The Exeter Group Topics and Show Dates
The Exeter Group Real Estate Talk Radio Show™ is live each and every Monday from 12:00 noon to 1:00 PM Pacific Standard/Daylight Savings Time. Click here to listen live on Monday.
Monday, February 25, 2008
Vanessa Liddell, President, ShortSalePlan.com, joins us for the first time live in studio to discuss short sale processes, procedures and strategies in the present challenging real estate market. Nathan Hanks with RealSource will be calling in from Salt Lake City, Utah to discuss commercial real estate, including the acquisition criteria that his firm uses to identify, analyze and acquire commercial real estate. Click here to listen live on Monday.
Previously Recorded Programs
Monday, February 18, 2008
We have two new guests with us this Monday. George Brock from Spectrus Real Estate Investments will be calling in from Los Angeles to discuss Single Buyer Commercial Properties versus Tenant-In-Common Investment Structures through Spectrust Real Estate Group. Marci Gendel, Esq., is a real estate closing and settlement attorney who will be calling in from New Jersey to discuss short sale issues, structures and processes. Listen to the recorded version of the show.
Saturday, February 23, 2008
IRS Issues Guidance on 1031 Exchanges and Vacation Property and Second Homes
The Internal Revenue Service has finally issued guidance to help taxpayers understand when a vacation home or a second home may qualify for 1031 exchange treatment.
Revenue Procedure 2008-16
The IRS issued Revenue Procedure 2008-16 to help define when vacation property or second homes might be qualified use property and therefore qualify for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code.
Treasury Inspector General's Report
This long awaited guidance regarding the 1031 exchange of vacation property and second homes was a direct result of the Inspector General's Report issued on Like Kind Exchanges last September.
1031 Exchanges of Vacation Property
I've tried to pull all of the information together and write a comprehensive article on the requirements to 1031 exchange vacation homes or second homes. You can read the article here.
Revenue Procedure 2008-16
The IRS issued Revenue Procedure 2008-16 to help define when vacation property or second homes might be qualified use property and therefore qualify for tax-deferred exchange treatment under Section 1031 of the Internal Revenue Code.
Treasury Inspector General's Report
This long awaited guidance regarding the 1031 exchange of vacation property and second homes was a direct result of the Inspector General's Report issued on Like Kind Exchanges last September.
1031 Exchanges of Vacation Property
I've tried to pull all of the information together and write a comprehensive article on the requirements to 1031 exchange vacation homes or second homes. You can read the article here.
Sunday, February 10, 2008
Evaluating Co-Ownership (CORE) or Tenant-In-Common (TIC) Interests in Real Estate
ONE OF THE MOST COMMON CONCERNS U.S. INVESTORS AND their professional advisors face when structuring taxdeferred exchange transactions is the difficulty in locating, identifying and acquiring like-kind replacement properties within the unforgiving tax-deferred exchange deadlines.
Because many investors wait until the closing of their property sale to start the search for properties, the taxdeferred exchange deadlines already are imminent.
Investors are under the gun, and are forced to rush the search for suitable properties and shorten the duediligence period.
Section 1031 of the Internal Revenue Code places strict time constrictions and rules on designating like-kind replacement properties. Investors typically designate no more than three replacement properties—given the difficulty making a proper identification under the rules—and because of the time limit, they typically evaluate only local or regional properties of the same asset class.
Though this manner of identification could meet investors’ goals, replacement properties chosen in haste are likely to have the same problems or conditions that originally motivated the investor to sell the relinquished property—inflated
sales prices, poor cash flow or intensive property management requirements, for example. Often, investors ultimately face a tough choice: purchasing less-than-ideal properties to complete the tax-deferred exchange or letting the exchange fail and continuing the search for replacement properties that make sense outside 180-calendar-day deadline.
You can read the complete article by Alexis Aiken, J.D. at http://www.exeter1031.com/pdfs/Article_1031_exchange_CORE_TIC.pdf or contact Exeter 1031 Exchange Services, LLC at http://www.exeter1031.com/ for more information.
Because many investors wait until the closing of their property sale to start the search for properties, the taxdeferred exchange deadlines already are imminent.
