All-Cash TIC Advantage for 1031 investments

Some time back, I saw an interesting article by Robert Johnson - president of St. Paul-based AEI Capital Corporation - discussing the advantages of an all-cash tenant-in-common investment. I asked, and received, his permission to re-publish some of the important issues he describes in the article. The full article appeared in the January 2009 National Real Estate Investor. The article contains solid information for 1031 investors that lack debt in their relinquished property and are looking for suitable replacement property investments.

Access to affordable capital has rapidly become a difference maker in the tenant-in-common industry. TIC sponsors that able to use an all-cash acquisition and offering strategy are getting a leg up on their leverage-dependent competition. Moreover, a lack of acceptable financing is forcing some leveraged TIC sponsors to delay bringing. or to pull altogther, deals to the market.

Sales volume in the Tenant-In-Common industry has been reduced due to a decline in U.S. real estate sales and the corresponding decrease in demand for 1031 exchange properties which enable investors to defer capital gains taxes. Despite the drop in sales volume, the TIC property ownership structure remains sound for suitable 1031 exchange buyers.

Benefits of an all-cash TIC transaction include no foreclosure risk, no interest rate refinance risk, and less risk of capital calls. Added benefits include avoiding the bank application process, easier resale, and flexible 1031 exchange closing schedules.

All-cash TIC properties usually generate a slightly lower rate of return. On the other hand, the front-end fees associated with all-cash transactions will normally be less than those of TICs using debt. Ultimately, the all-cash model provides an added layer of protection that is attractive in a market where investors are increasingly averse to risk.

Although TIC offerings requiring leverage are still offered, they are considerably more difficult to organize in today's relatively illiquid market. As financing has become more expensive, and difficult to obtain, the advantages of an all-cash strategy become more meaningful for 1031 investors.

As Mr. Johnson points out, all-cash TIC offerings tend to focus on properties priced under $10 million and may not be suitable for all 1031 exchange investors looking to reduce risk (larger, institutional-grade properties are typically perceived by investment professionals to contain less overall risk). TIC offerings should be reviewed with full due diligence and a complete understanding of the investment risks. If you are considering an investment in a tenant-in-common property, you should discuss the offering details with your legal and tax professionals. For futher details on the ideas expressed here, contact Robert Johnson at 800-328-3519 or at aei1031@aeifunds.com.