A Fresh Take on CRE

Why TICs are good! - Part 2 - Why a 1031 TIC?

In my last post I explained what a 1031 is, and showed you the advantages. Now, let's go back to Isabella Investment. Isabella has decided that she'd like to save the 27% in taxes and go with a 1031 exchange. However, the idea of owning another commercial or investment property is really not all that appealing to her. She's selling her office building, because she's sick of the headaches that go with being a landlord. Furthermore, she's nervous about having all of her money tied up in one small building in New York City. She wants to diversify, and she would love to invest in a big office building, one she simply couldn't afford to own by herself. To make things even more complicated for Isabella, according to the 1031 statute, she must identify buildings in which she would like to invest within 45 days in order to defer taxes!

Well, incredibly enough, Isabella is the ideal 1031 TIC investor. But what's a TIC? TIC stands for Tenant in Common, and it is simply a situation where multiple people own one building. It could be you and your uncle George, or in the case of the TICs Grubb & Ellis offers, they are securitized investments regulated by the SEC.

So, how does it work? OK . . . here it goes. Before Isabella sells her office building, she identifies a "qualified intermediary" (basically an escrow agent). When she sells her building, the qualified intermediary holds the money temporarily. Once she sells the building, the clock starts ticking, Isabella has 45 days to identify up to 3 buildings for potential investment, and up to 6 months to close on one or more of these properties. She calls up Grubb & Ellis (or another TIC provider), and is presented with several opportunities. The buildings are located throughout the country, and in different industry sectors. After careful deliberation, Isabella decides she is interested in a golf course in Florida, a medical office building in South Carolina, and a retail shopping center in New Jersey (yes, these are all considered to be "like kind" for tax purposes). It has now been a month since Isabella sold her office building, so she has 5 months to go to close on properties.

Isabella decides she would like to invest in the medical office building, and the retail shopping center. There is $30 million in total equity invested in the medical office building, and Isabella invests $1 million. She receives a deed for 1/30 of the property. There is $15 million in total equity invested in the retail shopping center, and Isabella invests $1 million. She receives a deed for 1/15 of the property.

For the next 3-8 years Grubb & Ellis (or a similar company) manages, leases and handles all maintenance on Isabella's investment properties. Meanwhile, Isabella receives checks for her share on the profit from leasing the buildings. In 3-8 years, the properties are sold and Isabella receives her share of the profit on the sale. She then must decide again, to defer or not to defer.