1031 Exchange and Tenancy-in-Common: Seeking the Right
Advisor to Achieve TIC Investment Objectives
by Cary Losson
Published on this site: November 30th, 2005 - See
more articles from this month
A long-established section in the federal tax code, section
1031, allows real estate investors to sell property that has
been held for investment purposes and defer capital gains
and depreciation recapture taxes if they acquire "like-kind"
exchange property of equal or greater value and reinvest all
of their equity. Since the mid-1990s, many investors have experienced the benefit
of reinvesting their equity into investment property interests
structured as Tenancy-in-Common (TIC). TIC owners hold an
undivided fractional ownership interest in investment property
evidenced by a deed of trust.
TIC, also known as Co-ownership of Real Estate (CORE), enables
an investor to participate in the ownership of institutional-grade,
professionally managed investment properties. The investor's
equity can be diversified amongst several different properties, geographic markets and real estate companies,
potentially increasing both the value and safety of the real
estate investment. TIC/CORE investments are designed to offer
preservation of capital, predictable cash flow and long-term
appreciation in institutional-quality investment property
assets that benefit from greater economies of scale.
With its features and benefits, TIC/CORE is an increasingly
popular 1031 exchange option for many real estate investors.
However, 1031 exchanges and TIC/CORE transactions are very
complicated, with both tax and legal issues topping the list
of potential pitfalls. It is therefore essential that investors
be knowledgeable about what to look for in a quality advisor.
Financial advisors are required by securities law to be properly
licensed in order to consult clients regarding TIC/CORE transactions
and other investment interests in real estate. Financial advisors should hold both Series 7 and Series 63
securities licenses to qualify them as knowledgeable, well-rounded
consultants in the investment process. It is essential that
they have experience in the commercial real estate business,
in addition to an understanding of personal investment objectives
and client suitability issues.
But perhaps the most important component to look for in a
TIC financial advisor is their intimate, trusted and deeply
rooted relationships with key real estate companies. This
attribute is critical to their ability to provide the best
opportunities for their clients. There are almost 80 real
estate companies across the United
States that are either already involved or considering involvement
in the TIC/CORE industry as a real estate provider. As with
any industry, these 80 companies represent varying degrees
of acumen, experience and quality. To achieve the greatest
potential for a client, a financial advisor should have consistent
access to the top ten percent of these companies in order
to provide their client access to the best properties available.
Obviously, a new financial advisor with little or no experience
or industry knowledge may not have access to the top real
estate providers, as these providers prefer to work with experienced
consultants that specialize in this unique segment of the
market.
Investors should also be aware of how their financial advisor
stacks up, looking for a history of successfully completed
transactions. A long and proven track record indicates that
a financial advisor is an experienced professional. An investor
wants such an advisor in their corner asking all the right
questions, making appropriate and suitable recommendations,
understanding the nuances of successfully completing TIC/CORE
transactions and providing answers to any and all tax and
legal questions.
When considering a 1031 exchange or TIC/CORE investment,
investors should ask the following specific questions of the
financial advisor:
- What percentage of your business is 1031 exchange and/or
TIC/CORE related?
- How many investors have you consulted that invested in
TIC/CORE structured properties this year? How many last
year?
- How long have 1031 exchanges and TIC/CORE been a focus
of your investment recommendations?
- Do you have the appropriate licenses to complete this
transaction (Series 7, Series 63 securities licenses)?
- With which real estate providers do you work most closely?
As customer demand continues to drive this segment of the
real estate market, the emphasis on quality - quality consulting,
quality property, and quality transactions - will be increasingly
important. Part of the qualitative process is ensuring that financial advisors representing a client make
appropriate recommendations for that client based on the client's
best interest and not based on any "bias." A final
issue that needs to be addressed is that it is not unusual
for "referral" compensation to be paid between referring
parties. This practice is illegal and a complete breach of
ethics,. Therefore, if any form of compensation changes hands
- disclosed or undisclosed - between financial advisors and
Qualified Intermediaries, real estate companies or other unlicensed
individuals derived from an exchange transaction, a felony
may have occurred.
In short, investors should take the time to identify a reputable
advisor who not only can provide acceptable answers to the
above questions, but who will also have the relationships
necessary to guide their clients into the appropriate investment.
It is important to remember, firms or individuals involved
in recommending, offering or selling 1031 TIC/CORE investments
must be licensed with a broker-dealer, the SEC, the NASD and
the state securities regulators in every state in which the
firm or individual operates and in which the client resides.
Any "unlicensed" firm or individual involved in
recommending, offering or selling these investments is in
direct violation of federal and state securities laws.
Co-ownership is the fastest growing option for 1031 exchange
investors seeking suitable replacement property. Properly
structured and presented, such investments can also generate
new listing opportunities for real estate agents while satisfying
both the IRS "like-kind" investment property requirements
and the SEC and NASD securities regulations. The advantages of
co-ownership of institutional-grade real estate are clear
and compelling. When exploring co-ownership, smart investors
need to seek out industry experts to guide them through the
replacement property process. It is indeed the wise investor
who is aware of his or her long-term goals that seeks experienced
guidance to chart their course, thereby turning TIC/CORE investment
opportunities into realities.
Cary Losson is the Founder and President of
http://www.1031exchangeoptions.com1031
Exchange Options. A luminary in the TIC/CORE 1031 exchange
marketplace, Mr. Losson is frequently quoted in journals and
periodicals concerned with investment property issues and
advice. For more resources to assist in your learning: http://www.1031exchangeoptions.com/resources.html
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