A long-established section in the federal tax code, section 1031,
allows real estate investors to sell property that has been held for
investment purposes and defer capital gains and depreciation recapture
taxes if they acquire "like-kind" exchange property of equal or greater
value and reinvest all of their equity. Since the mid-1990s, many
investors have experienced the benefit of reinvesting their equity into
investment property interests structured as Tenancy-in-Common (TIC).
TIC owners hold an undivided fractional ownership interest in
investment property evidenced by a deed of trust.
TIC, also known as Co-ownership of Real Estate (CORE), enables an
investor to participate in the ownership of institutional-grade,
professionally managed investment properties. The investor's equity can
be diversified amongst several different properties, geographic markets
and real estate companies, potentially increasing both the value and
safety of the real estate investment. TIC/CORE investments are designed
to offer preservation of capital, predictable cash flow and long-term
appreciation in institutional-quality investment property assets that
benefit from greater economies of scale.
With its features and benefits, TIC/CORE is an increasingly popular
1031 exchange option for many real estate investors. However, 1031
exchanges and TIC/CORE transactions are very complicated, with both tax
and legal issues topping the list of potential pitfalls. It is
therefore essential that investors be knowledgeable about what to look
for in a quality advisor. Financial advisors are required by securities
law to be properly licensed in order to consult clients regarding
TIC/CORE transactions and other investment interests in real estate.
Financial advisors should hold both Series 7 and Series 63 securities
licenses to qualify them as knowledgeable, well-rounded consultants in
the investment process. It is essential that they have experience in
the commercial real estate business, in addition to an understanding of
personal investment objectives and client suitability issues.
But perhaps the most important component to look for in a TIC financial
advisor is their intimate, trusted and deeply rooted relationships with
key real estate companies. This attribute is critical to their ability
to provide the best opportunities for their clients. There are almost
80 real estate companies across the United
States that are either already involved or considering involvement in
the TIC/CORE industry as a real estate provider. As with any industry,
these 80 companies represent varying degrees of acumen, experience and
quality. To achieve the greatest potential for a client, a financial
advisor should have consistent access to the top ten percent of these
companies in order to provide their client access to the best
properties available. Obviously, a new financial advisor with little or
no experience or industry knowledge may not have access to the top real
estate providers, as these providers prefer to work with experienced
consultants that specialize in this unique segment of the market.
Investors should also be aware of how their financial advisor stacks
up, looking for a history of successfully completed transactions. A
long and proven track record indicates that a financial advisor is an
experienced professional. An investor wants such an advisor in their
corner asking all the right questions, making appropriate and suitable
recommendations, understanding the nuances of successfully completing
TIC/CORE transactions and providing answers to any and all tax and
legal questions.
When considering a 1031 exchange or TIC/CORE investment, investors
should ask the following specific questions of the financial advisor:
* What percentage of your business is 1031 exchange and/or TIC/CORE related?
* How many investors have you consulted that invested in TIC/CORE structured properties this year? How many last year?
* How long have 1031 exchanges and TIC/CORE been a focus of your investment recommendations?
* Do you have the appropriate licenses to complete this transaction (Series 7, Series 63 securities licenses)?
* With which real estate providers do you work most closely?
As customer demand continues to drive this segment of the real estate
market, the emphasis on quality - quality consulting, quality property,
and quality transactions - will be increasingly important. Part of the
qualitative process is ensuring that financial advisors representing a
client make appropriate recommendations for that client based on the
client's best interest and not based on any "bias." A final issue that
needs to be addressed is that it is not unusual for "referral"
compensation to be paid between referring parties. This practice is
illegal and a complete breach of ethics,. Therefore, if any form of
compensation changes hands - disclosed or undisclosed - between
financial advisors and Qualified Intermediaries, real estate companies
or other unlicensed individuals derived from an exchange transaction, a
felony may have occurred.
In short, investors should take the time to identify a reputable
advisor who not only can provide acceptable answers to the above
questions, but who will also have the relationships necessary to guide
their clients into the appropriate investment. It is important to
remember, firms or individuals involved in recommending, offering or
selling 1031 TIC/CORE investments must be licensed with a
broker-dealer, the SEC, the NASD and the state securities regulators in
every state in which the firm or individual operates and in which the
client resides. Any "unlicensed" firm or individual involved in
recommending, offering or selling these investments is in direct
violation of federal and state securities laws.
Co-ownership is the fastest growing option for 1031 exchange investors
seeking suitable replacement property. Properly structured and
presented, such investments can also generate new listing opportunities
for real estate agents while satisfying both the IRS "like-kind"
investment property requirements and the SEC and NASD securities
regulations. The advantages of co-ownership of institutional-grade real
estate are clear and compelling. When exploring co-ownership, smart
investors need to seek out industry experts to guide them through the
replacement property process. It is indeed the wise investor who is
aware of his or her long-term goals that seeks experienced guidance to
chart their course, thereby turning TIC/CORE investment opportunities
into realities.
(c) 2005, 1031 Exchange Options. Reprint rights granted so long as the
article and by-line are reprinted intact and all links made live. This
article is neither an offer to sell nor an offer to buy real estate or
securities. There are material risks associated with the ownership of
real estate. You must be an accredited investor. Securities offered
through Sigma Financial Corporation, Member NASD/SIPC.
