Parties Involved in a Tenant-In-Common
("TIC") Investment Offering
The number of parties involved in a normal tenant-in-common or “TIC” investment property transaction confuses even the most savvy real estate investor and for good reason: the structure of these investment offerings necessitates that additional parties be involved for securities and income tax law purposes. The purpose of this article is to list the major parties involved in a standard TIC investment property transaction and explain their purpose and participation.
Real Estate Exit Broker
While TIC investment properties may be purchased with available liquid cash, they are typically acquired as like-kind replacement properties as part of a 1031 tax-deferred like-kind exchange transaction ("1031 exchange"). The 1031 exchange process requires that you sell one or more of your existing investment properties ("relinquished properties") and acquire one or more new like-kind replacement properties in order to defer your income tax consequences.
Your real estate agent can function as your "Real Estate Exit Broker" by assisting you in listing, marketing and selling your relinquished properties in order to free up your trapped equity and acquire more profitable like-kind replacement properties such as TIC investment properties.
Escrow Officer or Closing Agent
The sale of the relinquished properties and the subsequent acquisition of the like-kind replacement properties, regardless of whether it is a TIC investment property or not, still require a settlement or closing process with an escrow officer or closing agent or attorney depending on which state the real property is located in.
The escrow officer or closing agent or attorney is responsible for ordering the preliminary title insurance report or title commitment and acting as a neutral third party or fiduciary for receiving all documents and monies required to settle or close the transaction as described in the written instructions provided by the seller and buyer.
The closing agent is also generally responsible for preparing any escrow or closing instructions, any required documents and deeds in accordance with terms of the sale, ordering payoff demands on existing loans, notes, liens or judgments, reviewing the documents received in the escrow and presenting the documents, statements, loan package(s), estimated closing statements and other related documents to the seller and buy for approval and signature, and to determine when the transaction will be in a position to close or settle.
Once the transaction closes or settles the closing agent delivers the appropriate closing or settlement statements, net settlement funds or proceeds and remaining documents to the principals, agents and/or lenders. The net settlement funds or proceeds must be disbursed to the Qualified Intermediary if you are completing a 1031 exchange.
Qualified Intermediary or Accommodator
The Qualified Intermediary or Accommodator is a party to the transaction only if you choose to structure a tax-deferred like-kind exchange pursuant to Section 1031 of the Internal Revenue Code ("1031 exchange").
The Qualified Intermediary drafts the legal documents necessary to properly structure your 1031 exchange transaction, holds and safeguards the net settlement proceeds from the sale of your relinquished property in order to prevent you from having constructive receipt of your assets and triggering a taxable event, and assists you through your 1031 exchange process, including reviewing your transaction for compliance with the Federal code, regulations and rulings.
You can learn more about the role of the Qualified Intermediary and how to choose a SAFE Qualified Intermediary for your 1031 exchange transacation by reading our articles entitled The Role of the Qualified Intermediary and Choosing a SAFE Qualified Intermediary.
TIC Sponsor or Syndicator
TIC Sponsors are typically larger real estate firms who recognized early on that smaller investors would love the advantages of owning large institutional commercial real estate, but that the stringent equity and financing requirements kept it from being a real possibility for most investors.
In response to this demand, TIC Sponsors set out to make interests in these properties more marketable to individual investors by allowing them to be purchased in pieces ("fractional interests" or "co-ownership interests"), a process which requires these TIC Sponsors to purchase or "take down" these properties and then divide the properties into smaller deeded units, referred to as “tenant-in-common” or "TIC" interests, arrange non-recourse financing and then offer for direct purchase to investors through private placement offerings, and/or offered as like-kind replacement properties for Investors in 1031 exchange transactions.
The investor enjoys several different returns on the property: income from the long-term triple net leases of the building to large, credit-worthy tenants and any appreciation the building accrues during the period in which the investors hold a tenant in common interest. The depreciation can offset a large percentage of the taxable cash flow received by the investor.
Broker Dealer and TIC Broker
Most tenant in common or TIC offerings or private placements are best described as “passive investments” because you do not participate in the investment to make it profitable, but rather rely on the efforts of others to make the investment profitable. This particular characteristic of these deals is enough to make them fall under the definition of securities in the United States, and be subject to all the marketing restrictions that apply thereto.
Most TIC offerings are structured as “Reg. D” offerings, which allows them an exemption to the registration requirements of the Securities Act of 1933, and may only be offered by licensed securities brokers to clients that qualify as “accredited investors” pursuant to Securities Regulations. However, even though the investments themselves are exempt from registration, the people responsible for selling them are not.
The Broker Dealer serves in a supervisory role and generally assists the TIC Sponsor to structure prospective securities transactions, identify potential purchasers of securities, marketing specific products and participating in the order taking or order-routing process, such as taking orders from customers. Broker Dealers are subject to regulatory controls, including training standards to assure their brokers have requisite expertise to conduct appropriate due diligence, as well as books and records requirements and financial responsibility standards to protect customer funds. This licensing requirement also serves to help exclude those Broker Dealers unfit for the business so that customer protection provisions can be imposed on those engaging in broker-dealer activities, and the SEC and the NASD can discipline and even expel from the business those persons who have engaged in improper conduct or who have demonstrated their unfitness for handling customer funds and orders.
The Broker is a representative of the Broker Dealer, and is responsible for doing the due diligence on an offering with a prospective investor interested in buying into the particular property. The broker will sit down with the prospective investor and their real estate professionals and go through the Private Placement Memorandum (typically referred to as a “PPM”) which contains all the information rendered from the due diligence process of the Sponsor and all disclosures related to the property, and determine whether or not the investment is suitable for the particular investor. If it is determine that it is a suitable investment, then the Broker will ascertain what percentage of the property the Investors purchase money and/or equity will buy of the total offering, and the Investor will acquire a percentage of the property and a percentage of the debt already arranged by the Sponsor in accordance with that ratio.
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