What to look for when purchasing a TIC interest.

The big rage in real estate these days are TIC interests.

TIC stands for "Tenant-In-Common," which is the legal name that these types of interests hold title to property. TIC interests are program investments similar to the partnership tax shelters of the 1970s and '80s, in that they pull together a group of investors to purchase one large property.

There are two major reasons for this great surge in these types of investments: the first is that the IRS approved TICs as suitable replacement properties for 1031 exchanges in 2002. Prior to that date it was uncertain that a TIC interest could be purchased as the replacement for a 1031 exchange because their structure closely resembles a partnership, and as a result investors were wary of them. Today, however, approximately 70% of the TIC interests are purchased by such investors.

The second reason for their popularity is their desirability to aging baby boomers because a TIC interest lets them own a piece of a property large enough for a professional management team to take care of, thus relieving busy investors of that chore.

It also allows the investors to invest in large multi-million dollar properties that would otherwise be beyond their means.

Approximately 30% of the TIC interests are currently purchased by investors as an alternative to other types of real estate investments, such as Real Estate Investment Trusts, which are similar to mutual funds, but only own real estate.

Because the TIC industry is so new, it still has a number of rough edges you need to watch out for. The most important thing to watch for is the size of the sponsor.

Approximately 10% of the sponsors (people, or companies, that put together a TIC offering) are large companies that have multiple properties available for purchase at any one time.

The other 90% of the sponsors are small sponsors that may only package one property at a time, and many of them only sponsor one property.

The reason why size is so important is because you need to have an exit strategy for your TIC investment. While most of the projects have a stated investment time frame, say, five years, there is no guarantee that the project will be sold at that time. Market forces dictate such sales, and you have no way predicting when the market will be right for the sale.

Because your own situation may require that you get out of the investment before the date the property is sold, finding someone to buy your interest can be very difficult.

This is where dealing with a large sponsor is important, because the large sponsors have good investor relations programs--they want you to reinvest with them when your building is sold. And because of their size, they always have a very large pool of potential, and usually willing, investors. It is to their advantage to line you up with another investor that will buy your interest.

Lastly, because of their size, these sponsors have excellent "due diligence" departments that thoroughly analyze each property they sponsor--they can't afford a lawsuit.

GARY GORMAN, MANAGING PARTNER, 1031 EXCHANGE EXPERTS