You’re not alone. Qualified Intermediaries all over the country are inviting real estate investors involved in or considering a 1031 exchange to put their funds into a TIC. They’re placing ads in the newspapers. They’re holding seminars. Why do the QIs have all this interest in TIC? Because they stand to make a lot of money.

Three parties are involved in this type of transaction. (1)You, the investor with the money. (2) The QI holding your money. (3) The sponsor with the real estate looking for money. What do we know? The QI usually gets a substantial finder’s fee. They will rave about the due diligence they performed on the sponsor and the sponsor’s outstanding abilities. The sponsor will get the money to buy the property. It’s possible the sponsor will also get leasing commissions, property management fees, income from the sale of goods and services to the property, a share of cash flow, a share of profits and losses, and a commission on sale. What will the investor with the money get? A percentage interest in the deed to a property that qualifies for the 1031 exchange.

All of this does not necessarily make a TIC a bad investment. There are three things you the investor must do. (1) You can’t accept the QI’s due diligence on face value. You must do your own due diligence on the sponsor and the property. (2) You need to read every document and evaluate the fairness of the relationship. Special attention should be directed toward the financial, managerial and accountability aspects of the relationship. If necessary, consult with your attorney. (3) As part of a TIC, you are part of a group. It is important to understand the advantages and disadvantages of this type of legal entity.