Since entering the financial services industry in 1972, my primary mission has been to seek out and share “More Options and Better Solutions” for the benefit of my clients and with other professionals with whom I network. I consider “The 1031 TIC Tax Deferred Exchange” to be my most valuable find.
From this CFP’s point of view, there are three distinct phases in the Wealth Cycle. While sequential, they are not mutually exclusive, as they often over lap in real life. In order they are: (1) The Accumulation Phase, (2) The Distribution Phase, and (3) The Transfer/Estate Planning Phase.
Libraries are loaded with volumes of financial planning tools, strategies, and products, all of which have been endorsed by attorneys, accountants, trust officers, life insurance agents, charitable planners, mortgage brokers, stockbrokers, Realtors, qualified intermediaries, and certified financial planners. In my experience these traditional tools employed in phases #1 and #3 are predictably beneficial. When employed in phase #2, the results tend to be more disappointing than not. With that said and with your indulgence, I will share with you why The 1031 TIC (Tenant-In-Common) Tax Deferred Exchange may be the “Better Solution” for The Distribution Phase of your wealth cycle.
“The Distribution Phase”
is when one’s life style choices and financial objectives begin to shift towards smelling the roses in order to enjoy the fruits of one’s labor. “The 1031 TIC Tax Deferred Exchange” is about re-positioning real property (equity) to facilitate funding those life style changes.
Unfortunately, the “Financial Tools” most often recommended by the majority of professionals are either not tax efficient, too complicated, expensive, confusing, provide limited financial flexibility, require the owner to continue as an active property manager, or a combination of the above.
The 1031 Tax Deferred Exchange has been around since the 1920s. Historically, real estate investors have employed “The 1031 Tax Deferred Exchange” very successfully during the Accumulation Phase.
In the early 1990’s, a southern California property sponsor, attorney, and CPA pioneered The 1031 TIC Tax Deferred Exchange, which they engineered with the intention that it comply with IRC Section 1031 for the purpose of re-positioning real property equity. Since not all Broker/Dealers and Registered Representatives offer TIC Properties, and since the majority of Realtors are not licensed to sell security products, it is understandable why this “Distribution Strategy” has remained somewhat of a secret.
The 1946 landmark case, S.E.C. v. HOWEY CO., 328 U.S. 293 (1946), Rev.Proc.2002-22 and the Edwards vs SEC decision handed down by the US Supreme Court in January 2004 defines TIC’s as a security product that must be offered through a securities broker dealer. In 1999 one could count the number of sponsors marketing TIC Property on your fingers. Over the past decade the TIC industry has experienced phenomenal growth. Therefore as we begin 2008 there are sixty seven active sponsors registered with The Tenant-In-Common Association (TICA) of which ninety percent (90%) have elected to market their properties on a securities platform, which unlike a real estate platform, requires full disclosure of all assumptions and risks to investors.
In October 2005 the TICA released their TIC Best Practices Memorandum at their Annual Conference. The following month at the NAR National Conference the National Association of Realtors released their white paper publishing the merits of TIC property. At that moment, in my opinion, a case could be made that Realtors were put on notice that they have a fiduciary duty to inform clients involved in 1031 Tax Deferred Exchange transactions that TIC replacement property may be an appropriate solution to accomplish their financial objectives, regardless of the regulatory or compensation issues.
Therefore it should be no surprise that during the past three years the NAR has been working together with the Securities and Exchange Commission (SEC) on what is known as an “Exception Request” the sole purpose of which is to allow licensed real estate agents to team up with licensed securities professionals to market TIC’s. The Exemption is required in order for non-security licensed Realtors to receive compensation for participating in the marketing of securitized TIC’s to the public. My best guess is the SEC will approve some form of Exemption request within the next 12 months.
In a nutshell, real property owners, who are sophisticated investors and who meet the accredited investor test, can potentially exchange equity held in smaller properties for a TIC interest in professionally selected and managed multi-million dollar, institutional quality property, located in major markets. Property types include shopping centers, warehouses, industrial parks, office complexes, retail centers, and class “A” apartment complexes. New inventory is introduced every week to ten days. A TIC investment may be a favorable solution for individuals with one or more of the following objectives:
1. Want to simplify their lives.
2. Want to defer capital gains tax.
3. Want to defer recapture of depreciation tax.
4. Want to “discount” the value of real estate holding for estate taxes.
5. May have a mortgage over basis problem.
6. Want positive leverage.
7. Want (NNN) tenants and professional management.
8. Want renewed tax deductions.
9. Want the opportunity for a potential increase in cash flows.
10. Want professional third party due diligence with full disclosure.
Of course, TICs are not suitable for everyone. As with any investment in real estate there are risks associated with TIC ownership, including fluctuations in the real estate market that impact the value of the property, vacancy rates that can impact cash flow and risks associated with the loss of a major tenant. It is not possible to address all relevant risk factors in this forum. Risk factors are outlined in the Private Placement Memorandum for each offering and potential TIC investors should thoroughly understand all risk factors and discuss them with their financial representative prior to investing in a 1031/TIC offering.
It is well known within the real estate industry that 30% to 40% of 1031 Deferred Exchange transactions fail to close. Either the client is not able to locate and/or identify a quality replacement property within the 45-day window, or the transaction falls apart prior to closing. Therefore if you or someone you know meets the accredited investor requirements and is considering re-positioning a minimum of $150,000 in real estate equity, or is involved in a 1031 Tax Deferred Exchange and simply concerned about the risks inherent with identifying and closing on a replacement property, I urge you to consider a TIC Property. It could be the “Better Solution” you or your clients have been seeking.
Since November 2000, I have committed myself to specializing in TIC Properties. As a result over the past eight years I have had the privilege of introducing The 1031 TIC Tax Deferred Exchange as “A Distribution Strategy” to The Society of Exchange Counselors, The Florida, Georgia, Idaho, Illinois, Oregon, and Washington Chapters of The REALTORS Land Institute (RLI), Agricultural & Commercial Exchangers of the Northwest (ACENW), The Montana Association of Real Estate Exchangers (MAREX), and The Pacific Northwest Marketing Conference. This past October it was my privilege to be appointed by Dick Gaylord, NAR President, to the NAR Commercial Legislation and Regulatory Subcommittee for 2008.
As I begin my 36th year in the financial services industry, I am convinced everyone wins when our mission is to seek out and share “More Options…Better Solutions” for the benefit of our clients and with those professionals with whom we network. For more information visit www.ticassoc.org.
David L. Baker, CLU, CFP is a real estate broker and Registered Representative having spent more than three decades in the financial services industry offering products and services in the states of AZ, CA, ID, KS, MO, MT, OR, TX UT, WA, WV.
Securities are offered through Pacific West Securities, Inc. member FINRA/SIPC. Investment advisory services are offered through Pacific West Financial Consultants, Inc., a Registered Investment Advisor. Corporate offices are located at 555 S. Renton Village #700, Renton, WA 98057 (425) 271-3550.
To order your Free Copy of “The 1031 TIC Exchange Strategy” CD-ROM from Baker & Associates, LLC at P.O. Box 18837, Spokane, WA 99228 include $9.95 for shipping and handling. (509) 467-1011. Visit www.baker-associates.com or e-mail dbaker@pwfinancial.net.
