What is TIC Ownership?

We Make the American Dream Available to Everyone.

Historically, only wealthy real estate tycoons could invest in high quality income producing commercial & multifamily properties. Now anyone from a 1031 Exchanger to a Foreign Investor can own management-free income properties while enjoying the tax benefits and equity appreciation. Fractional Deed Ownership makes this possible.

Co-Ownership

What Is Fractional Deed Co-Ownership?
Fractional-Deed Co-Ownership, also know as Tenant In Common Ownership (TIC) or Co-Tenancy enables individuals to acquire an interest in high-quality properties or developments and step away from personal day-to-day property management. These properties are larger, professionally managed, and require significantly less hands-on involvement than sole-owned real estate. In many cases Fractional-Deed Real Estate conforms to IRS standards for a 1031 Exchange, making them a solid solution to identifying the like-kind property for an Exchange.

How Fractional Ownership Works
A Fractional Ownership program does vary from project to project, however the underlying structure remains the same. Generally, a limited liability corporation TIC is established for acquiring, developing, improving or remodeling, and then selling of a specific property. The LLC Tenants in Common provides for individual investors to own an undivided fractional interest in the entire property. Under this co-ownership structure, the investor shares in the net income, tax shelters, and growth. Further, investors will receive a separate deed and title insurance for their percentage interest in the property and have the same rights as a single owner. By purchasing real estate through our Tenant in Common program you gain superior efficiencies in the identification, acquisition, financing, closing, and operating stages of real estate ownership.

1031 Exchange

What is a 1031 Exchange?
An IRS Code 1031, which has become a popular real estate investment strategy, that allows owners to defer capital gains by selling a property, identifying a like-kind replacement property within 45 days, and closing escrow on the new property within 180 days. A property owner, that does not do a 1031 Exchange, is taxed on any gain realized by the sale of the property. In a 1031 Exchange, some or all of the tax on the transaction is deferred until some time and action in the future, usually until the newly acquired property is sold without doing a 1031 Exchange. (Presently taxes can be deferred indefinitely doing successive 1031 Exchanges by relinquishing one and acquiring another).

What is Revenue Procedure 2002-22?
This is the new guidance from the IRS which makes it clearer and outlines how to structure a fractional-deed Tenants In Common (TIC) co-ownership of property by individuals who want to do a tax deferred 1031 Exchange.

What is “like-kind” property?
'Like-kind’ can be all types of Real Estate and can be exchanged for other Real property, such as vacant land for an apartment building or a rental home for a retail center as long as the guidelines are properly followed.

Can one do a 1031 Exchange with foreign property?
Presently only property located within the fifty United States and the U.S. Virgin Islands are eligible for a 1031 Exchange.

Can a fractionalized co-ownership be considered for a 1031 Exchange?
With the Proc. 2002-22 by the IRS in the year 2002, a Tenant In Common (TIC) fractionalized co-ownership interest is considered like-kind and qualifies for Section 1031 consideration. The investor’s interest in the property must have been held by the owner for the productive use in trade or business, or for investment, but not personal property.

What are the identification and closing periods?
The identification and closing periods are very strict time lines and limitations that have to be adhered to precisely. Once the property that an owner is selling has closed, s/he has 45 days from the date of sale to identify like-kind replacement property/s, which terminate at midnight on the 45th day following the transfer date. The property/s that has been identified, the owners have 180 days to close, which include Saturdays, Sundays or holidays.

You can select and identify several (or multiple) properties, and even change your mind about your choices during the period. However, you may ONLY acquire a property that was identified during the 45-day period, not after.

What does an Exchange Accommodator (Qualified Intermediary) do?
The Qualified Intermediary and the Exchange Accommodator is the same thing. They act as a “safe harbor” approved by the IRS to hold the exchange proceeds and to make sure that the structure of the exchange is properly observed. Note that there are many persons who are Disqualified by the IRS to act as Accommodator: your attorney, your accountant, your broker, investment banker, or a relative cannot perform the Exchange for you.

The Accommodator does more than just hold the money to avoid “constructive receipt”, they actually create the mechanism for a trade. In the case of a Reverse or Improvement Exchange, they provide a safe harbor for the title of the replacement property to be “parked” until the exchange is completed.

When will I have to pay taxes on the gains?
The taxes on the gains are ‘recognized’ when the owner disposes of the Replacement Property and does not get into another 1031 Deferred Exchange and that becomes a fully taxable transaction. If the owner continues to execute 1031 Exchanges, the gain may never be recognized and there are no time or number limits as to when and how many 1031 Exchanges one can do.

Who is eligible to do 1031 Exchanges?
Individuals, Corporations, LLC’s, and Partnerships are eligible to do 1031 Exchanges, providing it is ‘like-kind exchanges. Stocks and partnership interests are specifically excluded from being considered like-kind to real estate.

Benefits of TIC

Cash flow in the form of a guaranteed lease payment is generally paid monthly and is tax-sheltered via depreciation pass through and interest deductions. You may also share in the appreciation of the property when it is sold.
Minimum equity requirements as low as $50,000 allow you to purchase high quality property. These low minimums also allow you to diversify, which can reduce your risk by acquiring properties in different locations, with various property types, tenants, industries, etc.
Ownership as a Tenant In Common can potentially increase your net cash flow, provide you with substantial tax write-offs, and, like any real estate, potentially give you appreciation, all without the time commitments of active property management.

Fractional-Deed co-ownership is ideal for knowledgeable real estate buyers tired of personally managing property day-to-day, but still seeking the benefits of real estate ownership.

Sole-owned real estate and co-ownership properties offer the same tax benefits, wealth preservation, cash flow, and long-term appreciation potential. Co-ownership properties, however, eliminate the headaches of day-to-day management: all management duties are overseen by independent, third-party national firms.