Investors are under the gun, and are forced to rush the search for suitable properties and shorten the duediligence period.
Section 1031 of the Internal Revenue Code places strict time constrictions and rules on designating like-kind replacement properties. Investors typically designate no more than three replacement properties—given the difficulty making a proper identification under the rules—and because of the time limit, they typically evaluate only local or regional properties of the same asset class.
Though this manner of identification could meet investors’ goals, replacement properties chosen in haste are likely to have the same problems or conditions that originally motivated the investor to sell the relinquished property—inflated
sales prices, poor cash flow or intensive property management requirements, for example. Often, investors ultimately face a tough choice: purchasing less-than-ideal properties to complete the tax-deferred exchange or letting the exchange fail and continuing the search for replacement properties that make sense outside 180-calendar-day deadline.
You can read the complete article by Alexis Aiken, J.D. at http://www.exeter1031.com/pdfs/Article_1031_exchange_CORE_TIC.pdf or contact Exeter 1031 Exchange Services, LLC at http://www.exeter1031.com/ for more information.
Parties Involved in a Tenant-In-Common ("TIC") Investment Offering
Parties Involved in a Tenant-In-Common ("TIC") Investment Offering
The number of parties involved in a normal tenant-in-common or “TIC” investment property transaction confuses even the most savvy real estate investor and for good reason: the structure of these investment offerings necessitates that additional parties be involved for securities and income tax law purposes. The purpose of this article is to list the major parties involved in a standard TIC investment property transaction and explain their purpose and participation.
Real Estate Exit Broker
While TIC investment properties may be purchased with available liquid cash, they are typically acquired as like-kind replacement properties as part of a 1031 tax-deferred like-kind exchange transaction ("1031 exchange"). The 1031 exchange process requires that you sell one or more of your existing investment properties ("relinquished properties") and acquire one or more new like-kind replacement properties in order to defer your income tax consequences.
Your real estate agent can function as your "Real Estate Exit Broker" by assisting you in listing, marketing and selling your relinquished properties in order to free up your trapped equity and acquire more profitable like-kind replacement properties such as TIC investment properties.
Escrow Officer or Closing Agent
The sale of the relinquished properties and the subsequent acquisition of the like-kind replacement properties, regardless of whether it is a TIC investment property or not, still require a settlement or closing process with an escrow officer or closing agent or attorney depending on which state the real property is located in.
The escrow officer or closing agent or attorney is responsible for ordering the preliminary title insurance report or title commitment and acting as a neutral third party or fiduciary for receiving all documents and monies required to settle or close the transaction as described in the written instructions provided by the seller and buyer.
The closing agent is also generally responsible for preparing any escrow or closing instructions, any required documents and deeds in accordance with terms of the sale, ordering payoff demands on existing loans, notes, liens or judgments, reviewing the documents received in the escrow and presenting the documents, statements, loan package(s), estimated closing statements and other related documents to the seller and buy for approval and signature, and to determine when the transaction will be in a position to close or settle.
Once the transaction closes or settles the closing agent delivers the appropriate closing or settlement statements, net settlement funds or proceeds and remaining documents to the principals, agents and/or lenders. The net settlement funds or proceeds must be disbursed to the Qualified Intermediary if you are completing a 1031 exchange.
Qualified Intermediary or Accommodator
The Qualified Intermediary or Accommodator is a party to the transaction only if you choose to structure a tax-deferred like-kind exchange pursuant to Section 1031 of the Internal Revenue Code ("1031 exchange").
The Qualified Intermediary drafts the legal documents necessary to properly structure your 1031 exchange transaction, holds and safeguards the net settlement proceeds from the sale of your relinquished property in order to prevent you from having constructive receipt of your assets and triggering a taxable event, and assists you through your 1031 exchange process, including reviewing your transaction for compliance with the Federal code, regulations and rulings.
You can learn more about the role of the Qualified Intermediary and how to choose a SAFE Qualified Intermediary for your 1031 exchange transacation by reading our articles entitled The Role of the Qualified Intermediary and Choosing a SAFE Qualified Intermediary.
