What is a Tenancy-in-Common investment?
A Tenancy-in-Common investment (also known as a tenant-in-common or TIC) is defined as a tenancy in which two or more parties share ownership of property but have no right to each other’s interest (as upon the death of another tenant).
It’s important to understand the potential risks, costs, and advantages of a Tenancy-in-Common before investing. Generally offered as a 1031 exchange tax deferral, financial professionals often misrepresent the risks and benefits of these investments. Moreover, the investments (due to the attractiveness of the income offered by the investments) are often marketed to conservative and retired investors.
How does it work?
Tenancy-in-Common (TIC) refers to an investment made by the taxpayer in real estate which is co-owned with other investors. Since the taxpayer holds deed to real estate as a tenant in common, the investment qualifies under the like-kind rules of § 1031.
Essentially, the way that a TIC investment works is as follows: After acquiring a property, the TIC sponsor markets and sells interests in the property to investors (at a markup), with the sponsor then reducing its own interest in the property to a small fraction or zero as its interest are sold off to the investors. A second entity is then formed by the sponsor to enter into a lease agreement with the investors, pursuant to which the investors become the landlord of the subject property and the second entity becomes the property manager. The Lessee would then sub-lease the property to tenants and, in theory, pay the promised income to the owners.
Various broker-dealers have been used by TIC sponsors to market and sell interests in these investments to the unsuspecting public and were compensated (handsomely) by these sponsors through the form of commissions.
Delaware Statutory Trust (also known as a DST) goes hand-in-hand with TIC investments, with slight differences. A DST is a separate legal entity formed as a trust under the law of Delaware in which each owner has a “beneficial interest” in the DST for income tax purposes and is treated as owning an undivided fractional interest in the property. Recently, DSTs have been gaining in popularity for a number of reasons including being able to secure financing more readily and attract more investors with lower minimum investments amounts.
What are the benefits of Tenancy-in-Common investments?
The primary reason someone would want to get into a TIC investment is the tax benefits, known as the 1031 exchange, they would receive. Under the Like-Kind Exchange IRC Code § 1031: “Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange. Gain deferred in a like-kind exchange under IRC Section 1031 is tax-deferred, but it is not tax-free.” Eventually you do have to pay the taxes, but a 1031 exchange allows you to delay those taxes until later down the road.
What are the risks of Tenancy-in-Common Investments?
Like with any investments there are downsides to TICs.
- While the investor is often focused on avoiding the Capital Gains Tax, they do not think about the fact that TIC properties may be owned by up to 35 people, and no limit with a DST. This is an inherent problem because a unanimous consent of all tenants is necessary to make decisions like selling, leasing, and refinancing.
- TIC investment almost always illiquid. This can create a number of problems. For example, if one of the TIC owners has a life altering event occur they can’t just sell their interest to free up money. They have to wait until the decision to sell is made by all or the majority (depending on the TIC structure) is ready to sell.
- Is your broker recommending a TIC for his own interests? Financial advisors should have their client’s best interest set as a priority. Unfortunately, TIC investments pay unusually high commissions to the advisors. This brings up a huge conflict of interest. The questions becomes, did my advisor recommend this TIC because he/she thought it was a great investment and fit my needs or were they more interested in the 5-10 percent commission they are making on this sale?
- Most TIC investments are also highly leveraged, borrowing enormously to acquire the properties. This means that the TIC runs the risk of default with even the smallest of market fluctuations.
A TIC Sponsor is an individual or entity that locates properties to buy ‘wholesale’, packages it, sells it to multiple investors at a ‘retail’ price. The multiple investors hold a title as ‘Tenants in Common’. The difference between the wholesale and retail price is what the sponsor is paid for their services. Typically this is between 5-7% percent of the total value of the investment, according to TM 1031 Exchange.
The sponsors often make the investments sound too good to be true – income producing, no hassles, great properties. The sponsors usually even provide glossy marketing materials showing the properties and forecasting great prospects. Notwithstanding these representations, TIC investments remain extremely high-risk, in large part due to the enormous commissions being paid out to the sponsors, brokerage firms, and financial advisors, which can eat in to any profitability the investments may have had.
