Asset Management Fees for Tenant In Common Properties

Tenant in common (TIC) ownership is an investment structure for investors who are looking to hold undivided interests in commercial properties. It allows multiple investors to collectively own a property while retaining individual rights to their respective shares.

When paired with a 1031 Exchange, TIC ownership offers investors the benefit of deferring capital gains taxes through the exchange of one investment property for another.

This article explains 1031 Exchanges and Syndicates that utilize TIC ownership for the acquisition of commercial real estate. It also outlines the methodology for allocating asset management fees among TIC owners.

Brief Overview: TIC Ownership and 1031 Exchanges

For syndication asset managers, TIC ownership and 1031 Exchanges provide a framework that supports diverse investment portfolios and offers tax advantages. However, they also come with specific management responsibilities. Ensuring that each TIC owner’s interests are well represented requires meticulous oversight and a thorough grasp of regulatory guidelines, particularly those set by the Internal Revenue Service (IRS).

In a TIC setup, each investor owns a fractional interest in the property, and these interests can vary significantly in size. This diversity necessitates a keen focus on equitable management practices. Asset management fees must be allocated fairly to reflect each investor’s share in the property.

If one of the TIC owners is a Syndicate, it should contribute a prorated portion reduced by the percentage ownership attributed to other TIC owners. Otherwise, it would be inequitable for the Syndicate, which owns only a fraction of the property, to cover 100% of the operational fees. The distribution of these fees among TIC owners is described in the Asset Management Agreement.

Professional management services aim to optimize property performance, but the fee structure must be both transparent and justifiable. Understanding these elements helps syndication asset managers meet investor expectations while ensuring the property is managed efficiently and profitably for all parties involved.

Asset Management Fees Explained

In the context of TIC ownership, asset management fees are defined as charges for overseeing and managing the property on behalf of the TIC owners. These fees typically range from 0.5% to 1.5% of equity annually. The industry standards on administrative fees for managing syndications are 0.1% to 0.2% per year, which covers the ongoing costs of daily operations.

Because each investor benefits from the professional management services, such expenses must be properly allocated and equitably distributed. This also guarantees all TIC owners receive fair and consistent treatment.

A syndication asset manager is responsible for ensuring these fees are justified and proportionate to the services provided. An effective fee structure not only covers the costs of professional management but also supports the long-term financial health and performance of the investment property.

IRS Guidelines on Asset Management Fees

Under Revenue Procedure 2002-22, the IRS has laid out specific instructions on the acceptable methods syndication asset managers can use to collect their fees from TIC owners. This guideline stipulates that customary fees are permissible, provided they are proportionate to the services delivered and consistent with market standards.

The IRS also emphasizes transparency and fairness in fee allocation to prevent any potential conflicts of interest. For instance, the fees collected should strictly reflect the operational and management services provided and must not include performance-based incentives like profit splits.

Revenue Procedure 2002-22 guarantees that charges to all TIC owners correspond to their ownership interests in the property. With the rules clearly spelled out, all parties involved have a clear understanding of the costs and services associated with managing the TIC property. Thus, it also serves as a safeguard against the misuse of fee structures.

Types of Customary Fees for Asset Managers

Here’s a breakdown of the IRS-approved asset management fees and how they can be distributed among TIC owners, including the Syndicate:

1. Loan Guarantor Fees and Refinance Fees. These are charges for securing loans and refinancing to establish the property’s financial viability. TIC owners are responsible for guaranteeing their own portion of the loan, so they do not participate in these fees. The amount paid to the Asset Manager should be adjusted to reflect only the Syndicate’s ownership portion.

2. Asset Management Fee. Divided among TIC owners according to their percentage interests in the property, this is the primary fee for overseeing the property’s operations and maximizing its value.

3. Disposition Fee. Charged upon the sale of the property, this is the asset manager’s compensation for their efforts in marketing and negotiating the sale. It is also divided among TIC owners based on their percentage of interest in the property.

4. Construction Oversight Fee. If property improvements or repairs are necessary, this covers the manager’s role in supervising construction projects for timely and cost-effective completion. Allocation is similar to the two previous fees.

5. Acquisition Fees. Acquiring the property entails compensating the manager for their expertise in identifying and securing high-value investment opportunities. These fees are also split among TIC owners according to their percentage interests in the property, but with a distinct difference: They are also expected to contribute cash as an additional fee beyond the required cash investment for their exchange.

Should an owner’s investment fall below their required investment amount, they may be liable for taxes on the deficiency. One way to handle this is by paying their proportionate share of the acquisition fee in cash to the 1031 accommodator, in addition to the boot it holds. This is then shown on the closing statement as a separate fee, which is disbursed to the Asset Manager at closing.

Alternatively, the TIC owner could pay their share of the acquisition fee directly to the Asset Manager as a separate fee outside of the 1031 Exchange. To manage this correctly and prevent any unexpected tax liabilities, the exchangers should discuss the ramifications of such an option with their accommodator and the Syndicator.

Moving Forward with Professional Advice

Navigating TIC ownership and its corresponding fee structures demands a high level of expertise. It’s essential for syndication asset managers to fully grasp the guidelines set forth by the IRS.

When determining fees, accurately reflecting the scope and quality of services you provide is a must. This involves a keen understanding of market standards and an ability to justify each fee component as well as regular reviews and updates to your fee structure.

Consulting with attorneys who specialize in real estate investments is highly recommended. Their expertise can guide you through the legal nuances and help ensure that your fee practices comply with all relevant regulations. This collaboration can also protect you from potential legal mishaps and secure the appropriate compensation for your efforts.

Staying informed and vigilant about regulatory changes is also vital. The real estate investment landscape is dynamic, and keeping abreast of new guidelines will help you adapt and continue to operate within legal boundaries.

By prioritizing transparency, fairness, and professional advice, you can manage TIC properties effectively, optimizing returns for all involved.  Following these strategies not only safeguards your interests but also enhances the overall performance and credibility of the investment as a sustainable business model.Embarking on a TIC ownership asset management? Get a real estate investments legal expert on board! Shams Merchant is the leading real estate private equity and syndication lawyer in Texas, representing clients in more award-winning real estate projects in the state than any other lawyer under 35. Specializing in real estate syndications, fund formations, securities law, and private placements for commercial property investments and development, Shams has been featured in publications like Law360, the Austin Business Journal, BisNow, and The Real Deal.