TIC Sponsor or Syndicator
TIC Sponsors are typically larger real estate firms who recognized early on that smaller investors would love the advantages of owning large institutional commercial real estate, but that the stringent equity and financing requirements kept it from being a real possibility for most investors.
In response to this demand, TIC Sponsors set out to make interests in these properties more marketable to individual investors by allowing them to be purchased in pieces ("fractional interests" or "co-ownership interests"), a process which requires these TIC Sponsors to purchase or "take down" these properties and then divide the properties into smaller deeded units, referred to as “tenant-in-common” or "TIC" interests, arrange non-recourse financing and then offer for direct purchase to investors through private placement offerings, and/or offered as like-kind replacement properties for Investors in 1031 exchange transactions.
The investor enjoys several different returns on the property: income from the long-term triple net leases of the building to large, credit-worthy tenants and any appreciation the building accrues during the period in which the investors hold a tenant in common interest. The depreciation can offset a large percentage of the taxable cash flow received by the investor.
Broker Dealer and TIC Broker
Broker Dealer
Most tenant in common or TIC offerings or private placements are best described as “passive investments” because you do not participate in the investment to make it profitable, but rather rely on the efforts of others to make the investment profitable. This particular characteristic of these deals is enough to make them fall under the definition of securities in the United States, and be subject to all the marketing restrictions that apply thereto.
Most TIC offerings are structured as “Reg. D” offerings, which allows them an exemption to the registration requirements of the Securities Act of 1933, and may only be offered by licensed securities brokers to clients that qualify as “accredited investors” pursuant to Securities Regulations. However, even though the investments themselves are exempt from registration, the people responsible for selling them are not.
The Broker Dealer serves in a supervisory role and generally assists the TIC Sponsor to structure prospective securities transactions, identify potential purchasers of securities, marketing specific products and participating in the order taking or order-routing process, such as taking orders from customers. Broker Dealers are subject to regulatory controls, including training standards to assure their brokers have requisite expertise to conduct appropriate due diligence, as well as books and records requirements and financial responsibility standards to protect customer funds. This licensing requirement also serves to help exclude those Broker Dealers unfit for the business so that customer protection provisions can be imposed on those engaging in broker-dealer activities, and the SEC and the NASD can discipline and even expel from the business those persons who have engaged in improper conduct or who have demonstrated their unfitness for handling customer funds and orders.
The Broker is a representative of the Broker Dealer, and is responsible for doing the due diligence on an offering with a prospective investor interested in buying into the particular property. The broker will sit down with the prospective investor and their real estate professionals and go through the Private Placement Memorandum (typically referred to as a “PPM”) which contains all the information rendered from the due diligence process of the Sponsor and all disclosures related to the property, and determine whether or not the investment is suitable for the particular investor. If it is determine that it is a suitable investment, then the Broker will ascertain what percentage of the property the Investors purchase money and/or equity will buy of the total offering, and the Investor will acquire a percentage of the property and a percentage of the debt already arranged by the Sponsor in accordance with that ratio.
The number of parties involved in a normal tenant-in-common or “TIC” investment property transaction confuses even the most savvy real estate investor and for good reason: the structure of these investment offerings necessitates that additional parties be involved for securities and income tax law purposes. The purpose of this article is to list the major parties involved in a standard TIC investment property transaction and explain their purpose and participation.
Real Estate Exit Broker
While TIC investment properties may be purchased with available liquid cash, they are typically acquired as like-kind replacement properties as part of a 1031 tax-deferred like-kind exchange transaction ("1031 exchange"). The 1031 exchange process requires that you sell one or more of your existing investment properties ("relinquished properties") and acquire one or more new like-kind replacement properties in order to defer your income tax consequences.
Your real estate agent can function as your "Real Estate Exit Broker" by assisting you in listing, marketing and selling your relinquished properties in order to free up your trapped equity and acquire more profitable like-kind replacement properties such as TIC investment properties.
Escrow Officer or Closing Agent
The sale of the relinquished properties and the subsequent acquisition of the like-kind replacement properties, regardless of whether it is a TIC investment property or not, still require a settlement or closing process with an escrow officer or closing agent or attorney depending on which state the real property is located in.
