Norman, I've been involved with TIC investments for the last 7 1/2 years as a real property asset manager working for Triple Net Properties which is now known as Grubb & Ellis Realty Investors. This is the biggest and most successful TIC sponsor (No brag, just fact)
The CONS are fairly straightforward:
1) This is a VERY illiquid investment that has a typical life cycle of 48 to 66 months. If you need to sell earlier than the program disposition, there is a faint secondary market and it is filled with predatory buyers who will offer you a fairly deep discount to your par and there are significant costs associated with selling an interest even after you've found a buyer.
2) This is real estate. Markets go up and down so that means occupancy can go up and down and so can rents and operating costs and property taxes. While the investment sponsor makes every effort to keep the investment operating as pro-formaed, there are NO promises. Its not a bond. Cash distributions can be cut. Capital calls could occur. Lenders could be quite demanding if occupancy fall below a certain level.

The PROs:
1) There are absolutely no management burdens. Just get the monthly distribution and read the routine quarterly or monthly reports sent to you as you go about your life.
2) When it comes time that a sell recommendation comes along, if you like the sponsor, they'll make it easy to roll the sale proceeds to the next investment at a reduced cost.
3) With TIC sponsors, you get the opportunity to own a portin of an instituional quality asset that might have a multi-million dollar value.

As for the second part of your questions, because of the investment horizon of 48 to 66 months, I would suggest that thinking about pre-election markets may be limiting yourself. The two things to think about are:
1) Quality of sponsor and management. LOts of very small shop guys out there who know real estate but know nothing about investor services or property management. Also, they must have a great balance sheet. You're trusting them with a fair amount of money, BE CAREFUL!!
2) Quality of building. Go see the property before you invest. Go drive the sub-market. Find out about the subject properties's competition. Do the due diligence that spending hundreds of thousands of dollars requires. Ask to see engineering reports and property condition reports. Ask to see the due diligence officer appraisal. Ask about the loan, is thera a debt service coverage ratio covenant? How is it calculated?
Best of luck. MIchael Frieman

posted 5 months ago

It may depend on what geography you are looking at. TICs have been common in Berkeley and many parts of the San Francisco Bay Area for years now. Realtors, lenders and buyers are very comfortable with them when they have been set up properly. The are about as liquid as condos and in this area, TICs usually are a cut above architecturally (older victorian & eduardian TIC units abound.) You just need to evaluate each opportunity individually.

posted 5 months ago

Mr. Frieman's comments are on the mark. However,,, to say Grubb and Ellis is the largest and most successful is a stretch. This is only because they just purchased the largest and most successful (NNN). (Don't misunderstand... Grubb and Ellis is a giant in the commercial real estate industry and deserves to be so!)

The second part of your question is best answered by the fact that TIC investing helps to remove the need to market time different asset classes. The low minimums (250-350 K, less for DST's) allow the investor to diversify his holdings among different property classes, different geographic markets and different sponsors. There are several good sponsors with successful track records. Be careful not to only speak to a "captive" representative.

Also, SCI sells TICS as real estate, without the safeguards and documentation requirement of the securitized offerings. Only a FINRA licensed rep. can present these. Securitized offerings provide further disclosure and suitability requirements that SCI doesn't. Ask about Spectrus and why they don't offer Real Estate commisions anymore.

Hope this helps...
Marty

Links:

• http://www.1031national.com

Marty G also suggests this expert on this topic:

• Ken M

posted 5 months ago

Norman:

There is another type of TIC common here in Northern California that hasn't been addressed. That is the "residential TIC" - where the investors live in the building. Starting with San Francisco, conversions from apartment to condominiums are very, very difficult to complete. So there has been considerable interest in TIC's among people who want to buy. This probably isn't the type of TIC you were asking about - it's certainly a niche market. It has met a strong market need and for the most part these have worked fairly well.

posted 5 months ago

The following is not legal or tax advice. You should seek appropriate counsel to answer your questions.

TICs have their own pros and cons and complications. The TIC structure can be a fractional ownership of real property or a securitized investment subject to the Securities Act of 1933 and the Securities Exchange Act of 1934. The economic reality of the transaction is based on questions regarding how profit is derived. Is owner’s profit derived from the substantial work and knowledge of others? Is the owner’s profit derived from major decisions made by the co owners based on their work and knowledge? The Internal Revenue Code (IRC) doesn’t explicitly address the tax treatment of TICs leaving the treatment open to interpretation. The taxpayer may find the IRS has determined the TIC is nothing more than a partnership nullifying the 1031 tax deferred exchange. While IRS Revenue procedure 2002-22 provides some assurance that TIC investments are valid replacement property options for tax-deferred like-kind exchanges under IRC Section 1031, no safe harbor or guaranteed structure for TIC ownership interests exists. TIC structures vary widely. The IRS will consider issuing a private-letter ruling if fifteen conditions are met which I won’t list as they are beyond the scope of this discussion.

They IRS may determine the TIC should not be subject to the tax treatment of a partnership. That isn’t the end to the taxpayer’s problems. If the TIC is determined to be a security or investment contract, section 1031 might not apply to transactions where investors want to reinvest in a TIC property. Section 1031 specifically excludes any exchange of investment property for “interests in a partnership,” “stocks, bonds, notes” or “other securities.” 1031 tax deferred exchanges are for like kind property. Real property must be exchanged for real property. Securities laws and Federal tax law can differ. A TIC may qualify as a security under securities laws and qualify as real property for Federal tax law and the tax deferred treatment of Section 1031. A TIC can have dual characterization which is great for investors. TIC structures vary widely and their increased popularity has shown TIC structures variations are increasing. Since the structure of the TIC can vary the securities broker required involvement can vary from investment to investment.

TICs popularity is growing because they alleviate some inherent risk associated with the deadlines for a successful tax deferred exchange. In the near future, we can expect a few court cases that will clarify the TIC treatment for securities laws and Federal tax laws.

The investor needs to have his or her own professional team of advisors assist in the necessary due diligence to determine if the TIC private placement memorandum (PPM) is accurate or contains false and misleading information, research the sponsoring entity and the principals, and read all agreements including the purchase and sale agreement, management agreements, lease agreements, etc. Lease agreement provisions can nullify tax deferred treatment under IRC Section 1031.

posted 5 months ago