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Tenants in Common: Real Estate or Security?

Owning investment real estate as a Tenant In Common provides investors with several advantages of which diversification and a lack of management responsibilities are primary. The two most common disadvantages involve the questions of liquidity and control.

TICs are not for everyone but can play an important role for investors who are fully informed of the trade offs of TIC ownership.

Even though all TIC investments are, at bottom, real estate some are structured and sold as securities while others are sold as real estate. A security is defined as “an investment of money in a common enterprise with the expectation of profit based solely on the efforts of others.” Some TICs meet this definition without question, but most are simply real estate investments with more than one owner.

Security or not, TICs are arranged by a Sponsor. The TIC Sponsor is primarily responsible for:

    * Locating an attractive investment
    * Negotiating the purchase of the property if they don’t already own it.
    * Performing comprehensive due diligence on the property and its tenants.
    * Negotiating the terms and conditions for any debt on the property
    * Managing and completing the TIC investor process
    * Deciding if the investment will be sold as a security or as real estate.

Whether a TIC is sold as a security or as real estate is decided by the Sponsor after consulting with their attorneys. While TIC securities tend to have higher fees associated with them some Sponsors choose to market their properties as a security because they feel that they, the Sponsor, are better protected from liability if the property goes bad. The sponsor can also take advantage of a well organized marketing channel of licensed security dealers to find investors for their properties.

There are some TICs that clearly have to be sold as a security. This is because the financial success of the investment is not only dependent on the performance of the real estate but a third party that the investor has little or no control over. These investments tend to be at the higher end of the risk spectrum. Investors need to be careful to fully understand the risk they are taking both for the real estate they are investing in and the likelihood of success of the third party.

As with all investments the real question is what the likelihood of success is, does the investor fully understand the risk they are taking, are they being properly compensated for the risk they are taking and is the level of risk appropriate for their personal circumstances.

There are several ways to achieve the goal of satisfying a 1031 exchange, building a portfolio of properties that require little or no management and to minimize investment risk. As with all investments TICs have both positive and negatives when compared with other investment and at the very least should be considered when reviewing possible investment alternatives.

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TM 1031 Exchange writes articles that are published in newspapers throughout the United States.
If you would like to receive a free copy of the article please click here.

Copyright © 2008, TM 1031 Exchange.Inc.
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TM 1031 Exchange Inc. does not provide legal or tax advice. Investors should conduct their own independent investigations and rely only on those results.
Before making any investment decision consult with appropriate professionals.