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Tenants-In-Common Ownership and Evaluating Risk
Investors’ primary attraction to TICs is a desire to eliminate management responsibilities but frequently the potential lack of control and liquidity causes them to shy away. These same investors have built their wealth by managing properties themselves (e.g. apartment buildings and strip malls) and are accustomed to maintaining control and the ability to make unilateral decisions. Lack of control and liquidity is perceived as added risk.
As with everything in life there are trade offs. With Tenants in Common the investor is trading one hundred percent control for properties they don’t need to manage themselves. According to the IRS Rev Proc 2002-22 Tenants in Common owners must be able to sell their interest at anytime. While an investor can sell their interest at any time the liquidity of Tenants in Common interest will vary property to property because of the fees associated with the sale of their interest.
The most common fees that makes it undesirable to sell a Tenants in Common interest are associated with transferring the fractional interest in the debt on the Tenants in Common property. This fees will vary and investors would be wise to find out what fees are involved in selling their interest before investing.
As with any real estate investment the quality of the property needs to be considered carefully before making an investment. This is done by looking at the underlying real estate to evaluate the risk of TIC investment. For example, the investor must assess: the quality (credit) of the tenant(s), the terms and length of the leases, the location and age of the improvements and the growth potential for the area the property is located in.
After evaluating the quality of the real estate involved in the proposed investment the tenant in common investor should consider what would happened if the TIC sponsor goes away and whether or not their investment and cash flow will be negatively impacted.
The answer the investor should be looking for is that nothing materially would happen to their investment. If the answer is that their investment would be materially effected by the sponsor going away the investor needs to ask what are they really investing in and are they being paid for that risk. If the return is high enough it still might be a good investment but the investor should be very careful to fully understand the risk they are taking.
To insure suitability, it is imperative that an investor consult with its own tax and legal consultants when evaluating any major investment.