Using a tenants-in-common structure for 1031 proceeds

Over the past six months, we at Adaptive have got a crash course in tenants-in-common deals and I think this may open a new avenue for growth in our business.

To understand why, you first need to understand what a TIC deal is: A tenants-in-common situation is one in which multiple owners possess a property simultaneously. In effect, two or more owners put up the money for the acquisition and then have ownership stakes proportionate to their investment, with the running of the building governed by a TIC agreement.

The reason TIC deals are interesting in this phase of the cycle is that high prices are enticing many owners to sell. Unless they plan to exit the real estate business entirely (and pay a ton of capital gains tax), those owners generally opt to do 1031 exchanges.

But the same high prices that are enticing people to sell also make it hard to execute 1031 exchanges, since the properties available to buy are generally expensive.

The only deals that make sense are value-add deals, where you buy a bad property and make it good. But many owners aren’t equipped to do that kind of deal. And the 1031 rules prevent them from investing their sale proceeds in a fund (of the type we have often run in the past), because you only defer the tax by exchanging one property for another (not one property for a membership interest in an LLC).

In order to solve this problem, we have concocted a structure based on a TIC whereby investors can sell their own properties via 1031 and invest alongside us in value-add deals. It’s complicated and therefore only really relevant for investors with, say $2MM+ in sale proceeds to place, but it works.

If you’re an owner (or broker) considering selling a property and wondering where to place the sale proceeds, get in touch.

N.B.: The foregoing is not tax advice. Consult an attorney!