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What Do TIC Sponsors Do?
A Tenants In Common (TIC) Sponsor is an individual or entity that locates a property to buy "wholesale", packages it, and sells it to multiple investors at a "retail" price. The multiple investors hold title as “Tenants in Common”. The difference between the wholesale and retail price is what the Sponsor is paid for their services. Typically this is between 5% to 7% percent of the total value of the investment.
Holding title as Tenants In Common is a vehicle for co ownership of property where each owner has an undivided fractional interest. The passing of Revenue Procedure Code 2002-22 (providing guidelines by which a TIC interest in a property will qualify as "like kind" for a 1031 exchange) has sparked a proliferation of Tenants in Common (TIC) Sponsors. TICs have become a popular way for investors to purchase investment grade real estate for relatively modest minimum investments, or diversify their real estate holdings.
A TIC Sponsor uses their expertise and experience to identify properties that generate competitive cash returns and appreciation. Once a property is identified, a Sponsor performs all due diligence, negotiates the acquisition, provides all cash deposits, negotiates a loan (if leverage is part of the plan), pays all costs of holding the property and locates qualified investors to purchase TIC interests.
Successful Sponsors have well qualified acquisition teams that actively seek suitable properties. These teams do in-depth analysis of hundreds of properties to find appropriate acquisition candidates. The due diligence that the Sponsor performs before acquisition is critical to success, as it is later shared with potential purchasers.
The due diligence package should provide all available information on the property including quality of the tenant (are they national credit tenants, regional tenants or local businesses), rent rolls showing terms of leases and any increase or “bumps”, demographics (statistics related to where the property is located), past and projected profit-and-loss statements and appreciation projections.
The investor should pay close attention to debt structure (interest only or fully amortized, when due, etc.) and how debt terms correspond to the terms of leases and rent increases. Property reserves need to be scrutinized as they relate to the terms (are there adequate reserves to re-tenant the building without disrupting cash flows), type of leases (who pays for maintenance and capital expenditures etc.) and for adequacy of funds relative to the age and type/condition of building.
A TIC Agreement, written by the Sponsor and signed with each investor, specifies how the asset will be managed and documents how future property decisions will be made, i.e. how and when it will be sold. The TIC Sponsor generally arranges for property management and details this arrangement in the TIC Agreement.
If the tax deferral benefits of a 1031 Exchange are a priority, the property must be 1031 compliant. Investors should seek confirmation from the TIC Sponsor; the TIC Sponsor’s legal council and their own accountant and/or real estate attorney that the property qualifies for 1031 exchange as spelled out in Revenue Procedural Code 2002-22.
When packaging a TIC property, there are generally two ways a Sponsor will structure the sale. The most common way is to put the property in escrow (under contract) and invite TIC investors to purchase an interest in the property Once the target equity amount is raised, the sale is closed and a separate deed for an undivided fractional interest in the property is provided to each investor . 1031 Exchanges are extremely time-sensitive; when the purchase is structured in this manner it is imperative that the Sponsor have the financial strength to close on the property even if the required amount of equity from investors is not raised in time.
The other method used is for the TIC Sponsor to purchase the property with their own funds and sell undivided fractional interests post closing. This method is safer for 1031 investors as there is no danger of the transaction not closing within the Exchanger's required time frame.
The most important component of risk evaluation in any real estate investment is the integrity of the real estate itself. When evaluating a TIC investment the credibility of the Sponsor is an additional part of the risk evaluation. The Sponsor’s background and performance history in past projects should be carefully reviewed and discussed with the individual Sponsor.
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