Is the warm weather bringing out more TICs?

Unlike the little pests that bother our pets, these TICs can be helpful options for real estate investors.

“I think the popularity has been the run-up in real estate prices around the country,” said Tom Oldfield, a tax-deferred-exchange specialist in Tacoma, Wash. “Sellers wanted to get out of one property and exchange into another, but they found replacement property was far more expensive than what they could afford.”

The answer for many taxpayers has been the TIC, or tenancy-in-common, transaction. This strategy allows investors who sell an investment property to buy ownership interests in another property (or properties) instead of buying an entire “like-kind” property to qualify for an exchange and defer capital gains taxes on the sale.

While TICs have been around for years and have been structured by a number of savvy property exchange specialists, they were officially blessed in 2002 when the Internal Revenue Service issued a set of 15 guidelines laying out the ground rules for successful TIC deals. Interest increased immediately, especially from investors who had no easy way of locating other investors who wanted — or could only afford — a piece of another property.

Here’s how TICs usually work: A “sponsor” such as real estate investor or broker will identify and arrange to purchase an apartment building, shopping center or office building. The sponsor will then make available a TIC purchase opportunity to other investors through friends and other brokers. These potential buyers can either buy a TIC interest outright or transfer the proceeds of a previous property sale in order to qualify as an exchange, which allows them to defer capital gains.

TICs have become popular and some big-name sponsors have entered the niche. This activity offers investors diversification of location and property type.

“Investors need to properly research any TIC offering and understand what they are accepting,” Oldfield said. “They need to know how the property is going to be managed, and if the costs include a commission, which is typically paid by the seller, not the buyer.”

Oldfield said that many TIC commercial buildings often are leased to one master tenant who is associated with the TIC sponsor. The master tenant then subleases the building and stands to profit the most when rental rates rise. TIC participants are guaranteed a rate of return but typically none of the additional windfall rents.

A tax-deferred exchange (commonly known as IRS Section 1031 Exchange) is really an arms-length sale and purchase. The transaction will proceed just as a sale for you, your real estate agent and parties associated with the deal. However, provided you closely follow the exchange rules, the IRS will “sanction” the transaction and allow you to characterize it as an exchange rather than as a sale. Thus, you are permitted to defer paying the capital gain tax.

An exchange occurs when you trade real property that is other than your home or second residence for other “like kind” real property that you have held for trade, business or investment purposes. The like-kind definition is very broad. You can dispose of and acquire any interest in real property other than a home or a second residence. For example, you can trade raw land for income property, a rental house for a multiplex, or a rental house for a retail property.

Section 1031 specifically requires that an exchange take place. That means that one property must be exchanged for another property, rather than sold for cash. The exchange is what distinguishes a Section 1031 tax-deferred transaction from a sale and purchase. The exchange is created by using an intermediary (or exchange facilitator) and by providing the required exchange documentation.

By pooling the proceeds of investors, TICs combine the tax and estate-planning benefits available to investors through 1031 exchanges with the potential advantages of owning a share of an institutional-quality investment property. Investors receive their monthly distributions (after expenses) while giving up the maintenance and administration chores associated with managing property.

That task sometimes includes chasing down tenants who have tick-infested pets in the heat of summer. Didn’t that rental contract stipulate no pets?

When Tooey Courtemanche, then running an Internet business in the Silicon Valley, began building himself a house just outside Santa Barbara, he soon became frustrated trying to keep tabs on a project 300 miles away.

His solution, with the help of his tech-savvy staff, was to create an online program that put him right alongside the contractor, architect, engineer and other key players with access to progress reports, budgets, schedule changes and other project information. It worked so well that in late 2001, he launched Procore Technologies, a company offering these same communication and collaboration tools to homeowners, their contractors and other building industry professionals.

At a time when people are increasingly using multifunctional cellphones, laptops, BlackBerrys and other mobile devices to stay in touch — at home, in the office or in the car — Courtemanche thought it made sense to extend this connectivity to home-building projects, where poor communication can waste time and money.

“Most people are never going to spend more than they do when buying or remodeling a house,” he said. “Now they have the tools to remain closely involved in the progress of their job.”