A group of prospective purchasers is identified and organized under a co-ownership structure, and as co-owners are able to purchase a more substantial property than they would as individuals. Each co-owner receives a fractional fee title ownership deed and title report at closing.

The co-owners exit the co-ownership agreement when they unanimously elect to sell the property. Co-owners may also sell their individual interest at any time, either to another co-owner or to a buyer outside of their co-ownership agreement. At this point, the co-owner may either pay taxes on the profit or execute a 1031 Exchange and defer capital gains tax.

Co-ownership agreements include other aspects of the IRS guidelines and enable all participants to benefit from a structured operational agreement.

Each co-owner has the same rights as an individual owner.

Summary of Benefits

Fee-Simple deed at closing.
Title insurance coverage.
Pro-rata share of all net monthly income, tax benefits and appreciation.
Deferred capital gains taxes.
Third-party property and asset management with reporting responsibility to each co-owner.
Monthly distribution checks (typically) and an annual property operating statement.
Economically feasible to acquire a Wide variety of Class-A replacement properties.
Maximum flexibility in transaction size and property type diversification.
High-quality properties with more reliable monthly cash flow.
1031 Exchange Buyers preserve 100% of their equity by deferring taxes.
Increased depreciation potential.
The opportunity to consolidate several smaller properties into one larger property.
The opportunity to acquire an interest in a substantially larger property and to use 60%-70% leverage to enhance future overall returns.
Economically feasible to acquire a co-ownership interest in multiple properties, decreasing risk through diversification.

Triple Net Lease

What Is A Triple Net Lease?
The terms TRIPLE NET LEASE, TRIPLE NET LEASED, TRIPLE-NET, NNN, NET LEASE, NET-NET-NET are interchangeable. The definition of a Triple Net Lease (NNN) requires the tenant to pay all insurance, maintenance, and taxes. The tenant is responsible for all normal expenses of ownership, leaving the owner free of day-to-day management responsibility.

Most commercial property triple net lease leases are often between 15-30 years and normally include cost-of-living rent increases. Rental payment continues for the full term of a triple net lease lease. This makes the credit rating of the tenants very important.

Triple Net lease- Advantages
Here are a few benefits of an investment grade (defined as having a BBB- or Better Credit Rating by at least one of the rating agencies) 1031 exchange investment property:

1031 exchange properties can relieve owners from day-to-day management issues.
A long-term lease to a corporate tenant with credit rating usually makes it easier to get a mortgage loan at favorable rates.
triple net lease properties may have appreciated residual values because they are most often built for retailers who have researched the market to find high density, middle income areas with attractive traffic patterns.

Why Triple-Net-Leases should align tenant and landlord interest.
Many regional and national companies choose to lease their business property. Leasing the property gives the occupying companies the ability to control their physical environment without the financial commitment of ownership. By leasing the property, companies free up their corporate funds for business expansion and improvement. A triple net leases gives the companies control over the property they occupy without the capital commitment of ownership.

Use Your Equity

Put The Equity In Your Home To Work For You
If you’re sitting on a ton of equity in your home, it’s time to put it to work for you. By refinancing your home and pulling cash out from its equity, you can take the funds and invest them into a fractional ownership property that will provide you with a monthly check. A management free, co-ownership investment will not only allow you to receive additional income and added tax benefits but you’ll also have the potential of building equity in your new property along the way.

Today’s mortgage interest rates are at all time lows. Refinancing this way lets you use the bank’s money to make money. For example, a $200,000 thirty-year term loan with a fixed interest rate of 5% will cost approximately $1074 per month. If these funds are re-invested into a fractional ownership property with a cash-on-cash return of 8% (cash on cash return may vary on individual property investment), you can receive a monthly check for $1,333. After paying the mortgage on the money you borrowed from the equity in your home, your net monthly income will be approximately $259 per month or $3,108 per year.

Since most mortgage interest on a home loan is tax deductible, you may also be able to deduct the mortgage interest from your refinance. Contact an Aura Mortgage Group Representative for a free loan consultation and check with a tax professional for more details.

TIC Financing

Historically, most tenant in common groups shared one or more apartment building loan(s) which were secured by the entire property. Under this “group loan” arrangement, the tenancy in common Agreement would specify the percentage of each loan that was owed by each co-owner, each owner would contribute his/her share of each loan payment as part of his/her monthly “dues” to the group, and the group would make each payment to the lender. While group loans remain the norm for tenancy in common financing, several banks have recently introduced programs under which each co-owner has his/her own loan. Individual tenancy in common loans are secured only by one co-owner’s percentage share in the property, meaning that one co-owner’s mortgage default does not imperil the other co-owners. Yet another popular TIC financing option is individual mortgages carried by a seller or former owner, often in conjunction with an underlying loan that predates the tenancy in common formation.

Popularity of TIC Ownership

With the restrictive lending practices introduced in recent years by the United States Congress on the lending industry, and ever increasing restrictions by municipalities on condominium conversions, more and more investors are turning to tenancies- in-common and other non-traditional co-ownership structures as a way to maximize their buying and selling power. These arrangements lower prices and increase choice for buyers by allowing them to pool resources and buy more real estate than they otherwise could or would, while agreeing among themselves on an allocation of rights and responsibilities so each buyer does not end up with more than he/she needs. At the same time, tenancy in common arrangements increase sale prices and marketing options for sellers by allowing them to sell fractions of their property to buyers for prices that generally add up to more than what the seller would receive from a single buyer. The popularity of tenancies in common has been further enhanced by the recent introduction of “fractional loans” which allow co-owners to have individual mortgages, substantially decreasing the risk of co-ownership.