The escrow officer or closing agent or attorney is responsible for ordering the preliminary title insurance report or title commitment and acting as a neutral third party or fiduciary for receiving all documents and monies required to settle or close the transaction as described in the written instructions provided by the seller and buyer.
The closing agent is also generally responsible for preparing any escrow or closing instructions, any required documents and deeds in accordance with terms of the sale, ordering payoff demands on existing loans, notes, liens or judgments, reviewing the documents received in the escrow and presenting the documents, statements, loan package(s), estimated closing statements and other related documents to the seller and buy for approval and signature, and to determine when the transaction will be in a position to close or settle.
Once the transaction closes or settles the closing agent delivers the appropriate closing or settlement statements, net settlement funds or proceeds and remaining documents to the principals, agents and/or lenders. The net settlement funds or proceeds must be disbursed to the Qualified Intermediary if you are completing a 1031 exchange.
Qualified Intermediary or Accommodator
The Qualified Intermediary or Accommodator is a party to the transaction only if you choose to structure a tax-deferred like-kind exchange pursuant to Section 1031 of the Internal Revenue Code ("1031 exchange").
The Qualified Intermediary drafts the legal documents necessary to properly structure your 1031 exchange transaction, holds and safeguards the net settlement proceeds from the sale of your relinquished property in order to prevent you from having constructive receipt of your assets and triggering a taxable event, and assists you through your 1031 exchange process, including reviewing your transaction for compliance with the Federal code, regulations and rulings.
You can learn more about the role of the Qualified Intermediary and how to choose a SAFE Qualified Intermediary for your 1031 exchange transacation by reading our articles entitled The Role of the Qualified Intermediary and Choosing a SAFE Qualified Intermediary.
TIC Sponsor or Syndicator
TIC Sponsors are typically larger real estate firms who recognized early on that smaller investors would love the advantages of owning large institutional commercial real estate, but that the stringent equity and financing requirements kept it from being a real possibility for most investors.
In response to this demand, TIC Sponsors set out to make interests in these properties more marketable to individual investors by allowing them to be purchased in pieces ("fractional interests" or "co-ownership interests"), a process which requires these TIC Sponsors to purchase or "take down" these properties and then divide the properties into smaller deeded units, referred to as “tenant-in-common” or "TIC" interests, arrange non-recourse financing and then offer for direct purchase to investors through private placement offerings, and/or offered as like-kind replacement properties for Investors in 1031 exchange transactions.
The investor enjoys several different returns on the property: income from the long-term triple net leases of the building to large, credit-worthy tenants and any appreciation the building accrues during the period in which the investors hold a tenant in common interest. The depreciation can offset a large percentage of the taxable cash flow received by the investor.
Broker Dealer and TIC Broker
Broker Dealer
Most tenant in common or TIC offerings or private placements are best described as “passive investments” because you do not participate in the investment to make it profitable, but rather rely on the efforts of others to make the investment profitable. This particular characteristic of these deals is enough to make them fall under the definition of securities in the United States, and be subject to all the marketing restrictions that apply thereto.
Most TIC offerings are structured as “Reg. D” offerings, which allows them an exemption to the registration requirements of the Securities Act of 1933, and may only be offered by licensed securities brokers to clients that qualify as “accredited investors” pursuant to Securities Regulations. However, even though the investments themselves are exempt from registration, the people responsible for selling them are not.
The Broker Dealer serves in a supervisory role and generally assists the TIC Sponsor to structure prospective securities transactions, identify potential purchasers of securities, marketing specific products and participating in the order taking or order-routing process, such as taking orders from customers. Broker Dealers are subject to regulatory controls, including training standards to assure their brokers have requisite expertise to conduct appropriate due diligence, as well as books and records requirements and financial responsibility standards to protect customer funds. This licensing requirement also serves to help exclude those Broker Dealers unfit for the business so that customer protection provisions can be imposed on those engaging in broker-dealer activities, and the SEC and the NASD can discipline and even expel from the business those persons who have engaged in improper conduct or who have demonstrated their unfitness for handling customer funds and orders.
