1031 Exchange and Tenancy-in-Common: Seeking the Right Advisor
to Achieve TIC Investment Objectives
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.
(c) 2005, 1031 Exchange Options. Reprint rights granted so long
as the article and by-line are reprinted intact and all links
made live. This article is neither an offer to sell nor an offer
to buy real estate or securities. There are material risks
associated with the ownership of real estate. You must be an
accredited investor. Securities offered through Sigma Financial
Corporation, Member NASD/SIPC.