Is Fractional-Deed Co-Ownership Right for Your 1031 Buyer?

Fractional-Deed Co-Ownership is a vehicle for directly owning investment real estate with out the traditional headaches associated with property ownership. Buyers for this type of real estate product are typically 1031 Exchangers with $250,000 to $2-Million of equity to replace. The company I represent, SCI Real Estate Investments, LLC is the largest seller of this type of investment on a real estate platform. SCI works exclusively through licensed real estate brokers and pays buyer brokers commissions in the same way sellers of sole-ownership properties pay real estate commissions. A fractional-deed co-ownership interest is a tenant-in-common slice of a larger investment property. It differs distinctly from a REIT or partnership interests in that the fractional-deed co-owner receives deeded fee-simple interest in the property. The current $15-Billion market for this product traces its origin to 2002 when the IRS issued Revenue Procedure 2002-22. In this document, the IRS issued fifteen guidelines clarifying the conditions under which a fractional-deed interest qualifies for a 1031 Tax Deferred Exchange. While some fractional-deed investments are sold as securities, SCI structures their properties on a “pure real estate” model to be sold exclusively through real estate brokers.The reason for the rapid growth of fractional-deed co-ownership following the RevProc 2002-22 is that it opened the door for smaller owners of investment properties to exchange into fractional interests in institutional-quality real estate, while enjoying the tax-deferring benefits of a 1031 Exchange. For real estate exchange buyers who have owned and managed their own small investment properties, this is great news. An owner in a small self-managed income property can 1031exchange into a fractional interest in a professionally-managed, credit-tenant anchored retail center or Class-A multi-unit residential community. An example of one of SCI current offerings is the Villages at Sugarloaf a grocery-store-anchored shopping center in Lawrenceville, Georgia. See http://www.sciproperties.com/investments/index.php?investment_id=000058&director_id=084&type=shortWith all of its advantages, fractional-deed co-ownership is not for everyone.1. Is my buyer willing to exchange sole control of a smaller property for shared-control of a larger, higher-quality realty asset?2. Does my buyer have previous real estate investment experience and does she/he meet the seller’s accreditation requirements?3. Does my buyer have a medium-to-long term investment horizon, and not just looking for a place to park their money short-term?If you answer ‘yes’ to all three questions, your buyer may be a good candidate for fractional-deed co-ownership. This form of ownership allows your buyer access to a larger and higher quality property than they could achieve through sole-ownership, while freeing your client of day-to-day management hassles. It allows you, the real estate advisor, to expand your breadth of your commission-paying property offerings while safe-guarding your client’s 1031 tax-deferral benefits. That is a ‘win’ for you and for your client.Mark Casey is the Colorado Regional Director for SCI Real Estate Investments, LLC based in Boulder. SCI is the nation’s largest seller of Fractional-Deed Co-Ownership interests on a real estate platform. He holds an MBA degree from the University of Virginia, and active memberships in the Denver Metropolitan Commercial Association of Realtors (DMCAR) and Commercial Brokers of Boulder (CBB). Mark can be reached at 303-665-6000 or email mcasey@sciproperties.com
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