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Return on investment
Initially, each TIC investor receives monthly or quarterly checks. The initial cash flow ranges from 5 percent to 8 percent of the initial invested equity or cash. Through tax advantages, tax shelters and property appreciation, a passive investor can recognize a greater return on investment (ROI) without the risk.
First, the deferral of capital gains and depreciation recapture (25 percent tax rate) into and out of the investment preserves significant wealth in the estate. Second, because the investor is taking the property with existing nonrecourse debt-financing (often a 60-percent to 75-percent loan-to-value ratio), the investor receives the TIC property on a stepped-up basis. This allows for additional depreciation pass-through and interest deductions that can shelter more than 50 percent to 60 percent of the cash-flow rental income from federal and state income tax. Third, after accounting for the additional return from appreciation of the TIC property, the after-tax ROI on an annualized basis can be even greater.
Overall, annual returns are projected in the low- to mid-teens, including cash flow, appreciation and principal reduction on the nonrecourse financing. For investors planning to take their real-estate investments to the grave, there is good news for their heirs. They get the property on a stepped-up basis, so the deferred tax liability is wiped out. One of the more-attractive benefits to TIC ownership is the reliable income and growth potential this type of property produces based on its tenants’ sophistication and strength.
The co-tenants must retain unanimous voting rights to approve a sale, lease, blanket mortgage and management contract. For decisions requiring a unanimous vote, a positive vote by 75 percent of the TIC owners usually is sufficient to initiate the impasse-resolution procedure. This procedure allows TIC owners with 75 percent or more ownership of the property to offer to buy out the dissenting owners’ control. The dissenting TIC owners can accept the offer, buy out the 75-percent TIC owners at the same price per percentage ownership or change their votes.
Further, a TIC interest can be purchased, sold, gifted, bequeathed by will or inherited. It is also subject to property taxes, gift taxes and estate and inheritance taxes in the same manner as a sole-ownership property.
TIC investing and your clients
When discussing TIC investing with your clients, have them consider the following. Do they think of themselves as “coupon-clippers”? Do they like the ease and convenience of a monthly check delivered right to their mailboxes? On the flip side, are they control freaks? Do they need to be in charge? Do they enjoy the stress and headaches that come with managing their properties and tenants on a day-to-day basis?
If they enjoy control and stress, perhaps the convenience of a TIC investment is not right for them. However, if your clients relate to ease and convenience, this may be the type of investment they’re looking for.
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