Background: Tenancy-in-Common Transactions Dr. Harold Hunt Research Economist Texas A&M Real Estate Center

Defining a “TIC” Ownership model based on English common lawOwnership model based on English common law Undivided fractional ownership in real propertyUndivided fractional ownership in real property –Each co-owner receives fee title and a title policy –Each co-owner receives proportional share of net income, tax benefits and appreciation

Defining a “TIC” Qualifies for a 1031 like-kind exchange with IRSQualifies for a 1031 like-kind exchange with IRS –Purpose is to defer capital gains taxes Qualification was clarified by IRS in Rev. Proc Qualification was clarified by IRS in Rev. Proc –Lays out guidelines for an advanced ruling request Private letter rulings vs attorney opinionsPrivate letter rulings vs attorney opinions –States 15 conditions for acceptable TIC structure –Primary concern is avoiding “partnership” designation

TIC Advantages Property managementProperty management Institutional-grade propertiesInstitutional-grade properties Potential for portfolio diversificationPotential for portfolio diversification Debt/equity flexibility for 1031 exchangesDebt/equity flexibility for 1031 exchanges

TIC Limitations LiquidityLiquidity Exit strategyExit strategy Co-owners may not know each otherCo-owners may not know each other Costs and feesCosts and fees

The Process A sponsor acquires/arranges to acquire propertyA sponsor acquires/arranges to acquire property Sponsor then helps facilitate sale of TIC interests to TIC investorsSponsor then helps facilitate sale of TIC interests to TIC investors Interests are sold as real estate or as a securityInterests are sold as real estate or as a security

The Process Sale of securitized TIC Interests:Sale of securitized TIC Interests: –Subject to Federal & State securities laws –Subject to State real estate laws –Brokered by securities broker dealers –Represent about 90% of TIC interests being sold

The Process With a TIC structured as a security:With a TIC structured as a security: –Sponsor or their affiliate remain as property manager –Sponsor or affiliate retains asset mgmt. function and controls most property decisions, including: Setting lease rates and TI expendituresSetting lease rates and TI expenditures Distributing funds to TIC investorsDistributing funds to TIC investors Recommending when to sell or refinance the propertyRecommending when to sell or refinance the property

The Process Sale of real estate TIC Interests:Sale of real estate TIC Interests: –Not subject to Federal & State securities laws –Subject to State real estate laws –Brokered by real estate licensees –Represent about 10% of TIC interests being sold

The Process With a TIC structured as real estate:With a TIC structured as real estate: –Sponsor allows TIC investors to select an unrelated third party to be property manager –Asset mgmt. decisions voted on by TIC investors * The issue of investor control determines whether TICs are real estate or a security

Security vs Real Estate 1946 Supreme Court case: SEC v W.J. Howey & Co.1946 Supreme Court case: SEC v W.J. Howey & Co. –Four conditions must be met for the sale of a TIC fee title property interest to be considered a security: (1) The investment of money (2) in a common enterprise (3) where the investor is led to expect profits (4) solely from the efforts of a 3 rd party (i.e. the sponsor)

A Few Statistics TIC Equity Volume (securitized TICS only):TIC Equity Volume (securitized TICS only): 2001: $167 million 2004: $1.8 billion 2005: $3.2 billion