Published March 2006

Tenancy-in-common
an investment option
in market of too few sellers

One of the nuances of the 1031 exchange rules is that once you close the property you sell, you have only 45 days to declare up to three properties that you are looking to exchange into — and you may only buy from this batch. You have 180 days to close on the replacement from the day you sold your property.

In sequence, that’s 45 days to declare and another 135 days after that to close on the exchange property in order to qualify. That means you have to act fairly quickly to make this work.

The problem today is that there are so many buyers and so few sellers that making the decision to do an exchange is only the beginning. Finding one property that you might be able to buy at a reasonable price is hard. Finding three is even harder.

With so much pressure on the market, other clever vehicles have emerged in recent years to facilitate hungry exchange buyers.

Of course, calling your favorite commercial Realtor to place you into a replacement property is still the most common — and a very reliable — action step.

In today’s market, good commercial Realtors are operating in a visible market with listed properties for sale and another, sometimes larger, inventory made up of clients who do not want to advertise their property for sale but are motivated to sell if an offer is made. The “off market” market. This is where many of the deals are made today. So they can be very helpful at bringing solutions that aren’t necessarily visible.

Tenancy-in-common is an ownership structure that is emerging to satisfy some of this demand. It works like this: Several investors group their investment money together. But rather than create their own new limited partnership or limited liability company to buy a property, they pool their money in separate but connected buckets of sorts called a tenancy-in-common ownership where they each own a specific percentage of the investment.

This ownership structure qualifies as an exchange, and they move along their roll-up plan. If instead they choose to form a partnership or limited liability company to purchase the same property, they trigger a tax event. So it’s an in-between kind of solution that works much like a partnership or limited liability company in many ways but qualifies as an exchange.

This tenancy-in-common, or TIC, structure opens up an almost commodity-like market of exchange buyers nationwide who can be pooled to buy real estate. Pooling allows them to look at larger properties just about anywhere, and mini-industries have developed to service this effort.

Because many TIC businesses are looking to pool exchange money, your favorite commercial Realtor can often guide you to one. If you’ve already sold and your proceeds are sitting in an account with an exchange facilitator, most of them know where to find TIC solutions as well.

TIC businesses aren’t about to pool all of these funds and allow investors to kick tires all over the country, however. Normally, you put your funds in, and you may or may not know at that point where they are going to land.

If you sold your four-plex in Edmonds and expect to be placed in another local property, you should rethink the TIC plan. There’s a better chance your money will land in a property in Houston than in something you can touch and feel locally.

For many real estate investors, it’s the tangible feature of real estate that attracts them to it in the first place. Going the TIC route often means you have to leave that attractive feature behind to some degree. But it is a solid option that answers a need in an environment where there are many buyers and just too few sellers to satisfy them in the timelines allowed under rule 1031. For some investors, that’s just fine.

Tom Hoban is CEO of Coast Real Estate Services, a commercial sales, leasing, investment and property management company with offices in Everett, Tacoma, Spokane, and Boise, Idaho. He can be reached at 425-339-3638 or send e-mail to tomhoban@coastmgt.com.

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