September 01, 2004

Syndicated Tenancy-in-Common Arrangements (2004, 18:05)

Syndicated Tenancy-in-Common Arrangements: How Tax-Motivated Real Estate Transactions Raise Serious Nontax Issues

Probate and Property, September/October 2004, Volume 18, Number 5

By Bradley T. Borden and W. Richey Wyatt

Bradley T. Borden is an associate professor of law at Washburn University Law School, Topeka, Kansas. W. Richey Wyatt practices with the San Antonio, Texas, law firm of Oppenheimer, Blend, Harrison & Tate, Inc.

Some real estate syndicators have added tenancy-in-common (TIC) interests to their traditional offerings of limited partnership interests. A TIC interest allows an investor to acquire an undivided interest in the underlying property instead of buying an interest in an entity that owns the property. The primary driving force behind this trend is property owners’ need for replacement property to complete tax-free exchanges under Code § 1031. Syndicators, however, are finding that investors will invest cash, other than Code § 1031 exchange proceeds, in TIC arrangements. They do so because syndicators promise higher rates of return than investors have recently been able to find in the stock and bond markets. Nonetheless, because TIC arrangements almost always involve Code § 1031 exchange proceeds, technical requirements must be satisfied to obtain the tax results required by the Code § 1031 investors. Also, because these arrangements involve the ownership of real estate by multiple owners, they raise many nontax issues that must be considered along with the tax issues.

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