Investment in TICs has grown to a multi-billion dollar industry. In a TIC, investors own buildings directly rather than through a corporation or partnership. This allows small investors to buy into the cash flow streams of large buildings such as Class A office buildings or large industrial warehouses occupied by excellent credit tenants on triple net leases. Tenancy in common ownership interests may also be sold as securities; but, only by licensed security brokers - not realtors.
TIC Application to Residential Condos
Many if not most TICs involve one large building in which each investor owns a "share" of the income stream as a tenant in common. There is no secondary market for tenant-in-common securities. Additionally, selling a property, or individual share, may require unanimous approval from all of the investors involved.
What of the case of residential rental condominium developments wherein each investor's share actually consists of individual physical condo units? The question becomes, can these individual rental condo units be sold off in fee-simple to owner-occupants?
The answer to this question can be vague. While a particular ownership association agreement may allow it, how easy would such a transfer be? For one thing, what potential condo owner would want to buy and live within a rental community? Not to mention the fact that the investor would have to endure the headache of evicting the current tenant prior to listing the condo for sale.
What makes this situation unique is the fact that the transfer value of an individual condo unit interest in fee simple to an owner-occupant could greatly exceed the transfer value of the net rental income stream that the same condo unit generates as a rental unit owned and managed through the TIC association.
TIC Residential Condo Example
For example, assume an investor owns one condo in a ten unit development. There are a total of ten individual investors who each own one identical condo within the development. Each investor owns one-tenth share as a tenant in common.
Typically, the investors will hire a management company to market and manage the property, collect rents, pay expenses including common-area maintenance and disburse net proceeds to the owners based on their pro-rata share of ownership. It is up to the investors to ensure that the management company is doing the best possible job of bringing the most income to the bottom line.
Let's assume these condos each rent for $1,200 per month ($14,400 per year). Once all expenses are paid, the managment company is able to net out let's say 50% of all income. That means 50% of $14,400 (or $7,200) is disbursed to the investor each year for the unit they own.
The investor doesn't even have to see the property. All they have to do is collect the check and the risk is relatively low. Let's say the risk is low enough to justify a modest 5.5% return - a typical going-in rate for Class A apartment developments. That would make the value of our investor's condo unit about $131,000 (or $7,200 net income divided by 5.5% rate).
The Dilemma
What if very similar residential condo units are selling for $400,000 to $500,000 within the same market? The investor holds a headache-free investment that returns 5.5% per year. He might be able to sell the investment to another similar investor for about $130,000; but, he might also be able to sell that unit to an owner-occupant for 3 to 4 times as much.
Numerous issues arise as to just how easily this could be accomplished. Is it really worth the hassle? Maybe better efforts should be made to get operating expenses down so the investment will return a higher annuity. Could the ownership association try to block the sale? What legal rights are involved especially if there is no owner with a majority share (and vote) in the TIC? What if there is a majority owner and they want to sell off multiple units all at once - flooding the market essentially and bringing all the other units' values down?
Resolution
An owner-investor of an individual residential rental condo within a TIC structure may be limited in their options regarding transfer of the property. Our recommendation is to have the ownership association agreement and title documents closely examined by an attorney. While an owner of a TIC rental condo may be tempted to sell their unit in a hot market, they should consider all their options carefully.
The first three obvious options are: 1) hold the unit and enjoy the benefits of hassle-free annuity payments; 2) quickly sell the rental condo to an investor based on its income stream or 3) market the condo for sale to an owner-occupant, evict the current tenant, negotiate with the ownership association, pay commissions, marketing and holding costs and hopefully find a wiling buyer. Ultimately, the hold-sell decision really depends on what the particular investor's needs are.
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