FEATURE ARTICLE, MARCH 2007

STRATEGIES FOR BROKERING TIC DEALS
While professionals may hesitate to suggest TIC properties to clients, new methods are proving profitable.
Andrew W. Topka and Harold C. Surface III

By teaming with a reputable Tenant-in-Common (TIC) broker, many real estate professionals are finding they are able to generate more commissions and enhance their value proposition to clients looking for replacement property to complete a §1031 exchange.

 At first glance, many real estate professionals are loathe to consider partnering with brokers of securitized TICs because they cannot be compensated from the sale of a TIC unless they are property licensed with the National Association of Securities Dealers (NASD). However, there are several partnering strategies that have emerged and proven successful and profitable. 

These strategies are specifically designed to help real estate professionals address the needs of clients who intend to use a §1031 exchange to defer capital gain and depreciation recapture taxes. 

Getting a Seller off the Fence

Compressed cap rates have left many would-be-sellers on the sidelines. The problem: it is difficult in a low cap environment to find quality replacement property. This is particularly true in highly appreciated areas. Enter the TIC solution. With the help of a TIC broker, agents are able to show clients an inventory of institutional grade properties around the country with competitive cash-on-cash returns. Competitive returns, in addition to the other positive attributes of TICs, can often entice an owner to sell, thus generating a commission for the agent, and meeting the needs of the client.

Buy-side

This is a version of the “Fence Sitter” scenario, except in this example, the real estate professional is acting as a buyer’s representative. A client needs a specific type of property for a business. The agent finds the right property but it is not for sale. The current owner is open to considering selling if the offer is right and suitable replacement property can be located. The availability of replacement property in the local market that is attractive (cash flow, price, asset class, etc.) to the owner can be difficult. Once again, TICs can be an attractive solution for the would-be seller and eliminate the replacement property road block.  The agent’s client is able to secure the desired property and the agent gets the business and truly provides value to parties on both sides of the transaction.

Farms and Land

As the tradition of the family farm fades into history, more and more families are faced with the decision of what to do with their land. Large agricultural companies and developers are often eager to buy the land, and selling can provide a windfall for many families.

For those families who do sell, a §1031 exchange (or partial exchange) is an attractive option, until they are faced with the prospect of finding replacement property.  Sellers are often of retirement age and do not want the hassle and complexity of dealing with a real estate portfolio of sole ownership properties. 

TIC properties offer a ready made solution for just those people. The proceeds of the sale can easily be exchanged into multiple properties, providing diversification and a source of passive monthly income.  While it is beyond the scope of this article, there are estate planning strategies using TICs that can also be very useful for the tax efficient transfer of wealth to the heirs of the sellers.

This example uses the family farm as an example, but would apply to any land holdings.

Differentiate Your Client’s Bid

This strategy is the opposite side of the “Farms and Land” strategy because  it describes how to use §1031/TIC to differentiate a formal bid for a piece of land. Including language in the offer that the buyer has resources to help the seller find replacement property in the form of TICs will almost always get the seller’s representative to call to inquire about what that means. 

TIC TOCK

There are many strict requirements of a 1031 exchange. One of the most stringent is that of time.  An exchanger has 45 days from the closing of their relinquished property in which to identify qualified replacement property for their exchange. This can sometimes be a challenging hurdle and many exchangers find themselves backed up against a wall and facing a frightening tax consequence if they don’t find an answer, and fast. TICs offer a high quality replacement property solution that can be very easily identified and the real estate professional that provides that added value suddenly becomes the client’s best friend, securing that client relationship for many years and commission checks to come.

Filling up the Dance Card

In this scenario, the real estate professional has helped the seller successfully close on their relinquished property, and also found suitable replacement property to complete the 1031 exchange. But, the replacement property does not equal or exceed the sales price of the relinquished property. The seller would like to exchange all of the equity and completely defer all taxes from the sale. A percentage interest in a TIC property can easily be identified to match the amount of exchange funds remaining nearly to the dollar and can typically be closed in a matter of days. Again, this is a great value add to the client.

Backup Replacement Property Identification

It is not uncommon for an exchanger to identify one or two potential replacement properties and not be able to complete exchange for many reasons. By carefully using the replacement property identification rules, TIC property can be added to the identification to serve as a backup replacement property and preserve the exchange.

Value-Add

In real estate sales, it pays to be creative in a way that the other guy is not. TIC investments can provide many real estate professionals with a tool that most others don’t know exist. As many know, an exchanger has 45 days in which to identify replacement property for their exchange and must replace an equal or greater amount of debt and equity associated with their sale so as not to incur any tax boot. This can sometimes be a challenging hurdle and many exchangers find themselves backed up against a wall and facing a frightening tax consequence if they don’t find an answer, and fast. TICs can be that answer and the real estate professional that provides that added value suddenly becomes the client’s best friend securing that client relationship for many years and commission checks to come.

These are just a handful of examples. There are almost as many scenarios as there are properties. Having a conversation with a reputable TIC broker about a challenging situation may uncover a way to resolve matters that benefits all. Look for TIC brokers that have due diligence departments that screen new offerings prior to signing a selling agreement, and whenever possible, use a firm that offers traditional financial planning services in addition to TICs. Those firms will approach the client’s situation in a holistic fashion and understand how the transaction at hand fits into the overall financial strategy of the client.

Andrew W. Topka and Harold C. Surface III  are with Charleston, S.C.-based Blue Oak 1031 Advisors, LLC.


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