Professional real estate companies soon learned the value a TIC can offer to investors. Approximately 7 companies (also referred to as "sponsors") offered this alternative of TICs to investors from 1997-2000.
Through the industry's explosive growth in the past 3-4 years, 60+ sponsors now offer TICs. The amount of TIC business has doubled each year for the past 4 years. With such growth, also come challenges.
When is a TIC right for you? Although, there are many benefits for co-ownership in a Tenant-In-Common, there are also some items we'd like to address that may not be considered on a frequent enough basis:

1. Co-ownership Provisions - By the rules set forth in most TIC agreements, majority or unanimous voting by co-owners will decide major financial decisions such as re-financing, obtaining additional financing or selling the property. Some co-owners may wish to hold a property that’s producing solid cash flow, while some may want to exit and take the gains while a particular market is hot. This can potentially create conflicts.

2. Il-liquidity - By their very nature, TICs are il-liquid investments. Because a secondary market does not yet exist for TICs, buying the property right is extremely critical. Defined exit strategies are seldom seen in this industry, and sometimes for good reason. Predicting future market patterns are difficult and even impossible at times. Even though they’ve recently sold faster, seven to ten years are typical projected hold periods in TICs.

3. Passive Management – Albeit a passive management role is a benefit to most investors, the property's ability to perform on a daily basis is now the responsibility of the management company. Without proper management, an excellent property can become a poor producer in a matter of months. Some sponsors manage the properties themselves, some use 3rd party management companies. Some TIC sponsors retain interests as a co-owner themselves aligning their desires for the property to perform well with that of the investors. We personally encourage this type of alignment with the investors so that everyone has a vested interest.

4. Syndication Markups – Typical costs are inherent regardless of the real estate transaction (i.e. closing costs, lender & legal fees, etc.). However, additional "loads" are applied to TIC offerings for the sponsors and selling groups. Understanding these loads and how they affect the investment in certain markets, economical conditions, and asset classes is critical in understanding a "break even" point at which the load is overcome through income and appreciation. This analysis of net-to-net comparisons will become more important as the industry evolves.

When is a §1031 exchange right for you?

Investor Basis – Before selling a piece of investment real estate, an investor should consult his or her tax advisor to determine their original basis and depreciation taken. If the overall capital gain is minor, it may be more beneficial to take the cash from the sale rather than hiring a Qualified Intermediary and going through the exchange process.

Future Needs – Although there are a few options for exiting from a TIC investment, it is still considered il-liquid. If an investor has any indication they will need money sometime in the future from the proceeds of a property sale; steer clear of placing all exchange funds into TICs. We'd offer an alternative such as Oil & Gas Royalties; that fully qualify for a §1031 exchange, have liquidity features and an established secondary market.

Greed – The idea of sheltering gains is so attractive that some people jump into their next deal too quickly. Many would rather give to charity than give a substantial chunk to Uncle Sam. We fear too many people are ending up with poor properties because they rushed into a trade-up. A significant level of due diligence needs to be done before making this type of financial decision.