Common TIC Sponsors
There are a number of companies that sponsor TIC and DST investments, including the following:
American Capital Group:
|Addison Greens Apartment Associates LLC|
|Highlands at Spectrum Apartments LLC|
|The Dakota Apartments Associates LLC|
|Sterling Pointe Apartment Associates LLC|
|Monticello apartments Associates LLC|
Cabot Investment Properties:
|Cabot East Town Acquisition LLC|
|Cabot Ashtabula Acquisition LLC|
|Cabot Creekside Acquisition LLC|
|Cabot Golf CL-PP Acquisition LLC|
|Cabot Northpark Southland Acquisition LLC|
|Cabot Oak Grove ACQUISITION LLC|
|Cabot Turfway Ridge ACQUISITION LLC|
Cottonwood Capital, LLC:
|Cottonwood Blue Swan S LLC|
|Cottonwood Copperfield S LLC|
|Cottonwood Arbors S LLC|
|Cottonwood Gables S LLC|
|Cottonwood Oakridge S LLC|
|Cottonwood Regatta S LLC|
|Cottonwood West Town S LP|
Covington Realty Partners
|Covington First Colony Commons|
|Covington Dardenne Acquisition LLC|
|Covington Gateway Station Shopping Center Phase II|
|Covington Lansing Acquisition LLC|
Desanto Realty Group
|DRG Cason Estates LLC|
|DRG Clearview LLC|
|DRG Cypress Medical LLC|
|DRG Fox Chase LLC|
|DRG Hendersonville LLC|
|DRG Hunter’s Chase LLC|
|DRG Northwoods Crossing LLC|
|DRG Pennbrook LLC|
|DRG Perry’s Crossing|
Direct Invest LLC:
|Direct Invest- Riverbend Executive park LLC|
|Direct Invest- 116 Invest Highway LLC|
|Direct Invest -Delmar LLC|
|Direct Invest- Winding Brook drive LLC|
|Direct Invest- 246 Omini Way LLC|
|Direct Invest- 2810 North Parnham Road LLC|
|Direct Invest 500 East Main LLC|
|Direct Invest- Heron Cover LLC|
|Direct Invest -Braintree Park LLC|
Gemini Real Estate Advisors, LLC:
|Gemini Brandon S TIC – Brandon LA Fitness Shopping Center|
|Gemini 442 West 36th Street S LLC TIC Comfort Inn (NYNY)|
|Gemini Diamond Run S LLC -TIC Diamond Run Mall|
|Gemini Johnstown Galleria S LLC- TIC Johnstown Galleria|
|Gemni Rio Norte S LLC- TIC Rio Norte Shopping Center|
|Gemini Rowlette Crossing S LLC – TIC Rowlette Crossing Shopping center|
|Gemini Tinley Park S LLC – TIC Tinley Park LA Fitness|
Griffin Capital Corporation:
|Griffin Capital Bolingbrook Investors LLC|
|Griffin Capital Independence Investors LLC|
|Griffin Capital Palomar Investors LLC|
|Griffin Capital Westmont Investors LLC|
|Griffin Capital Redwood Investors LLC|
Inland Real Estate:
|Charlotte 1031 LLC|
|Olivet Church 1031 LLC|
|Glenview 1031 LLC|
|Dublin 1031 LLC|
|Houston 1031 LLC|
|Plano 1031 LLC|
|Eden Prairie 1031 LLC|
|Waukesha 1031 LLC|
|Tampa Coconut Palms Office Building 1031 LLC|
|Geneva 1031 LLC|
|Memorial Square 1031 LLC|
|Countrywood 1031 LLC|
|Carmel Office 1031 LLC|
Cornerstone Real Estate Investment Services
Kay Properties & Investments LLC
According to Kay Properties’ website, the following is a list of current offerings:
Kay Properties & Investments FedEx Ground DST – Brookings, OR
Kay Properties & Investments Wal-Mart DST – Fayetteville, NC
Kay Properties & Investments Alexander Pointe Apartments DST – Orange Park, FL
Kay Properties & Investments Seacoast DST – Chesapeake, VA
Kay Properties & Investments Interchange DST – Riverview, FL
Kay Properties & Investments Maple Springs Apartments DST – Richmond, VA
Kay Properties & Investments Dallas Medical Office DST – Dallas, TX
Kay Properties & Investments Raleigh Pediatrics DST – Raleigh, NC
Kay Properties & Investments Innsbrook DST – Richmond, VA
Kay Properties & Investments Shannon Oaks DST – Cary, NC
Kay Properties & Investments Battlefield Technology Center DST – Chesapeake, VA
Kay Properties & Investments Brandywine DST – Fayetteville, NC
Kay Properties & Investments Charlotte Corporate Center DST – Charlotte, NC
Kay Properties & Investments Ashley Corporate Center DST – N. Charleston, SC
Irexa Financial Services Wealth Strategies
According to Irexa Financial’s website, the following is a list of current offerings:
