Tenants in Common or TIC, real estate investments, refer to the legal agreement between people who hold a certain percentage share of real estate property. The percentage reserved by each tenant is mentioned explicitly in the Tenancy-in-Common Agreement and is generally proportionate to the size of each tenant’s contribution. The ownership in the case of TIC real estate property is in the whole property rather than in parts such as apartments or land units. Also, the critical highlight to notice is that the TIC structure is generally used for residential or commercial real estate investments.
In cases where the co-tenant dies, the ownership of deceased TIC investor will pass to heirs of that investor, although for that to happen, it is essential for every tenant (of one property) to mention the names of the nominee in the TIC real estate investment agreement right in the initial stage. All TIC investors are obliged to share the costs and revenues of the property. Experts say that a correctly formed TIC real estate investment is capable of participating in a tax-free 1031 exchange for another real estate property.
History is evident that TIC investment has been a popular means of passive investment; however, over time, some issues appeared that pushed a lot of the luster from TIC investing:
- The common consent of all holders/investors/tenants is obligated to make decisions about the property; the cases include selling, leasing, refinancing, etc. In TIC Investments, where members are up to 35, it becomes difficult to execute the voting process.
- Every TIC investor has the right to force the distribution of the property. This means that the co-tenant can take ownership of a specially designated share of the property. The investor can go through the legal way to have the property sold to proceed with the distribution eventually. Some TIC investment agreements attempt to remove this right from the investors by having each investor waive it, but the statutory enforceability of the waiver is open to question.
- Many investors’ complaints have focused on the lack of pre-sale due diligence by the property sponsor/brokerage, as well as their failure to watch the progress at the property. Lawsuits have encountered some problems such as cursory background checks, poor review of financial statements, and void appraisals
- A wrong formed TIC real estate investment agreement may lead the IRS to re-make the arrangement, which would result in invalidating access to Section 1031 tax-free exchanges.
- If a TIC co-tenant (by any reason) declares bankruptcy, the value of the remaining TIC investments declines, because, it is understood by law that the bankrupt TIC investor would no longer be able to make fair share payments of expenses which included taxes, mortgages, maintenance, etc.)
- The number of co-investors is limited to a maximum of 35 members
During the 1990s, tax-deferred 1031 exchanges surfaced as an outstanding new real estate industry. People who supported this option would approach and pool funds from investors to acquire real estate. An investor employing in the pool could group their investments and build replacement property more efficiently to ensure that they continue to gain capital tax deferment status.
The Risks of Tenant-in-Common Real Estate Investments
There is a variety of risks linked with TIC real estate investments that a broker/sponsor must reveal to every investor. According to the law, a sponsor or a broker owes an investor the highest level of security care when advising them about financial decisions and the risks inter-linked with possible investment circumstances. As a fiduciary, the sponsor/broker must make decisions that are in the best interest of the client, and that would meet their efficient investment goals. Some of the possibilities that a sponsor/ broker should disclose insights like, TIC real estate investments might be overpriced and sold for far more than a real market rate of a property.
Also, If the property value drops down (for any reason), the investors or tenant might get trouble refinancing it in some other way. Some agents who attempt TIC real estate investments are usually seen charging excessive fees; this further results in an increase in the costs and expenses of security, which is (of course) higher than what the tax would be if the investor/tenant just paid the tax. A broker/sponsor should also ensure a growing relationship between their client and other investors in the TIC real estate investment.
Expert’s suggestion for choosing a Right Sponsor
Experts suggest that an investor should always select a registered investment representative or agent who has specialization in TIC real estate investments before they wish to sell the investment property. Also, Investors should carefully review all the options around property replacement. Sponsors should have a fair/honest track record with a robust business infrastructure. Talk to a TIC 1031 exchange advisor to safeguard your investment against losses.
For shared ownership, invest in Delaware Statutory Trust.
DSTs or Delaware Statutory Trusts is an individual trust that operates, owns, sells, and manages income-producing properties. DSTs have large investment properties in their portfolio that let you invest. So you can invest in significantly bigger and better properties. You can find a DST with up to a hundred investors or even more hundred.
By investing in a DST, you can get ownership in multiple real estates. Investors often invest their 1031 proceeds in a DST to eliminate boot as DSTs qualify for 1031 exchanges. Being a DST beneficiary, you receive monthly income and appreciation. We recommend before investing in a DST, speak to DST investment professionals. Talking to an expert can help in getting rid of potential financial risks.