TV producers and business partners Susan Baerwald and Marcy Carsey (“The Cosby Show,” “Roseanne,” “Grace Under Fire”) were handed those tools by their contractor, Bill Parris, president of Cunningham Parris Construction, when they began building in Summerland, Calif.

Five years ago, they paid slightly more than $1 million for a property in this beach community 10 miles south of Santa Barbara. Three years later, they scraped the site clean — except for trees — and began building a small cottage connected by a walkway to Just Folk, their shop selling antique and contemporary American folk art.

During construction, the program provided a “wonderful way for me to be more than an observer,” said Baerwald, who is enthusiastic about using online communications to keep everyone connected. “It gets a lot of information to a lot of people.”

Though she traveled to Summerland from her Los Angeles home most weekends, Baerwald used the program to view photos, designs, drawings, plans and invoices online. She and Carsey also had meeting agendas posted and could add items for discussion.

Baerwald, who is comfortable with computers, found the online experience very user-friendly. “It seemed to have all the bells and whistles I needed,” she said, suggesting the only drawback might be if a project member were not a computer person.

Although a number of seemingly similar products are on the market, they tend to be aimed at major contractors and large-scale developers. Leading names in the field of project management software include Primavera Systems, Meridian Systems, Sage Software and Autodesk. However, their products are generally not designed for individual homeowners.

Procore lets residential owners monitor progress on their building projects as closely as they wish, whether they are three doors down the street or on the other side of the country.

The long-distance connection appealed to L.A. resident Amy Lippman, who has been using Procore during the major remodel of a second home she and her husband, Rodman Flender, bought about four years ago in Santa Barbara.

Lippman, a screenwriter and producer, and Flender, a film and television director, live with their 10-year-old son in Bel-Air. She said she’s been through “multiple remodels” in Los Angeles but only while living in the homes.
“One of the scary things about this remote remodel is that I’m not there to see what’s happening and how everything’s going,” said Lippman, whose project started in February. She hopes it will be finished around the end of November.

She found out about Procore through her contractor, Signal Construction Co., based in Santa Barbara, and felt it was important to stay in touch with what was happening at the site every day.

Whenever she logs on to the program, Lippman has access to a wealth of fresh information — the daily schedule, weather forecasts, graphs charting the progress of the job. “I want every day to be involved and know what’s going on.”

Lippman said she was so enthused in the early weeks that she went a little overboard, sometimes firing off five or six e-mails a day to key figures running her project. Monitoring her work from afar, she must rely heavily on photos, but other users also check on quality periodically with personal visits.

Dave Gross, his wife, Dawn, and their three children live in Ventura and are building a 9,000-square-foot, five-bedroom, seven-bathroom house, with home theater, office and workshop, in Camarillo. The founder and managing partner of Santa Barbara-based Great Pacific Capital, Gross liked the look of Procore when he came across the company at a venture capital forum in June 2006.

Work started on his home in January, his contractor began using Procore in July at Gross’ suggestion, and by August, Gross had invested $1.5 million in the fledgling company.

A mechanical engineer by trade, Gross said he appreciates Procore’s attention to detail and its efficient use of communications, aspects that he thinks help avoid or minimize delays. “Trying to get things right the first time around can save a lot of time and money.”

Gross also likes the special features. Those include automatic reminders that gently nudge architects, designers, contractors or others in the network until they reply to requests and a “warranty period” that allows homeowners to continue using Procore past the project completion to wrap up any loose ends.

At the end of each project, homeowners are given a CD-ROM containing all the photos, reports, permits and other records from the job, including user manuals for the home’s appliances. Procore also stores the information in the archival safety of cyberspace for a small fee. Other features include a log of online digital photos, although some clients opt for 24-hour live webcam coverage of the construction site; with equipment and setup costs, this option can cost an additional $4,000.

To date, Procore has mainly been pitched at contractors who pay $95 monthly for projects costing less than $200,000 or $195 per month for larger ones and who in turn pass the cost on to homeowners. But the company is working to extend its reach directly to consumers. Courtemanche said homeowners across the U.S., plus Canada and Mexico, are using the program on projects ranging from bathroom remodels to new $30-million homes. Roughly two-thirds of all projects are residential, the rest commercial.

