What are Tenancy in Common Investments?
A tenancy in common investment, also known as a TIC, is another type of alternative investment that involves the purchase of real estate. These securities are privately traded, unregistered products known as private placements. TICs are essentially real estate investments disguised as securities.
Like all private placements, these TICs are not sold on public securities exchanges, but rather are private securities offered directly to investors by the sponsor of these investments, or by brokers on the sponsor’s behalf. Essentially, the sponsors of these products acquire a real estate property and then sell shares of it to other investors. This property could be either residential or commercial.
Those who purchase shares of a TIC product are then referred to as tenants in common. The property’s physical space is not divided up among the investors, but rather each investor owns a percentage of the property. The investors in a TIC can also sell, gift, or borrow against their shares of the investment without the permission of the other tenants in common.
Private Tenancy in Common Investments
Private placements are incredibly difficult to regulate and monitor. Many less than scrupulous securities brokers will use that to their advantage as it allows them to misrepresent some of the features of the product. Some brokers represent that these products are a “safe place” to put your money. Others will represent that the investor does not need to worry about market moves since the investment is not correlated to the stock market. Many brokers fail to inform the clients of the extreme costs involved with this type of investment, as well as the true level of illiquidity.
The truth is that private placements are incredibly speculative, highly illiquid, accompanied by extremely high fees, and are often only recommended due to significant conflicts of interest. The only way that sponsors of these private products are able to forgo registration with the SEC is by agreeing to only recommend them to what are known as accredited investors.
An accredited investor is an individual who has a minimum net worth of $1 million dollars, or a consistent annual income of $200,000. Securities brokers who recommend private placements such as TICs to investors who do not qualify as accredited have violated the terms of the registration’s exemption.
Real Estate Investments Can Be Incredibly Illiquid
Real estate is undeniably risky when purchased as an investment. Some investors prefer real estate over equities and bonds since they are receiving an actual physical thing for their purchase. In the investor’s mind, this purchased property will always be an asset to them. However, this is unfortunately not the case. While the purchased property will continue to exist, its ability to remain an actual asset is dependent upon many factors that include the market, the area, whether it is residential or commercial, and more.
A real estate purchase can very easily cost an investor their life savings due to an unforeseen ability to sell or lease the property and being forced to simultaneously pay property taxes without any money actually coming in. An investor can be stuck holding a real estate investment for years on end, since liquidating it is much more difficult than publicly traded equities. These publicly traded securities have what is known as a guaranteed redemption, meaning an investor can exchange their shares for the stated market value at a moment’s notice; however, in order to liquidate a real estate investment, the investor must literally put it on the market themselves and wait until they find a buyer.
Finding a buyer for a real estate investment can take years while leaving the investor trapped in a failing investment. This is no different for a TIC investment. The other tenants in common are not obligated to buy you out, meaning it can take just as long for the broker to find a new investor willing to purchase your share of the property.
The Truth About Tenancy in Common Investments
Like all other private placements, TICs are accompanied by extremely high fees. Broker commissions for these alternative products often range between six and eight percent and can be as high as ten percent of the investor’s principal. This is compounded with other upfront fees that can drain an investor’s principal investment of as much as seventeen percent just for the opportunity to invest in a TIC. These commissions often serve to be the main motivation behind brokers recommending these products to financially unsuited investors.
The truth is that TICs are really only suitable for investors who need to exchange a low basis real estate investment in order to avoid paying capital gains taxes. However, many recommending brokers will use the tax benefits of TICs to convince investors it’s the right investment for them, rather than analyzing what impact the capital gains tax would have if the customer sold his real estate investment and purchased a more plain vanilla mutual fund of ETFs.
Brokers Take Advantage Of Investors By Recommending Risky Tenancy in Common Investments
Private placements are not suitable for most investors and TICs are no different. Like all alternative securities, TICs are speculative, illiquid, and subject to extremely high upfront fees that drastically lower investor principals beyond the point of seeing desired investment returns. These products can be so harmful to investors that they are only sold by third tier brokerage firms. The major wire house firms like Morgan Stanley, Merrill Lynch, and Wells Fargo do not allow their registered brokers to recommend these types of private placements to investors.