“TIC”, as a term, is profligate: it is used in many different ways.  Its profligacy is here ruminated upon.

The term can be used to refer to a kind of investment, a kind of property, or a kind of investor.

TIC Investment

Most often “TIC” is used to refer to the Tenant-in-Common investment itself.  A TIC Investment is, in essence, a way of owning real estate, sometimes referred to as “fractional ownership”.  Under this method of taking title to real property, each investor is a co-owner of the property, owning an “undivided fractional interest” in the whole.  A main reason why this kind of investment is popular is that, since it can count as a “replacement property” in a 1031 exchange, it may be used to defer capital gains tax.  (More about this here.)

TIC Property

Sometimes “TIC” is used more loosely to refer to the property that is being taken title to.  So, for example, if the object of a given TIC investment is a skyscraper in Chicago, one might say “The TIC is in Illinois, so we’ll need to be Qualified to Do Business in that state.”

I can think of two possible linguistic explanations for this naming practice.

The first, and most interesting explanation, is that this nomenclature might be due to the unintentional use of the figure of speech known as synecdoche, in which “something is used to refer to the whole (and vice versa)”.  An example of unintentional synecdoche is the trend to refer to the clock tower at the Palace of Westminster as “Big Ben”, where, actually, Big Ben is the name given to largest of the clock’s bells, and the clock tower is simply called “the clock tower”.  In this example, the name for a part of the object, (the big bell) is used to refer to the object itself.  The inverse of this, in which a whole is used to refer to the part, is also a case of synecdoche, called “totum pro parte”.  Any given property may be the object of an investment,  and therefore, in a sense, a part of the investment, but the investment itself is distinct.  Investments are financial arrangements; real estate properties are areas of land, sometimes with buildings on top of them. Different things. So, to call the property the “TIC” may be to play slipshod with our terms, calling a part of the investment by the investment’s name.

The second and more natural explanation is that “TIC” is just short for “TIC Property”.

TIC Investor/TIC Entities

Sabre has more occasion to refer to individual investors, or, more specifically, individual legal entities used by individual investors, by the term “TIC”.  Investments, surprise surprise, have investors.  Tenant-in-Common investments can have up to 35 individual investors, all taking part of an undivided fraction of the property. Lenders require that each of these investors takes hold of their portion of a TIC investment by means of a Single Purpose Entity, typically a LLC (for more on this, see here).

These LLC’s, which Sabre can Form and Maintain on behalf of Sponsors, are named in such as way to reflect that their sole function is a vehicle for Tenant-in-Common investors to take hold of their interest of the investment.  Sabre deals with thousands of such entities.  Accordingly, seeing scores of legal entities all with “TIC” in the name, a natural linguistic evolution is to call the LLC’s just that: TIC’s.

TIC investments are the mechanisms by which TIC properties and TIC investors come together.  Or, to put it recklessly, TIC’s are the means by which TIC’s invest in TIC’s.

Almost all of the TIC Sponsors with whom Sabre works choose to Form LLC’s in Delaware.  The Delaware entities for a given TIC property are then Qualified to Do Business in the state jurisdiction where the property resides.  What’s the motivation for this?  Why not cut out the middle man and just Form the entities in the state of the property in the first place?

One reason often cited is that Delaware lets one Form entities anonymously.  This is something unique to Delaware, but what makes this so valuable?  Why would someone want anonymity anyway?

Apart from the usual unsavory reasons why one might desire anonymity, the biggest benefit to the anonymity one enjoys with a Delaware LLC is that it cuts out administrative and financial hassle.  Because Sponsors may Form anonymously if they wish, they are furthermore not obligated to Amend their entity’s filings.  With many other states, whenever there is a change in manager or member information (such as mailing address), the LLC must be Amended with the state to reflect this change.  This means more paperwork and more fees.  When dealing with hosts of investors altogether, such minor annoyances add up.  Forming in Delaware, however, provides one with genuine anonymity, the crowning perk of which is the avoidance of so much nasty bureaucratic red tape.
 
Also, when you consider the role LLC’s play in TIC investments, it becomes apparent how anonymity provides a Sponsor flexibility as they work to bring a TIC to market.  When a Sponsor puts together a TIC Investment, they are accomplishing a masterpiece of orchestration: they are gathering into a single investment up to 35 distinct investors, most of whom are working within their own 1031-exchange timeframes.  Things get complicated. 

So, it is beneficial to Sponsors to be able to create many LLC’s up front, before they even have investors who need them.  This way, the Single Purpose Entities are primed and ready as means for the investors to take hold of their interests in the TIC property.  But if to Form an LLC the Sponsor has to have all member information on hand, (i.e., the investor’s name and address) then this option just isn’t possible.

So, Forming entities anonymously helps (1) to sidestep bothersome forms and fees, and (2) affords Sponsors a way of creating entities up front and then assigning them to investors after the fact, which in turn works to make TIC investments more viable.

If you are visiting our website and don’t quite seem to understand what’s going on or what it is exactly that we do, this post is for you. 

Sabre Forms and maintains the “Limited Liability Companies” used in a niche real estate industry. Below is a very brief introduction to this industry and an explanation of how our LLC services fit into the picture.

A “1031 exchange” provides a real estate owner with the opportunity to relinquish a property without having to pay capital gains taxes, if he or she acquires a property of like kind according to certain rules. 

These rules are laid out in IRC section 1031 (hence “1031 exchange”). 

“Tenant-in-Common” references a certain way of taking title to real estate in which multiple owners possess undivided interests in a single property. 

In 2002, the IRS declared that Tenant-in-Common properties are valid replacement properties for 1031 exchanges. 

Since then, certain real estate companies (called “Sponsors”) have begun purchasing institutional-grade properties in order to enhance their values and resell them to investors as Tenants-in-Common. 

“TIC” investments are valuable to real estate owners interested in getting rid of their current properties in exchange for investments that they do not have to manage themselves. TIC properties centralize the resources of their investors so that a property management company can be put in place. 

The rules by which TIC properties qualify for 1031 exchanges are laid out in Rev-Proc. 2002-22. 

Each investor takes title to his or her replacement property by way of a Limited Liability Company. The investor is the single member of this LLC, and the single purpose of the LLC is to hold his or her title to the TIC interest. 

This LLC mitigates the risk of the investor’s entire asset base becoming susceptible to litigation. Usually the LLC’s used in a given TIC property are set up beforehand, as a part of the whole investment package. 

TIC Sponsors contract with Sabre to Form these LLC’s and keep them compliant with state law. We focus entirely on the compliance of the LLC’s used in TIC offerings. We streamline all of the LLC Formation and maintenance processes such that a Sponsor company can painlessly integrate our services into its offering and receive a single invoice, and zero headaches.