What is a 1031 exchange?
What's a TIC?
What's a Net Lease or NNN Lease?
What types of properties are used for TIC deals?
What are some of the advantages of TIC ownership?
How much will I have to invest?
What are the opportunities for diversification?
How will I finance my investment in a TIC?
What about the liquidity of my TIC investment?
What are the advantages of a Triple-Net-Lease?
A 1031 exchange is simply a method by which a real property owner disposes of one property and acquires another without having to pay capital gains tax on the transaction. In an ordinary sale transaction, the property owner is taxed on any gain realized by the sale of the property, as well as paying the recapture of previously taken depreciation. In an exchange, the tax on the exchange is deferred indefinitely.
1031 exchanges are authorized by Section 1031 of the Internal Revenue Code. Careful adherence to the requirements of Section 1031 is important in maintaining the tax-free status of the transaction. The sale of the relinquished property and the subsequent reinvestment in a replacement property can qualify as an exchange by means of an exchange agreement and the services of a qualified intermediary. An intermediary can guide you through the IRS's regulations, making a 1031 exchange easy, inexpensive, and safe. You should also consider having your accountant and/or attorney review any real estate transaction.
To facilitate a 1031 exchange it is required to utilize the services of a qualified intermediary (QI), also known as a facilitator or accommodator. A QI is the person or entity that acts as the middleman in the exchange, providing the paperwork, oversight, escrow services and expertise necessary to assure that the exchange qualifies as an exchange under Section 1031 of the Internal Revenue Code. Even though a 1031 exchange is a complicated process, an exchange using a good QI can become a simple process and look surprisingly like a standard sale. The intermediary performs these services on a fee-for-service basis.
In a 1031 exchange you cannot take physical possession or constructive receipt of the money resulting from the sale of your property. Therefore, since they are holding your money, it is very important to investigate the bonding, background, reputation and financial strength of a QI. The QI industry is largely unregulated, so it is very important to deal with a reputable, professional qualified intermediary.
An alternative to sole ownership of real estate is an investment in a single commercial property by multiple owners, not as limited partners or as an entity, but as individual owners. This form of ownership is known as co-tenancy or tenants-in-common (TIC). Under this co-ownership structure, you will own an undivided fractional interest in an entire property and share in your portion of the net income, tax shelters, and growth. Further, you will receive a separate deed and title insurance for your percentage interest in the property and have the same rights as a single owner.
A triple net lease is one in which the tenant pays all of the ongoing operating expenses. The landlord receives a net rent, because the tenant pays the property taxes, utilities, insurance premiums, maintenance and repairs. Most net-leases are long term (10-25 years) with cost-of-living increases in the rent. Triple net properties are considered by many to be the most liquid and secure real estate investments available. Nearly all such properties tend to sell very quickly, especially those with solid, credit-worthy tenants.
Many successful regional and national companies would rather lease the property they occupy for their trade or business, than own it. Leasing frees up corporate funds for further business expansion, rather than tying up capital in "brick and mortar." Because their company name and logo are typically on the building they are leasing, and the public perception is one of ownership, they have a vested interest in assuring the taxes are paid, the building is in good repair and the grounds and facilities are clean and maintained. Leasing the building on a triple-net lease basis gives the companies the control they desire over their physical environment without the capital commitment of ownership.
Some examples of net-lease tenants are: Walgreens, Arby's, Sherwin Williams Paint, Staples, U.S. Government, Hollywood Video, Taco Bell, Checker Auto Parts, Goodyear Tire, Barnes and Noble, Radio Shack, Microsoft, Circuit City, PetsMart, Jiffy Lube, Carl's Jr., Gart Brothers, HomeBase, Federal Express, Hartford Insurance Co., Applebees, and Marie Calendars.
TIC replacement properties are chosen because they can provide credit-worthy tenants, secure monthly income, stability, and growth potential.
Furthermore, fractional ownership provides you with the ability to diversify your 1031 Exchange into more than one property and to participate in potentially larger, institutional quality properties. Thus, small investors in one area of the country may participate in net lease properties all around the country.
An estimated 40% of all 1031 exchanges involve capital amounts of $250,000 or less. The price of admission into the net lease market typically begins at $1,000,000, thereby locking many 1031 investors out of this arena. However, Tenants In Common ownership is available for as little as $50,000.
An estimated 40% of all 1031 exchanges involve capital amounts of $250,000 or less. The price of admission into the net lease market typically begins at $1,000,000, thereby locking many 1031 investors out of this arena. However, Tenants In Common ownership is available for as little as $50,000.
Typically, TIC properties already have financing in place that can be assumed by the TIC buyer with minimal effort.
By maintaining a secondary market of TIC ownership interest, new investors can select seasoned properties, and existing owners can liquidate their partial ownership interest. The TIC-MLS facilitates that secondary market and any individual or a listing agent can post listings on the site.
Many real estate investors own their properties as a sidelight to their full-time jobs, and have little time to devote to their real estate investments. As baby-boomers approach retirement, they seek to eliminate the hassle of active property management, and take advantage of a more passive income approach. Triple-net lease properties can provide appreciation potential as well as a secure monthly income without the landlord responsibilities normally associated with real estate ownership. Many "burned-out" landlords turn to net-lease real estate as the property investment of choice.
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A serious dialogue is occurring in the real estate industry regarding the structuring of tenant-in-common transactions as real estate instead of as...
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