributions and provide equity growth. The goal is to produce the best possible returns reflective of your risk-comfort zone.

Legal Considerations

In March 2001 the Internal Revenue Service issued Rev. Proc. 2002-22 detailing fifteen guidelines for sponsors of Tenant in Common properties to integrate into their structure so as to distinguish them from partnerships. Each PPM contains a legal opinion discussing the structure and its compliance with Rev Proc 2002-22.