Real Estate Brokers Need To Learn The Benefit Of An 1031 Exchange Strategy Tenant In Common TIC

Very few properties are held for multi-decades or passed down from one generation to the next. As a result, the competition in the brokerage community has really heated up and creativity in the selling process can make a huge difference in closing or losing the client to another broker. An understanding of alternative1031 strategies can help the broker in making a sale.

In the typical 1031 exchange, a client will sell an income producing property and will replace it with another defer the capital gains; however, because of the IRS regulations, it easier said than done. In order to qualify as a safe harbor exchange, the replacement property must be identified within 45 calendar days after the initial escrow closes. The entire exchange transaction must close within 180 days of the initial escrow close. There are no exceptions other than a Presidential Decree granted additional time as a result of a natural disaster. Failure to either to identify the replacement property and close will result in the nullification of the exchange, thus resulting in a taxable event for your client.

As in all real estate transactions, the potential for merchantable title or survey disputes, financing, property condition or any other reason can delay the closing beyond the critical 180^th day deadline. Additional potential problems may include the concern of finding a replacement property with the proper loan to value ratio or finding a property that would allow the client to use 100% of the replacement values in the new property. Any portion of the sale not used in the exchange may be subject to capital gains taxation.

Still others client would like to sell his property but would also like to retire from the real estate market. In this instance, the purchase of another property would not solve the client's desire to no longer deal with management issues.

Tenant In Commons (TIC)

The brokerage community has been slow to learn and understanding to use the benefits of using a TIC in a 1031 exchange. In part because they fear the loss of control and thus the client isn't made aware that a TIC structured exchange is a good option to consider. Once the brokerage community does embrace the structure their transaction are certain to improve. Consider the many clients who are hesitant to sell their property because of the potential capital gains they have to pay. For the client that worries about finding and identifying a replacement property in the 45 day period or suffer the tax consequence, a TIC is a very good option. A tic is a good option for the client that wants to sell his property but would also like to retire from the real estate market. The replacement properties market changes rapidly. One week there might be numerous available properties, and the next week the supply might have drastically reduced. Proposing a TIC property to their client as an option will allay the fears of the client that a replacement property is not readily available. In today's marketplace TIC Sponsors have an inventory of properties that are available for immediate closing. In most cases, the sponsor will be able to provide the client immediate and verifiable information and third party due diligence on the property. The client is assured of a replacement property and it also allows the broker to make a sale that otherwise might not have been made.

When considering a TIC investment, geography becomes less of an obstacle in an exchange because a net leased TIC property can be located anywhere in the country. The due diligence and the disclosures statements give the client the opportunity of accessing all information and potential risks of the property anywhere in the country. Therefore, another advantage of a TIC is that it allows for geographic diversification for a client who may not have the ability to search nationwide for a replacement property.

Another benefit to a TIC is that they are almost always institutional quality properties. These properties may range from large apartment complexes or office buildings to industrial parks anywhere in the country. They give the client an opportunity of ownership in a property normally reserved for REITS, pension funds or larger investors. The sponsor will provide professional management of the property and is responsible for all leasing, insurance, taxes and any other items associated with ownership. Many clients relish the thought of ownership in these properties without having to deal with any of the potential problems associated with owning real estate.

Finally, as mentioned above the most important aspect in utilizing a TIC is the due diligence process. The Sponsor will spend a tremendous amount of time reviewing all aspects of each property. Properties are underwritten by the sponsoring real estate firm and diligently reviewed by independent outside firms in an attempt to fully disclose all potential risks to the client. These disclosures are made through an Offering Memorandum.

Every potential client has his own particular circumstances and should consider all options before deciding what is most appropriate for them. For the appropriate client, a Tenant in Common property offers a viable option in a 1031 exchange. The commercial broker who understands 1031 strategies utilizing tenant in common programs has a huge advantage over their competition.

In today's market it could mean the difference in making the sale or losing a client.

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