Frequently Asked Questions

1. What is the cash flow on TIC properties?

It differs from property to property, and will change within various economic climates. This information is found in the Private Placement Memorandum for each offering. It is intended to be a monthly distribution and a part of it is usually tax-sheltered. In addition an income stream, capital gains at the sale of the property is also an objective, though there is no guarantee that either objective will be met.

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2. Under what circumstances will the IRS suspend their 45 and 180 day requirements?

Practically speaking, never. Most recently, the hurricane devastation in the Southeastern U.S. in 2004 spurred the agency to modify its rules, but no investor should ever count on receiving an exemption.

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3. If I only have $150,000 in equity to contribute to a TIC, can I?

While most minimums are in the $400,000 to $500,000 range, we occasionally can find a program to fit the smaller investor. It is, however, a much more difficult task. The investor is encouraged, under these circumstances, either to find replacement property other than a TIC or be prepared to lose the tax deferral.

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4. Can anyone serve as a Qualified Intermediary?

As long as they are not considered to be "disqualified" by the IRS, they can serve as your Qualified Intermediary. Your attorney or accountant would be considered to be your agent and would be "disqualified".

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5. I want to bring the Private Placement Memorandum (PPM) with me on my vacation to read and study prior to making a commitment. Will this cause me any difficulty from a time perspective?

It could. We always suggest that investors thoroughly read the PPM and pose questions to their advisor and perhaps even the sponsors. In addition, it would be advantageous to have your attorney and/or accountant review the material and advise you accordingly. But it may not be wise to linger; the good programs go very quickly and the investor must act with dispatch.

The Chicago Best Practices Memo of 2003 addressed and many of the issues that confronted investment advisors with regard to the programs being unavailable by the time many clients had completed the PPM. But the nature of TIC's that provide for few investors in any one program can render them unavailable if an investor tarries. It is something, unfortunately, that is beyond our control.

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6. Can I do a 1031 TIC exchange into a REIT?

You cannot do a 1031 exchange into a REIT per se. There is, however, a program called an UPREIT (Umbrella Partnership Real Estate Investment Trust) that incorporates Sections 1031 and Section 721 of the Internal Revenue Code to enable an investor to eventually exchanges into a REIT (Real Estate Investment Trust). It is a complex undertaking and these remarks greatly simplify the process. The minimums are high ($500,000) and there are some restrictions and well as benefits. Discuss these with your FFEC advisor.

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7. You said you require investors to be an "Accredited Investor" in order to participate in most 1031 TIC exchanges. Exactly what is that?

An accredited investor is one with $200,000 annual income ($300,000 with spouse); or $1,000,000 net worth (inclusive of residence) or business entity worth $5,000,000. Investors should note, however, that there are people who fit the above situation and yet would not qualify. For instance, the investor must have some degree of financial sophistication. An absence of information or access to information may disallow some investors. Also, while a sponsor may approve the accreditation of an investor, the lender could disallow it. As an example, we had an investor declined by the lender because although she had a net worth of $1.1 million, just over 30% was represented by her exchange amount. The lender felt that was excessive, and so, even though she was deemed to be an accredited investor, was disallowed in that particular TIC. It should be noted that she was approved by her second choice.

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8. I have no intention of investing in a TIC; rather intend to purchase a small commercial interest in my hometown. Should I still identify a TIC property?

It certainly would not hurt. Many of our investors identify a TIC property as their second or third choice; some having no intention of ever owning one. But, in the absence of an ironclad guarantee that one will eventually land that desired property, it would be unwise not to choose a TIC as a safety net. As is commonly known in real estate, there is plenty that can go wrong. If you have not identified at least three properties, you may be in a difficult situation if your "hometown deal" falls through and you are past the 45 day "ID" period.

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9. My son and I hold our investment property jointly, but it was I who funded it. Can I do an exchange in my name only if he quit claims it?

That is not likely. The acquired property must be held in the same title as the relinquished property. This is an issue you should discuss with your tax advisor.

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10. Must I actually receive my monthly payments from the real estate property even if I do not need it now?

No. Many clients prefer to re-invest their dividends into other REIT programs or even stock and bond mutual funds. Ask your advisor for information on a reinvestment program.

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11. How do I plan for the distribution of my acquired property to my heirs at my death?

All investors, whether exchanging real estate property or not, should have adequate estate planning done for all of their property: personal, real and titled. FFEC has access to qualified estate planning attorneys for our clients' benefit if they so choose. But whatever they do, a solid estate plan is the foundation for sound financial planning.

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12. I represent an investor who wants to do a 1031 exchange into a TIC-type property but do so with no other investors. That is, he wants to be the sole investor. Can you help him?

