Play More Golf by Turning Over the Keys

Updated: Nov 18, 2021

By Dan Werry, JD, MBA

Invest in or trade your investment real estate for professionally managed investment grade property.

Many of my clients use to find themselves busy managing their investment real estate, or struggling to find investments to balance out their portfolio. In both cases those clients may have desired passive income private real estate to meet their goals. The first client generally would like to sell his labor intensive real estate, defer capital gains, and find a reasonable passive income replacement property. The second client generally has invested in most other asset classes and would like private real estate to provide portfolio diversification.

The solution for each client may be the same. Tenants-in-Common properties, also known as, TICs. TIC investment properties have been the choice for thousands of similar clients over the last ten years.*

TICs can enable a client to complete an IRS Section 1031 exchange and reinvest their proceeds into passive income real estate. Investors not completing an exchange are also choosing TICs as a means of finding professionally managed real estate because commercial real estate is an asset type that is not correlated to the stock market.

Both client types benefit from the typical attributes of real estate; tax benefits from depreciation and deductible mortgage interest. If the real estate is purchased well and has increasing net operating income the property has the potential to appreciate. However, TICs are investments in real estate and therefore they have the same real estate risks. Those risks generally are; 1 – tenant risks (vacancy), 2 – market risks (supply/demand), 3 – property management risk (under managed) and 4 – unforeseen events or disasters.

To minimize or manage the exposure to these risks, just as you would in purchasing any real estate, extensive due diligence is required. Due Diligence is my firm’s core and most important function. In addition to my due diligence staff, I am a registered representative of OMNI Brokerage, a national firm of over 70 TIC investment specialists. This is significant because OMNI is the largest broker/dealer in the TIC securities industry based on equity invested in TICs.* In 2007, OMNI Brokerage accounted for 12.63% of all equity invested, and since 2001 OMNI clients have invested in $3.9 billion dollars in TIC security real estate.* Since 1995 OMNI has completed over 4000 TIC transactions.* Because of this large transaction volume OMNI generally has more resources to invest in due diligence, and OMNI has more experience is this unique real estate asset type. Nationally, our Minneapolis based office has been recognized by OMNI Brokerage as one of its top two offices.

Understanding TIC investments

TICs are syndicated real estate investment vehicles that if structured as guided by the Internal Revenue Service in Revenue Procedure 2002-22 (Revenue Procedure) should also qualify as 1031 exchange reinvestment property.

The Revenue Procedure allows up to 35 investors to co-invest in each TIC property. The average number of investors has generally been from 12 to 24 investors. The co-investors are directed by a TIC agreement. Each property averages in value from $20 to $30 million and typically has a loan packaged with it for at least 50% of the value. So TIC investment sizes could be as little as $200,000 dollars. Understanding that you don’t need to invest millions of dollars to own part of a multi-million dollar building. With these investment amounts clients use TICs as a means to diversify their portfolios. They are generally seeking an asset type that has a low correlation to the markets, and they are investing for long term performance. Some clients do invest hundreds of thousands and even millions of dollars into properties some that have been valued up to $150,000,000.

Some clients with larger 1031 exchanges or at least $5,000,000 of equity choose our Real Estate Wealth Management Program which enables these investors to buy and own properties just like any major real estate company would without requiring them to have a large institutional infrastructure.

The property types that investors can invest in include Medical Office, Multi-Family (Apartment), Industrial, Office, Retail, Hospitality (Hotel), and Senior Assisted Living. The properties are located throughout the country enabling investors to diversify geographically and possibly invest in stronger markets. Each asset class has its pros and cons. Multi-Family can be a hedge against inflation because as you renew leases you can adjust them upward accordingly. However, if interest rates decrease low enough there is the concern of losing groups of tenants that could purchase their own homes. In general, management companies look for properties that have long-term leases so the TIC properties can weather uncertain economic times with minimal impact to investor cash flow.

Conceptually, the TIC structure is designed to allow investors to invest in passive income institutional quality real estate. Therefore investors rely on management to operate these properties within annual budgets. In addition, management negotiates leases, handles tenant issues, fills any vacancy, and takes care of capital improvements. If done correctly co-investors can expect to receive forecasted annual returns distributed monthly. Because investors do not expect to make additional contributions after their initial investment adequate reserves are required to cover re-leasing expenses such as tenant improvement costs and leasing commissions. Reserves are also required in the event of necessary capital improvements. Most TICs start with significant upfront reserves and through operations additional funds are accrued to avoid future investor contributions. The investor goal is to have the management take care of all property and financial details in order to receive monthly distributions, quarterly reports with conference calls and close the year with an annual operations summary.

Lastly, because transaction expenses such as commissions, legal fees and marketing expenses are built into each TIC offering these investments are not short term in nature. Investors do receive their monthly cash flow based on the amount of equity that they invest. Upfront costs are generally from $2,500 to $5,000. Just as with any investment that has transaction costs, with real estate, you look for increasing net operating income to compensate for initial expenses. Also, because there is no secondary market for these investments the client needs to wait for the property to resell before they can access the equity invested. This is another reason why these investments are generally considered long term investments.

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