The Broker is a representative of the Broker Dealer, and is responsible for doing the due diligence on an offering with a prospective investor interested in buying into the particular property. The broker will sit down with the prospective investor and their real estate professionals and go through the Private Placement Memorandum (typically referred to as a “PPM”) which contains all the information rendered from the due diligence process of the Sponsor and all disclosures related to the property, and determine whether or not the investment is suitable for the particular investor. If it is determine that it is a suitable investment, then the Broker will ascertain what percentage of the property the Investors purchase money and/or equity will buy of the total offering, and the Investor will acquire a percentage of the property and a percentage of the debt already arranged by the Sponsor in accordance with that ratio.
Saturday, February 09, 2008
Overview of Tenant-In-Common Investment Property Interests or TICs
Overview of Tenant-In-Common Investment Property Interests or TICs
As a Qualified Intermediary for 1031 Exchange transactions, one of the concerns that we often hear about from Investors when structuring 1031 Exchange transactions is the difficulty in locating, identifying and ultimately acquiring suitable like-kind replacement properties within the required 1031 Exchange deadlines.
Investors often rush into an acquisition of a like-kind replacement property that is not particularly well suited for their investment goals and objectives when faced with a rapidly approaching 1031 exchange deadline. Although the income tax benefits of completing a 1031 Exchange transaction are important, the financial and economic aspects and benefits of a particular like-kind replacement property should not be ignored simply because of the 1031 Exchange identification and completion requirements and deadlines. You should let the economics of the like-kind replacement property guide your decision.
You should also carefully consider and evaluate the merits of fractional ownership interests in real estate such as tenant-in-common investment property interests (TIC investment property interests or TICs), or other forms of co-ownership interests in real estate (CORE), when looking for suitable like-kind replacement properties for your 1031 Exchange, especially before rushing into an acquisition that may not make financial and economic sense.
Simply stated, fractional, or co-ownership, interests in real estate allows you to acquire, together with other investors, a larger, potentially more stable, secure and profitable real property asset than what you could have acquired and afforded on your own. In addition, by acquiring tenant-in-common investment property ownership interests in a number of different investment properties, you can achieve greater diversification and improved overall quality in your real estate investment portfolio.
The Treasury Department issued Revenue Procedure 2002-22 in March of 2002, which established guidelines pursuant to which the Internal Revenue Service (IRS) would consider issuing private letter rulings (PLRs) on TIC investment property ownership interests acquired as like-kind replacement properties as part of a 1031 Exchange transaction.
It is important to note that these guidelines do not offer "safe harbor" or "guaranteed" structures for TIC investment properties, but they do provide guidance for TIC Brokers and TIC Sponsors to use in structuring and distributing (selling) TIC investment property interests.
There are many TIC Brokers and TIC Sponsors that can provide you with guidance and advice regarding TIC investment property ownership interests. TIC Brokers typically work with numerous TIC Sponsors and can better assist you in evaluating the various options and help you in making an educated and informed decision as to whether the TIC investment property ownership interest is right for you.
Read Evaluating Co-Ownership (CORE) or Tenant-In-Common (TIC) interests in Real Estate for more complete information on evaluating TIC investment property interests for your 1031 Exchange transaction.
You should always consult with your legal, tax and financial advisors prior to entering into any 1031 Exchange or TIC investment property transaction, including the review of any Private Placement Memorandums (PPMs) on TIC property interests.
As a Qualified Intermediary for 1031 Exchange transactions, one of the concerns that we often hear about from Investors when structuring 1031 Exchange transactions is the difficulty in locating, identifying and ultimately acquiring suitable like-kind replacement properties within the required 1031 Exchange deadlines.
Investors often rush into an acquisition of a like-kind replacement property that is not particularly well suited for their investment goals and objectives when faced with a rapidly approaching 1031 exchange deadline. Although the income tax benefits of completing a 1031 Exchange transaction are important, the financial and economic aspects and benefits of a particular like-kind replacement property should not be ignored simply because of the 1031 Exchange identification and completion requirements and deadlines. You should let the economics of the like-kind replacement property guide your decision.
