While industry professionals estimate that investors trying to complete Section 1031 like-kind exchanges comprise anywhere from 80% to 99% of the investors in any given syndicated tenancy-in-common (“TIC”) offering, consummating a 1031 exchange is not a prerequisite to investing in a TIC offering. In fact, many of the well-publicized and promoted advantages of TIC investing have nothing to do with the tax-deferral benefits of a Section 1031 exchange.
These non-1031 benefits include:
- ownership of institutional-grade real estate,
- diversification across different asset classes and geographic areas,
- non-recourse financing,
- professional property management, and
- stable cash flow, among others.
Analyzing 1031 issues is just one of many factors registered representatives take into account when making suitability determinations and investment recommendations for their clients. Individual investment goals, portfolio concentration, asset diversification, and deal-specific analyses are all relevant factors that come into play and apply equally to all investors.
Registered representatives active in the TIC industry are quick to confirm that TIC investments can be an appropriate investment vehicle for non-1031 investors in a variety of contexts and many have observed an increasing demand for TIC investments from non-1031 investors in recent years.
Regardless of whether an investor is doing a 1031 exchange coming into a TIC offering, the benefit of being able to consummate a like-kind exchange at the “back-end” of the deal (i.e., when the TIC property is ultimately sold) should not be ignored. TIC offering marketing efforts are more typically directed toward investors searching for replacement properties to complete 1031 exchanges, but arguably those marketing efforts could be effectively directed toward also educating non-1031 investors about the tax-deferral benefits afforded by Section 1031 and how those benefits can be enjoyed later—assuming no intervening change in the law—upon the sale of the TIC property at the end of the holding period. This unique compatibility with Section 1031 is a major factor that differentiates TIC programs from syndicated real estate partnerships, limited liability companies, and REITs.
On the other hand, there are valid reasons why a securitized TIC program might not be the most appropriate choice for a non-1031 investor looking to invest in real estate. Investors often can achieve greater diversification—and less risk—through a syndicated LLC or REIT that owns a portfolio of properties than through a single TIC property. Investment minimums for real estate partnerships and REITs usually are significantly lower than in TIC offerings. All else equal, lower investment minimums allow investors to achieve greater exposure to different sponsors, property types, and investment styles.
In conclusion, securitized TIC programs can be a viable investment option for all real estate investors and merit consideration as part of a well-balanced investment portfolio regardless of whether completing a 1031 exchange is a current objective.