The Risks of purchasing real estate through Tenant In Common (TIC) direct ownership are very similar to owning real estate property in general and should be carefully considered in determining suitability and value..
Loss of Value
1. The major risk of owning real estate is that the value of the real estate declines in value. Factors contributing to a decrease in the value of a property include vacancy, which can in turn cause a reduction or elimination of monthly cash flow. Diversification geographically and into large commercial properties lower this risk, especially compared to single family, duplexes, triplexes etc. Natural disasters, less demand for that area (more common in rural areas), restrictions in zoning, growth trends leading away from a particular area and/or interest rate changes can also contribute to declining values. Historically, the value of real estate in general tends to increase overtime due to certain factors such as inflation, location as available land decreases, populations increase creating more demand for real estate, areas of growth increase demand and cause values to increase.
Control
2. Another risk associated with TIC properties is relinquishing complete control over major decisions, such as when to sell, when to refinance or spend on tenant improvements. TIC owners as a whole, usually maintain complete control of major decisions and maintain voting rights individually, but do not have direct discretion over day-to-day decisions. Most TIC sponsors firms require between 70 and 80 percent to indicate a unanimous decision. However, these decisions, which can be the most important decisions in affecting profit or loss, are a main reason investors prefer TIC’s. The sponsor firms often provide in-depth due diligence, professional and sophisticated experience not normally accessible to an average investor. Additionally, sponsors may regularly generate quarterly and annual reports of the property, the economic environment trends, projections and history to keep investors well informed about their property and professionally advise as to the above mentioned major decisions.
Liquidity
3. TIC investments, as most real estate investments, are not designed for rapid liquidity. With TIC real estate, investors have direct ownership, with their name on the title or deed qualifying for 1031 exchanges. Though, most TIC’s allow owners to sell at anytime, finding a suitable buyer may be a direct function of current demand and may be difficult. There are usually other caveats that allow the other TIC co-owners first right of refusal. This may actually be beneficial to investors because the direct interest the owners have presenting potential buyers immediately. Currently, no secondary market exists for the liquidating of TIC ownership.
Tax Laws
4. Potential changes in tax laws may adversely affect TIC owners tax liabilities, tax deferral benefits and/or income brackets. Current property owners, including TIC ownership receive substantial depreciation allowances that shelter significant portions of income. These tax laws along with 1031 exchanges laws are subject to change.
Financing
5. TIC real estate purchased using elements of financing are subject to risk of foreclosure just as would be any real estate purchased using leverage. Most large financial institutions financing TIC investments usually require loan reserves to be set aside. Substantial due diligence and research on each TIC property by the lender (eg Bear Stearns, Met Life, Chase, Wachovia), on the sponsor level and at the securities level, all help to reduce these risks.
Impact of Fees/Loads
6. Closing costs, loan fees, real estate and securities commissions often affect returns on real estate ownership and investment. Longer-term holding strategies normally make the most sense in order to adequately compensate for these fees and are a major reason real estate offers less liquidity than other investment asset classes. These costs may outweigh the tax benefits of reinvesting in real estate and/or TIC’s and should be carefully measured to carefully make the most suitable and appropriate decisions for individual investors. In the case of TIC’s, tax incentives, including depreciation, capital gains and recapture deferral, potential cash flow, diversification opportunities (not holding all your value in one location), relinquishment of management hassles and professional research and advice must all be measured against fees/loads and costs and risks in assessing proper suitability and in making investment decisions.
Individual Ownership
The Experts in 1031
Exchange Strategy.
The material contained herein is for informational purposes only and
does not constitute an offer to sell or buy real estate or securities.
Investments suitable for accredited investors only. There are material
risks associated with the ownership of real estate.
Securities offered through
Steven L. Falk & Associates, INC.
11280 Granite Ridge Drive
Suite 1042
Las Vegas, NV 89135
(T) 702-240-0174
(F) 702-254-4962
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