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Who scrutinizes and analyzes offerings for TIC investors, you may ask. You say to yourself, how do I know a TIC offering is not a scam or a losing proposition? These are fair questions, and the answers are as follows. First, sponsors normally look at hundreds of properties that are available for sale. They sift through such offerings, carefully analyzing whether the type of property, location, price, demographics, rental income, etc. meet the sponsor's criteria to be a purchase candidate. Numbers are run and projections are produced. Cap rates, rate of return, etc. are all analyzed. Leases are read and tenants are often interviewed. Condition of the property is also important.
Once in a while, the sponsor finds a property that it believes may "work" and, in such event, the sponsor may put the property under contract. Usually the contract allows the buyer (sponsor) to conduct additional due diligence and, often, to explore mortgage financing alternatives. If this pans out, the sponsor will allow the feasibility/due diligence contingency to expire and the contract "goes hard" and the earnest money deposit often becomes non-refundable. Once these things have occurred, the sponsor sets wheels in motion to finalize the purchase, explore mortgage alternatives and, at least with security TIC's, begins to work with a major lawfirm to prepare a Private Placement Memorandum (PPM) and an attorney opinion that the TIC investors should receive the 1031 exchange tax benefits and tax treatment they are expecting (tax deferral, etc.).
After this process, which is time consuming and expensive for the sponsor, the mortgage lender to whom the sponsor has applied for mortgage financing scrutinizes and analyzes the property, projected cash flows, tenant stability, purchase terms, available interest rates, financing terms, etc. to see if the lender believes the loan meets the lender's safety criteria. Sometimes the lender will dictate terms such as establishment of reserves if it is anticipated that a tenant's lease will expire during the loan term (as a cushion for lost cash flow during re-tenanting). If the sponsor, the property and projections pass muster with the lender, this still is not the end of the due diligence analysis and investigation.
Next, the sponsor contacts one or more securities broker-dealers about marketing the TIC offering. Broker-dealers who are interested then conduct due diligence in relation to the sponsor and the offering before they will sign a selling agreement with the sponsor for the particular offering. Broker-dealers reject some TIC's that are offered to them to sell because their due diligence does not make them comfortable. The broker-dealer's due diligence is the third level of analysis and scrutiny to which securities TIC offerings are subjected. Due diligence for sponsored TIC's offered as real estate usually is not as rigorous as described above. 1031Replace.Com does not deal in real estate TIC's, but only securities TIC's.
We believe that the levels due diligence described above afford securities TIC investors with unique, detailed and rigorous underwriting that would seldom be available for investors in traditional real estate.
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