Delivering Wall Street Investments to Main Street Investors

Grubb & Ellis Realty Investors has been one of the nation’s leading sponsors of securitized 1031 tenant-in-common (TIC) exchanges since its founding as Triple Net Properties in 1998. The company is acknowledged as one of the founders of this industry and helped securitized TICs emerge as a viable investment sector. In 2001, just $167 million of equity was raised in the TIC industry, a figure that has mushroomed into billions of dollars raised annually. Grubb & Ellis Realty Investors has taken an unprecedented 51 TIC programs full-cycle since 1998 (through February 2008).

1031 Tenant-in-Common (TIC) Exchanges

A 1031 exchange is a transaction in which a taxpayer is allowed to sell one property, buy another, and defer taxable income on the sale. Section 1031 of the tax code provides for like-kind exchanges, one of the best strategies for the deferral of capital gains taxes which would ordinarily arise from the sale of real estate. A section 1031 exchange defers the recognition of the capital gains tax from the sale of a real estate investment, leaving the property owner with substantially more proceeds to purchase a replacement property than they would have without the 1031 exchange.

The Internal Revenue Service’s Revenue Procedure 2002-22, issued in 2002, created the opportunity for undivided fractional interest in real estate and more importantly qualified tenant-in-common (TIC) ownership for use in 1031 tax-deferred exchanges. The marriage of TICs and 1031 exchanges has proven to be a popular one, as more and more owner-managers of real property are now able to sell and reinvest into institutional properties that provide stable income, while avoiding the headaches of active management.

Limited Liability Companies (LLCs)

Nearly every 1031 TIC exchange offering sponsored by Grubb & Ellis Realty Investors includes an LLC investment opportunity. LLC investors own units in a multi-member LLC that in turn owns an undivided tenant-in-common (TIC) interest alongside other TIC investors. LLC units require a relatively small investment ($25,000), allowing a larger pool of investors to benefit from the tax advantages and potential appreciation that real estate can provide.

What are some of the risks of TIC or LLC Investments?

As with any real estate investment, there is risk in TIC and LLC investments. Investors should carefully review offering materials related to a TIC or LLC investment as those materials will contain important risk disclosures and specific information about the property. Interests in real estate may be speculative and may involve a high degree of risk; investors should be able to bear the loss of part or all of their investment.

Some TIC interests are subject to recourse liability, i.e., the investor may be responsible for providing any cash needed in the future in connection with the property. There are restrictions on transferring TIC and LLC interests; these are not liquid investments. There are a number of significant tax risks and tax issues involved with the purchase of a TIC or LLC interest; investors should consult their own tax advisors and legal counsel. The direct or indirect purchase of real property involves significant risks, including market risk and property specific risk. The purchase of real property with other investors, e.g., as tenant-incommon, presents risks related to the relationship with those other investors. TIC and LLC investments are often leveraged; leverage may increase volatility and may increase the risk of the investment loss.

The manager has broad authority and discretion over the property and the terms of financing. The various fees paid to the manager and its affiliates in TIC and LLC investments are significant and may offset profits related to the ownership and operation of the real estate. Finally, there is no guarantee that cash distributions will continue, that a particular property’s business plan will be successfully executed, that the property’s value will be enhanced or the property will be sold within the planned time period. In other words, past performance is no guarantee of future results.