You should also carefully consider and evaluate the merits of fractional ownership interests in real estate such as tenant-in-common investment property interests (TIC investment property interests or TICs), or other forms of co-ownership interests in real estate (CORE), when looking for suitable like-kind replacement properties for your 1031 Exchange, especially before rushing into an acquisition that may not make financial and economic sense.
Simply stated, fractional, or co-ownership, interests in real estate allows you to acquire, together with other investors, a larger, potentially more stable, secure and profitable real property asset than what you could have acquired and afforded on your own. In addition, by acquiring tenant-in-common investment property ownership interests in a number of different investment properties, you can achieve greater diversification and improved overall quality in your real estate investment portfolio.
The Treasury Department issued Revenue Procedure 2002-22 in March of 2002, which established guidelines pursuant to which the Internal Revenue Service (IRS) would consider issuing private letter rulings (PLRs) on TIC investment property ownership interests acquired as like-kind replacement properties as part of a 1031 Exchange transaction.
It is important to note that these guidelines do not offer "safe harbor" or "guaranteed" structures for TIC investment properties, but they do provide guidance for TIC Brokers and TIC Sponsors to use in structuring and distributing (selling) TIC investment property interests.
There are many TIC Brokers and TIC Sponsors that can provide you with guidance and advice regarding TIC investment property ownership interests. TIC Brokers typically work with numerous TIC Sponsors and can better assist you in evaluating the various options and help you in making an educated and informed decision as to whether the TIC investment property ownership interest is right for you.
Read Evaluating Co-Ownership (CORE) or Tenant-In-Common (TIC) interests in Real Estate for more complete information on evaluating TIC investment property interests for your 1031 Exchange transaction.
You should always consult with your legal, tax and financial advisors prior to entering into any 1031 Exchange or TIC investment property transaction, including the review of any Private Placement Memorandums (PPMs) on TIC property interests.
Will The Real 1031 Exchange Please Stand Up
I have seen so many different ways of referring to 1031 exchange transactions over the years that my head spins, and I figured that it is probably a very confusing issue to many that are not in the business on a day-to-day basis like I am.
You have probably heard the terms tax-deferred exchange, tax-deferred swap, deferred exchange, like-kind exchange, like-kind swap, starker exchange, tax-free exchange, tax-free swap, forward exchange, regular exchange, normal exchange, real estate exchange, personal property exchange, and probably a few more that I can not think of right now.
Will The Real 1031 Exchange Please Stand Up
So, which one is the real deal? The bottom line answer is that they all are. The names referenced above all refer to the exact same thing: they are all 1031 exchanges. The only difference would be whether they are closed on a simultaneous (concurrent) or delayed basis, but they are all still the real 1031 exchange. The only name that I didn't include is the delayed exchange, because it refers only to those transactions where the sale closes first and the purchase is closed within 180 calendar days.
Other Types of 1031 Exchanges
There are other types of 1031 exchange structures that refer to a more specific strategy such as safe harbor reverse 1031 exchanges, non-safe-harbor reverse 1031 exchanges, build-to-suit 1031 exchanges that are also referred to as construction or improvement 1031 exchanges, as well as more sophisticated or advanced strategies.
So, there you have it.
You have probably heard the terms tax-deferred exchange, tax-deferred swap, deferred exchange, like-kind exchange, like-kind swap, starker exchange, tax-free exchange, tax-free swap, forward exchange, regular exchange, normal exchange, real estate exchange, personal property exchange, and probably a few more that I can not think of right now.
Will The Real 1031 Exchange Please Stand Up
So, which one is the real deal? The bottom line answer is that they all are. The names referenced above all refer to the exact same thing: they are all 1031 exchanges. The only difference would be whether they are closed on a simultaneous (concurrent) or delayed basis, but they are all still the real 1031 exchange. The only name that I didn't include is the delayed exchange, because it refers only to those transactions where the sale closes first and the purchase is closed within 180 calendar days.
Other Types of 1031 Exchanges
There are other types of 1031 exchange structures that refer to a more specific strategy such as safe harbor reverse 1031 exchanges, non-safe-harbor reverse 1031 exchanges, build-to-suit 1031 exchanges that are also referred to as construction or improvement 1031 exchanges, as well as more sophisticated or advanced strategies.
So, there you have it.
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