Recent Posts

Co-Ownership  Properties (Held as Tenants in Common - TIC'S)

The ownership of commercial properties under this structure has become very prevalent in the past few years as buyers have become more aware of the advantages.  Ownership is held (titled) as tenants in common (also referred to as co-ownership), which is a legal form of ownership originally from English land ownership laws.

A real estate company or originator locates commercial properties for sale and negotiates for the purchase and financing and also arranges for third party due diligence reports, including environmental and appraisal evaluations.  In many cases, tenants as well as city planners and competing property tenants are interviewed to determine the local market factors that may affect the property being purchased.  The due diligence reports are typically provided to potential buyers for their review.  The financing for these properties are in many cases non-recourse with low leverage of only 50-60%.  Fractional deeded interests are available to purchase for as little as $250,000 in properties that may be worth $20-80 million or more.  Many buyers of these co-ownership properties have recently sold their real estate and wish to defer capital gains income tax by performing a 1031 exchange, which can qualify under this ownership structure. 

The benefits of co-ownership are that a buyer is able to purchase into a much larger institutional quality property with a relatively low initial investment, there are no day to day management headaches, stable monthly passive income is generated, low leverage with very competitive interest rates and terms and rapid depreciation with cost segregation reports, which provides for higher after tax yield.  Yields based upon the initial investment (cash on cash pre tax) of 6-8% are generally realized, but can be 1-2% higher with the accelerated depreciation.  This type of ownership is based upon an Official IRS Revenue procedure issued in 2002, which provides for co-ownership using 1031 exchanges for a maximum of 35 buyers per property.  The co-ownership industry under these structures is estimated at over $10 billion annually.

Typically, the properties purchased under the co-ownership structure are class "A" multi-family apartments, retail and office properties that are in very stable markets with high occupancy levels.  The amount of due diligence performed is in many cases, more than most individual buyers will perform on their own.  Because the quality of the available properties is considered institutional and the originator typically is a co-owner in the property along with the other buyers, the properties are considered by many to be low risk and conservative, compared to the typical "B" or "C" class properties for owners with $250,000 to invest.  These "B" and "C" properties can require more funds held in reserve by the lenders for potential repairs, maintenance or improvements since they are older properties in many instances.  The owners have control over the property based upon their ownership percentage and make all the major decisions including the third party institutional property and asset management companies and when to sell.  The typical holding period is 3-8 years depending upon market conditions.

Many of the properties are purchased in the Sun Belt states throughout the Western, Southwestern, Southeastern and Mid Atlantic States where the population growth is strong.