Irexa TSWR Development SWD Portfolio I, DST – Texas
Irexa SL-FL NNN Industrial Portfolio I, DST – Florida
Irexa CSRA Grocery Portfolio II, DST – North Carolina
1031 Exchange Properties
According to 1031 Gateway, the following is a list of current offerings:
Coeur d’Alene ARC CVS Portfolio
Coeur d’Alene Chicagoland Multifamily
Coeur d’Alene Net-Leased Portfolio 2
Coeur d’Alene Net-Leased Portfolio 3
Coeur d’Alene Net-Leased Portfolio 4
Coeur d’Alene Net-Leased Portfolio 5
Coeur d’Alene Post Ladera Palms
Coeur d’Alene ARC Bridgestone Portfolio
Coeur d’Alene National Oilwell Varco
Coeur d’Alene National Oilwell Varco 2
Coeur d’Alene New York Grocery
Coeur d’Alene Post Regal Crossing
Coeur d’Alene Desert Sky Station
Coeur d’Alene Keaau Macadamia Nut Orchard
Coeur d’Alene Shops at Lindsey & Main
Coeur d’Alene Garden Park Apartments
Capital Real Estate
According to Capital Real Estate’s website the following is a list of current offerings:
Capital Real Estate Palm Trails Apartments – Chandler, AZ
Capital Real Estate Sevilla Apartments – Tempe, AZ
Capital Real Estate Mandarina Apartments – Phoenix, AZ
Capital Real Estate Dwell Apartments – Scottsdale, AZ
Capital Real Estate The Buttes – Loveland, CO
Capital Real Estate City Square – Denver, CO
Capital Real Estate Copper Ridge, Louisville, CO
Capital Real Estate Villa at Mountain Vista Ranch – Surprise, AZ
Capital Real Estate Heights on Huron – Northglenn, CO
Capital Real Estate The Flats at Pinecliff – Colorado Springs, CO
Capital Real Estate Vista Park – Aurora, CO
Capital Real Estate Skyway Village – Colorado Springs, CO
Capital Real Estate Falls at Lakewood – Lakewood, CO
Capital Real Estate Highland Way – Northglenn, CO
Capital Real Estate Bellaire Ranch – Colorado Springs, CO
Capital Real Estate Aura at Midtown – Phoenix, AZ
Capital Real Estate Sunset Peak – Thornton, CO
Capital Real Estate Monaco South – Denver, CO
Capital Real Estate Ponderosa Ranch – Tempe, AZ
Capital Real Estate Springs at Alta Mesa – Mesa, AZ
Capital Real Estate Alturas at Bellaire Ranch – Colorado Springs, CO
Capital Real Estate Omnia McClintock – Tempe, AZ
Capital Real Estate Pavilions at Arrowhead – Phoenix, AZ
Capital Real Estate Gateway on Gilbert – Mesa, AZ
Capital Real Estate Omnia on 8th – Tempe, AZ
Is a Tenancy-in-Common investment suitable for you?
The financial advisor should ensure that the investment that is being recommended is suitable for their clients. The financial advisor should conduct a suitability analysis on a holistic level. Liquidity needs, time horizon, risk tolerance, age, income, are just a few categories an advisor should take into account prior to recommending any investment. Once that is completed the brokerage firm must ensure that due diligence was completed at every level of each investment.
In 2005 FINRA issued multiple notices reminding brokerage firms that they cannot recommend TIC based only on the information they received by the sponsoring company. As a matter of fact, the Firm is required to conduct a “reasonable investigation” of their own accord to confirm there is no misrepresentation on the sponsors end. These safe guards are in place to protect the investor, unfortunately it is sometimes overlooked.
Recovery of Investment Losses
The foregoing information, which is all publicly available, is being provided by The White Law Group.
If you have suffered losses as a result of a financial advisor’s misleading representations of a TIC or DST investment, the securities attorneys of The White Law Group may be able to help you recover the investment losses through FINRA arbitration.
For a free consultation with a securities attorney, please call 888-637-5510.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida.
For more information on the firm and its representation of investors in FINRA arbitration claims, visit http://www.whitesecuritieslaw.com.