Those using the service are able to sign up online without the need for special software or training. Through e-mail, faxes and phone calls, all parties can access daily logs from the contractor, schedules and reports from subcontractors, input from engineers, architects and designers, and what Courtemanche calls “all the nitty-gritty at the job site.”

Lippman has appreciated being able to stay on top of the details for her second-home project in Santa Barbara. “One thing that’s really good is the impeccable record-keeping. Everything’s documented in a single communications file that’s available to everyone.”

Q: I recently purchased a house and a week after the closing I learned that the lender backed out of the deal. Now it appears that the title company had already paid off the seller and holds the deed to my house and is requesting monthly payments.

My concern is that I have no written contract with this title company. Can it can go ahead and sell the house at any point it wants? What can I do about this and who is responsible since there was already a closing and the paperwork was signed?

A: In light of the recent issues with lenders, your question is timely.

The good news is that you need to worry only about one major issue: You need to make sure that the deed from your seller to you was recorded and that title to the home is in your name.

Second, you should have obtained title insurance in the purchase of your home. If you purchased title insurance, the title company has an obligation to insure that you have obtained good title from the seller upon the closing of the home.

With your unfortunate set of circumstances, it seems that the title company closed the transaction, but at your closing, your lender probably closed its doors and failed to properly fund the closing. The title company cut checks to the seller and the seller’s lender along with everybody else at the closing, but didn’t receive the money.

The loan between you and your now-defunct lender is probably invalid. Your lender never funded on the loan, and the mortgage to that lender would probably not be good.

The title or escrow company — which acted as the closing agent for your purchase — is now saying to you that it expects you to honor your obligation under your loan. Except that rather than pay the now-defunct lender, you need to pay the title company.
Sam Tamkin Sam Tamkin

If all of this information is correct, you’ll need additional documentation from the title company to make sure that the title to the home is properly in your name, and that any funds that were to be sent on your behalf for real estate taxes and insurance are still with the title company. You also need some sort of agreement with the title company to honor the terms of your loan.

You should sit down with a real estate attorney to make sure that all the information you’re being given is accurate and correct, and that you fully understand the situation. Don’t sign any documents with the title company unless you have an attorney review them first.

At some future date, you can refinance the property with another mortgage lender. The title company would then release any claim it has against your property (just as any mortgage lender would) and you can proceed with a new lender.

If interest rates have fallen since you purchased the property and the value of your home has remained stable, you (or your attorney) can ask the title company if it is willing to pay the out-of-pocket expenses you’ll incur in refinancing the mortgage. If it is willing to do that (and it’s likely in their best interests to get this loan off their books), you can move on and have your loan placed with a real mortgage company.

If the title company has not recorded your deed and you obtained title insurance, you are correct to be worried. You need to have that deed recorded to reflect that title is now in your name. The title company should not hold your title hostage for a mortgage lender problem that you did not cause.

One option is for the title company to file an equitable mortgage against your property. That is, it may file paperwork on the property claiming that it has a mortgage on your home because the title company gave you the money to buy the home (it fronted the money for the lender, who failed to reimburse the title company). Having an equitable mortgage against your property allows the title company to be reassured that you won’t go off and sell the home and pocket all the money without repaying it the money it put up at closing.

We’ve heard from a number of buyers recently who in your shoes. The results aren’t pretty.

Some title companies have made demands of the buyers to refinance the loans. As a closing agent, the title company was the company that took the risk to make sure that the title properly transferred from the seller to the buyer. The title company shouldn’t now make that demand of the buyer unless it places the buyer in the same situation the buyer would have been in had the loan closed properly.

The truth is that your title company should not have closed on your transaction if it didn’t have the funds in its hands to distribute to the seller and other parties. What probably happened is that your title company received a check from the mortgage company and that check bounced.

In some ways, you’re lucky. If the title company had known that the check wasn’t going to be honored, it could have cancelled the closing and you would have been looking for a new lender, without a house and with an angry seller looking to sue you for failing to close on the purchase of the home.