Creative Ideas for 1031 TIC Deal Structures?

Question

My friend/business partner and I are working to try and set up a deal structure on a 1031 that is most equitable for both of us. There are several deals floating around but the one I can give rough details as an example is a commercial builidng where 20% is being put down on a 2.5 million dollar asset between 3 TIC equity/capital investors that are each providing roughly a third of the equity. The fourth partner is my friend/business partner who is not bringing in equity but has handled all of the negotiations and will be the sole operator on the deal. The value add will include TI's and renting out the 50% of the square feet that is vacant.

The hangup is that in a TIC structure we have learned that every person must bring money into the deal to achieve an equitable split. The solution that was initially proposed was that friend/business partner would have his 25% equity split bought out of the funds that the 3 equity/capital partners are bringing to close and then he would take 25% of the backend profits. I stewed on this for a bit but found that it was tough to stomach being diluted 25% percent from the jump as a breakeven project would equal a significant loss of capital for myself. I feel that I'd be more interested in 50/50 backside split than this (if TIC rules allow this).

Does anyone have intel on what they have seen in TIC structures for splits or asset management fees etc? Obviously each deal structure can be different based on the specific deal, we are just looking for some ideas as we haven't done TIC structures before together.

Matt Devincenzo · Answer

Where is the rule about equal equity coming from?...at its most basic titling the TIC, does not require equal contributions it's just a deed defining percentages. So the requirement must be from some other aspect of the deal....funds are coming from a 1031 or SDIRA etc that is driving this requirement.

As far as the contribution/buy out idea and being dilluted, I don't see how that is any different than your original proposal. In both three people end up contributing all of the equity and one manages the project. The only difference being the fourth temporarily funds equity for a few days/weeks until you refund him...

Blake Salisbury · Answer

Sorry for the slowness in getting back to you two, was checking around with some other folks on some structure ideas. It does sound like you can have a separate management agreement that can be made which would could include the fees the sponsor would provide aside from the TIC agreement. So contrary to what I was told, this could just have a standard agreement like a sponsor setup with property management fees, waterfalls, etc.

Dave Foster · Answer

@Blake Salisbury, if you're trying to create a TIC structure complian with Rev Proc 2002-22 then you'll have issues.  But if you are simply a group of friends/acquaintances buying a property as tenants in common then it's pretty straightforward and flexible.  Like @Matt Devincenzo, there is no requirement for equal contribution at all.  You can arbitrarily allocate ownership % any way you want on the purchase.  If an LLC is involved later then the capital accounts of the LLC might be different for each.  But with tenants in common that doesn't matter.  When the property is sold each of the 4 own 25% of the property.  And each can do a 1031 exchange on their 25%.