Background:Background: Tenancy-in-Common TransactionsTenancy-in-Common Transactions

Dr. Harold HuntDr. Harold HuntResearch EconomistResearch Economist

Texas A&M Real Estate CenterTexas A&M Real Estate Center

Defining a “TIC”Defining a “TIC”

• Ownership model based on Ownership model based on English common lawEnglish common law

• Undivided fractional ownership in real propertyUndivided fractional ownership in real property

– Each co-owner receives Each co-owner receives fee titlefee title and a and a title policytitle policy

– Each co-owner receives Each co-owner receives proportional shareproportional share of net income, tax of net income, tax

benefits and appreciationbenefits and appreciation

Defining a “TIC”Defining a “TIC”

• Qualifies for a 1031 like-kind exchange with IRSQualifies for a 1031 like-kind exchange with IRS– Purpose is to Purpose is to defer capital gainsdefer capital gains taxes taxes

• Qualification was clarified by IRS in Qualification was clarified by IRS in Rev. Proc. 2002-22Rev. Proc. 2002-22

– Lays out guidelines for an Lays out guidelines for an advanced ruling request advanced ruling request • Private letter rulingsPrivate letter rulings vs vs attorney opinionsattorney opinions

– States States 15 conditions15 conditions for acceptable TIC structure for acceptable TIC structure

– Primary concern is avoidingPrimary concern is avoiding “partnership” “partnership” designation designation

TIC AdvantagesTIC Advantages

• Property managementProperty management

• Institutional-gradeInstitutional-grade properties properties

• Potential for portfolio Potential for portfolio diversificationdiversification

• Debt/equity flexibility Debt/equity flexibility for 1031 exchangesfor 1031 exchanges

TIC LimitationsTIC Limitations

• LiquidityLiquidity

• Exit strategyExit strategy

• Co-owners may not know each otherCo-owners may not know each other

• Costs and Costs and feesfees

The ProcessThe Process

• AA sponsorsponsor acquires/arranges to acquire property acquires/arranges to acquire property

• Sponsor then helps facilitate sale of Sponsor then helps facilitate sale of TIC interestsTIC interests

to TIC investorsto TIC investors

• Interests are sold as Interests are sold as real estatereal estate or as a or as a securitysecurity

The ProcessThe Process

• Sale of Sale of securitized securitized TIC Interests:TIC Interests:

– Subject to Subject to Federal & StateFederal & State securities laws securities laws

– Subject to Subject to StateState real estate laws real estate laws

– Brokered by Brokered by securities broker dealerssecurities broker dealers

– Represent about Represent about 90%90% of TIC interests being sold of TIC interests being sold

The ProcessThe Process

• With a TIC structured as a With a TIC structured as a securitysecurity::– Sponsor or their affiliate remain as Sponsor or their affiliate remain as property managerproperty manager

– Sponsor or affiliate Sponsor or affiliate retainsretains asset mgmt.asset mgmt. function and function and controls most property decisionscontrols most property decisions, including:, 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 ProcessThe Process

• Sale of Sale of real estate real estate TIC Interests:TIC Interests:

– Not Not subject to subject to Federal & StateFederal & State securities laws securities laws

– Subject to Subject to StateState real estate laws real estate laws

– Brokered by Brokered by real estate licenseesreal estate licensees

– Represent about Represent about 10%10% of TIC interests being sold of TIC interests being sold

The ProcessThe Process

• With a TIC structured as With a TIC structured as real estatereal estate::

– Sponsor allows TIC investors to select an Sponsor allows TIC investors to select an unrelated unrelated third partythird party to be property manager to be property manager

– Asset mgmt. decisions voted onAsset mgmt. decisions voted on by TIC investors by TIC investors

** The issue of The issue of investor controlinvestor control determines whether TICs determines whether TICs are real estate or a securityare real estate or a security

Security vs Real EstateSecurity vs Real Estate

• 1946 Supreme Court case: 1946 Supreme Court case: SEC v W.J. Howey & Co.SEC v W.J. Howey & Co.

– Four conditionsFour conditions must be met for the sale of a TIC fee must be met for the sale of a TIC fee title property interest to be considered a security:title property interest to be considered a security:

(1) The investment of (1) The investment of moneymoney

(2) in a (2) in a common enterprisecommon enterprise

(3) where the investor is led to (3) where the investor is led to expect profitsexpect profits

(4)(4) solely from the efforts of a solely from the efforts of a 33rdrd party party (i.e. the sponsor)(i.e. the sponsor)

A Few StatisticsA Few Statistics

• TIC TIC EquityEquity Volume (securitized TICS only): Volume (securitized TICS only):

2001: $167 million2001: $167 million

2004: $1.8 billion2004: $1.8 billion

2005: $3.2 billion2005: $3.2 billion