Yes, we can accommodate investors under these circumstances, providing they qualify. Obviously, it would need to be a large enough transaction to facilitate economy of scale, usually around $5 million in equity. By definition, of course, it would not be a Tenant-in-Common arrangement, but all the features of a TIC arrangement, i.e. professional management, passive ownership, income stream and tax deferral would apply.

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13. My CPA is unfamiliar with the TIC program. What can I do?

Revenue Procedure 2002-22 is relatively new; consequently many highly qualified CPAs, accountants and Enrolled Agents may just be getting introduced to them. We at First Financial conduct regular seminars for CPA's and attorneys who are looking to better understand the TIC process and intricacies. If your situation is such that time is of the essence, we can meet with your accounting professionals and also have them sit in on conference calls that will answer their questions on your behalf.

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14. At what point should I begin to consider investing into more than one Tenant-in-Common program?

Generally speaking, a client with around $1 million dollars or more in real estate equity will want to look at two separate and distinct programs. Ideally, they will vary not only with geography, but also to type of property as well as other factors. If the investor intends on investing in more than three properties, then the total value of the acquired property cannot exceed twice the value of the relinquished property. This is called the "200% Rule."

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15. Who should not do a 1031 TIC Exchange?

That of course, can vary from investor to investor. But those who may not want to include:

a) Investors who buy and sell raw land.
b) Investors who have owned their investment property a relatively short time, for instance two years.
c) Investors who do not want to give up control of the day-to-day managing and monitoring of property.
d) People who need liquidity.
e) Investors who prefer to pay the taxes on the property.
f) Smaller investors.

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16. What are the advantages of a 1031 TIC?

There are many advantages of doing a 1031 TIC. Some of these advantages are:
1. Many investors have the opportunity to own quality property that they otherwise could not afford.
2. Capital gain taxes and depreciation recapture generally are deferred.
3. Estate planning is made simpler.
4. Professional managers handle day-to-day operations.
5. Consolidation (or diversification) of real estate capital.
6. A more predictable and dependable income stream is available.
7. Can add stability to an equity-weighted stock portfolio.
8. Decreased investor responsibility with triple-net leases.
9. Credit-worthy tenants help insure cash flow and can increase the value of the property.
10. Free up time formerly dedicated to operating, repairing and managing real estate.

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17. What tax forms are needed when a 1031 is done?

Here are a couple of commonly used tax forms. As always, we would strongly suggest that you seek consultation from a CPA or a Tax Advisor.

http://www.irs.gov/pub/irs-pdf/f8824.pdf
http://www.irs.gov/pub/irs-pdf/f4562.pdf
http://www.irs.gov/pub/irs-pdf/f4797.pdf

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18. Is there a timeline for a 1031 TIC Exchange?

Yes, there is a time compression for the completion 1031 TIC Exchanges. Here is a brief timeline.

1. If the sale of your relinquished property has not yet occurred: Notify your First Financial investment advisor that you are considering exchanging into a Tenants-in-Common (TIC) passive investment. (If you have already closed on the relinquished property, and the funds from the sale are at the Qualified Intermediary, notify your advisor of this fact immediately!)
2. Your advisor will suggest a Qualified Intermediary (QI) unless you already have chosen one. He or she will then make contact with your QI to advise them that FFEC will be looking for replacement investment property (or properties) for you.
3. You will receive a packet from the Advisor with pertinent information regarding 1031 exchanges, specifically TIC's.
4. Your Advisor will conduct a general interview with you, in person or by phone, to help insure that a TIC exchange is right for you.
5. It will be your responsibility to keep the Advisor current on the status of your pending sale, its probable sale price and your existing mortgage. Your sales contract should have language stating your intent to conduct a 1031 exchange and that the Buyer will cooperate with your exchange. Your Advisor or QI will provide you with this language.
6. At the close of escrow, the net sale proceeds are wired to the QI. It is imperative that you, the exchanger, do not take actual or constructive receipt of the assets! To do so will result in you being unable to defer capital gain taxes.
7. From this date, the transfer of the relinquished property, you have forty-five (45) days to identify the replacement property. Your interests are best served by identifying three, irrespective of whether you intend to purchase your second and third choice. (In certain circumstances, more than three may be identified.)
8. Your Advisor will advise you of what properties are available for you, who the offering sponsor is, what kind of program it is and the underlying financials.
9. Upon indicating an interest, the Advisor will provide you with a Private Placement Memorandum (PPM) which you must read and discuss with your accountant and/or attorney who is familiar with such programs and your personal tax situation.
10. Once you have settled on a replacement TIC property, your Advisor will provide you with the forms and applications that must be completed and signed for the exchange to be successful. As this is a time sensitive issue, you must act with all deliberate dispatch to insure participation in the chosen program.

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