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.