Something special "in common"

TICs - investment properties owned by two or more tenants - rising in popularity
By Beth Potter
Special to The Denver Post
DenverPost.com

For commercial real-estate broker Art Haag, owning and managing a Loveland mobile- home park can be a big hassle.

So if he can sell the park without paying capital-gains tax and invest in something that will pay him a monthly stipend, it sounds like a great deal, Haag said.

"It's a strong tenant-lease property. But then you have the hassles of ownership and management," Haag said. "I'm 74 years old, so I'm at the point now where I don't want to deal with it."

Haag and others with investment property who are looking to retire are prime candidates to invest in "tenants in common" real-estate deals, said Gary Herick, owner of Herick Asset Management in Denver.

Such deals shield them from paying capital-gains tax and pay up to 7 percent in yearly returns, Herick said.

How it works: Say you bought a condo in Vail for $85,000 in 1970 that now is worth $1 million. When you sell it, you and other real-estate investors (i.e., the tenants in common) buy an office building, which pays you, say, $70,000 a year as it appreciates, Herick said.

Because you are rolling money into the new real-estate investment - in a process known as a 1031 Exchange - you needn't pay an estimated $212,000 in capital-gains tax on the condo sale. The Internal Revenue Service in 1992 approved rules that made it easier for individual investors to get involved.

"You don't want the tenants, toilets and trash, but you want to have the tax benefits," Her ick said. "You don't want to manage the property, and you may want more income."

While the use of "tenants in common," or TICs, has been around for 20 years, it has exploded in places such as California and Arizona in the past few years as property values have risen rapidly.

An estimated $4 billion will be invested in them this year, Herick said, citing industry data.

Howard Runyan, who just retired from Xcel Energy in Colorado and who owns land in Punta Gorda, Fla., on the Gulf Coast, is considering the strategy.

Office property seems like a good investment, and the tax shelter also means if he dies, his children won't have to pay the capital-gains tax either, Run yan said.

"It doesn't make any sense to give the government money when you can collect interest and not pay any taxes," Runyan said. "Between what you get in the interest and not paying the taxes, it's quite a good deal for me."

Farm families with land holdings also are good potential clients because they have already used up depreciation methods to save on taxes over the lives of their land, Herick said. Once all the depreciation has been used, the tax liability is huge, making the tax-free exchange process a good one, he said.

On the upside of TICs, Her ick and other money managers scour real-estate investments across the United States to find the biggest returns, he said.

That means "unlocking equity" of the 7 percent returns he promises.

"If the economy goes to hell in a handbasket, you're a lot less vulnerable in this than in any other investment," Herick said.

On the downside, there can be heavy startup fees associated with handing your management duties to somebody else. As with real-estate investment trusts, or REITs, investment returns can also fluctuate depending on the commercial real-estate market, Herick said, no matter how solid the investment seems to start.

In addition, because of the unique nature of the deals - REITs are actually securities bought and sold on stock exchanges - investors might be asked to add money to the pot after the initial deal is done.

"You want to make sure you get a professional to help you, someone who is on your side," Herick said. "There can be good eggs and bad eggs (in advisers), so you want to make sure you're careful."

This e-mail was initiated by machine [10.148.8.4] at IP [10.148.8.4].