Summary: Listen to the new 1031 Exchange Podcast If you would like your questions to be answered on our next 1031 Exchange Podcast email them to podcast@1031alternatives.net. Thank you for tuning in to the 1031alternatives podcast on 1031 exchange investing. We will be discussing today NNN vs. TIC: Where should your 1031 money go? There’s a lot of investors out there seeking replacement property for their 1031 exchange, but can’t decide on whether to go with a single-tenant NNN (triple net) property or a Tenant In Common (TIC) property. Some of the arguments discussed below make it pretty clear why TICs are becoming more and more popular. TICs are passive income properties that require no daily responsibilities and can free up your time to do other things besides fixing toilets and dealing with tenants. Not to mention, they have the potential to give investors a competitive annual income (paid monthly) which could be partially tax-sheltered due to a new depreciation basis and mortgage interest deductions. Yes, TICs can qualify as replacement property for a 1031 tax-deferred exchange (IRS Rev. Proc. 2002-22). However, many investors who may not be familiar with TICs, or 1031 exchanges in general, underestimate how much easier and simpler they are to acquire than many other types of real estate. Once an investor sells his property, he only has 45 days to “identify” properties that he would like to acquire in a 1031 exchange. And as most seasoned real estate investors recognize, it can be extremely difficult to find, negotiate, study, and buy an investment property and arrange financing in these short time frames. TICs may reduce this dilemma because they are prepackaged and ready for purchase almost immediately. TICs provide an exclusive opportunity for investors with little equity to get into institutional-grade properties. Some TIC offerings require minimum equity amounts as low as $100,000 to $300,000 (varies from property to property). In most cases, if you wanted to leverage into a single-ownership property with roughly $100,000 to $300,000 to work with, you could probably purchase a commercial property in the $300,000 to $950,000 price range (depending on the tenants in place, the type of building, and your credit for a bank loan). In this kind of price range, commercial properties usually have local tenants or franchises of national tenants, depending on the market. These properties may demand management involvement and are probably not institutional-grade. NNN (triple net) properties have been common for 1031 investors for a long time and some deem them as viable option of no-management investment property. A NNN property typically has a single tenant such as a Burger King, Applebee’s, 7-Eleven, Starbucks, etc. The lease term is usually long (15-20 years). In a NNN lease, the tenants pay for everything regarding the property including rent, taxes, insurance, maintenance, utilities, and so forth. The guarantee could be corporate (desirable) or franchisee (less desirable but depends on the size of the franchisee). The typical price range is about $1.2 million to $3.5 million. For higher rated tenants, such as Walgreen’s, CVS, Wal-Mart, Best Buy or Home Depot, the price can reach $5 million or higher. We’ve already concluded the fact that most NNN properties are not going to be institutional quality but they can provide a management-free investment. On the other hand, a lot of investors prefer multi-tenant investments to reduce risk. Think about it. If that single tenant leaves your building, breaks a lease, or goes out of business, you have no cash flow and will need time to figure out what to do while continuing to pay debt service. If one of the “multiple” tenants leaves in a TIC, you may have a reduction of cash flow but all of your “eggs are not in one basket,” like a NNN property. So, getting back to that same $100,000 to $300,000 in equity, you have the capability to own a piece of a Medical Office Building or a Class “A” Apa
