|
|
| Tenancy-in-common investments 01/24/08 Several dozen Palm Beach real estate professionals turned out Tuesday for an update on a proposed change in federal rules on tenancy-in-common investments that could open up a new source of income for them. A growing investment niche and a variation of the 1031 Exchange, the tenancy-in-common deals allow investors to defer capital gains from the sale of property that is not a primary residence. The program at the Beach Club featured securities lawyer Eric Perkins, of Hirschler Fleisher in Richmond, Va. It was hosted by Mariner Asset Management of West Palm Beach, whose co-founders are Palm Beach native Homer Marshman Jr. and Michael Cabot, of Palm Beach. The topic has become increasingly timely, with the growth of the niche tenant-in-common industry. "Investment in the TIC industry has escalated dramatically" since the Internal Revenue Service in 2002 clarified the criteria and requirements, Marshman said. In 2001, less than $200 million in real estate was exchanged into tenancy-in-common properties. Now, it is more than $3 billion. Tenancy in common is a legal vehicle by which two or more people can co-own property. There is no right of survivorship, so the investor's interest passes to his or her heirs, not to the other investors. The debate over compensation boils down to the question of "are we selling real estate or selling securities?" Perkins said. The answer determines who gets paid. Previously, the majority of fees for putting together 1031 Exchange transactions or tenancy-in-common investments were in the hands of securities brokers and lawyers. Real estate brokers weren't allowed to accept a fee or commission for advising clients. Last fall, the National Association of Realtors asked the Securities and Exchange Commission for an exemption to its requirements to allow commercial real estate brokers to receive compensation for advising clients on securitized TIC investments. The period for public comment ended in mid-December, and the SEC is expected to make a final ruling in about two months, Perkins said. "It's inevitable it will happen. It's a safe bet that opportunities for the real estate professional are on the way. The SEC very likely will issue relief from the regulation," Perkins said. The 1031 Exchange has been around for decades, providing a way to defer taxes on capital gains when the profits from a real estate sale are rolled over into "a like property," Perkins said. In the mid-1990s, some "brains" on the West Coast organized tenancy-in-common programs to make the process easier. "Tenant-in-common (deals) offer opportunities for small investors to get into high-quality, institutional-grade assets," Perkins said, including retail centers, office buildings, multi-family residential projects, hospitals, marinas and equestrian developments. Because they are buying only a share of the property, the capital outlay is lower. Before 2002, people were putting together deals without much guidance about how the IRS would evaluate the tax liability. "Investors were afraid of jumping in," Perkins said. But that year, the IRS said if a deal were structured with 15 parameters, it would not judge the entity as a partnership. That's what "opened the flood gates" of investors. Perkins said there were 60 to 70 "sponsors," or deal-makers, bringing tenancy-in-common deals to market in 2006, and Mariner is one of only a few sponsors in Palm Beach County. The likelihood of a favorable SEC ruling means that real estate brokers should get prepared. Perkins recommended online resources: TIC Monthly and TIC Talk, featured on the Web site of Certified Commercial Investment Members. "Finally, establish networks with sponsors who are bringing (deals) to market and ask them questions. They will be your strategic partners and potential investors," Perkins said. Ann Surovek, a sales associate with Brown Harris Stevens, was among several colleagues who attended the program. "As agents, we try to stay current. It's always exciting to find something for buyers, sellers and investors. This gives us another choice with our clients," said Surovek, who has participated in 1031 exchanges. It sounds promising, "and a little surprising," that the SEC and the National Association of Securities Dealers are considering referral fees and commissions for real estate agents, said Rodney Dillard, of Illustrated Properties International. "It would be a real departure from the past. They were very opposed to sharing any fees," he said. "This would open up a whole new avenue of referral business, because we deal with a lot of people who make those kinds of investments." Mariner's first tenancy-in-common syndication began in November 2006, when the firm handled the acquisition, financing and purchase of Park Centre in Miami Gardens for $22 million. The mixed-use property covers 132,878 square feet on a 9.1-acre site, with retail, office, showroom and warehouse space. The tenants in the building were CompUSA, Peter Glenn Sports, GE Healthcare, The Miami Herald and SICC USA Inc. By September, the syndication was fully subscribed. "This was our first outing as a sponsor, and it took months to sell it out. Investors were slow to jump in. But we paid off all our interim lenders and private lenders," Marshman said. The deal yielded "an unheard of" 8 percent. As smaller investors realize they can own a piece of an institutional-quality asset, more funds will flow into the industry, he said. Tips on Tenant-in-Common Exchanges * Mariner Asset Management "highly recommends" that any investor considering a TIC deal get a tax opinion letter from a reputable law firm verifying how well the structure of the transaction adheres to IRS guidelines. * An investor must identify a new property within 45 days of selling the old one, and the exchange must close within 180 days. The new property must be of equal or greater value to the old one. A reputable sponsor can expedite the process by finding a property that fits the investor. * TIC transactions must involve an agent who is registered with the National Association of Securities Dealers and the state where the deal takes place. * Homer Marshman, of Mariner Asset Management of West Palm Beach, said it's "mandatory" in a 1031 Exchange for the investor to choose an appropriate Qualified Intermediary, whose role is "critical." Since the investor cannot receive cash upon the sale of the original property, the intermediary accepts the proceeds and holds them in escrow until the new acquisition closes. Currently, Qualified Intermediaries are not regulated by any governing body. "As an investor, I would want to know whether my funds are held in a separate account, what the financial strength of the intermediary is, how long the intermediary had been in business, and the references for that intermediary," he said. *** |