Investing in Tenancy in Common

TIC, or Tenancy-In-Common is a type of co-ownership pertaining to real estate where the “right of survivorship” is void. TIC allows those with interest in the property to name an inheritor to take control of his/her share of the property upon death.

Tenancy-In-Common is often confused with “Joint Tenancy” where upon the death of one of the joint tenants, his/her interests would be transferred to the rest of the persons sharing ownership.

In the world of real estate, the advantages of TIC are becoming ever popular, even being compared to a kind of “timeshare with benefits” realty vehicle. Two or more parties purchase, for example, a cabin in the mountains near a lake under a Tenancy-In-Common agreement. This enables them to use the property when they see fit and allows them to defer a portion of the investment while still having a legal entitlement to the property.

Another advantage to a TIC agreement is that, per new IRS legislation, certain TIC properties are income-tax deferrable exchanges. Real estate prices are rising around the country and this is certainly a favorable outlet of expense especially if you factor in depreciation. Also, each TIC share can be treated as a separate transaction for the purpose of calculating capital gains tax. Furthermore, the proceeds from each can be put into a 1031 tax-deferred exchange. It is important to understand that different precautions and measures should be taken according to an individuals circumstances. A buyer should always consult his/her tax or financial consultant.

There are legal restrictions on Tenancy-In-Common agreements, most of which apply to formation and ownership and they vary from state to state. The state of California has specific rules when it comes to recorded and unrecorded usage documents and converting certain properties to TIC property arrangements. A potential TIC buyer should always check with his/her state’s Department of Real Estate or a TIC attorney for specific regulations.

When considering a TIC agreement the buyer should always look at financial issues, not just personally, but at each individual investor, even if the financial aspects are not shared. During the process of drawing up a TIC agreement, or if one has already been drafted, a buyer should employ a seasoned Tenancy-In-Common attorney to review the document, to advise the buyer of any precautions or changes that need to be made, or concerns that need to be brought to the attention of the party of ownership.

Normally a TIC agreement will cover issues such as division of the property in regards to group and individual usage and responsibilities. A description of each members financial responsibilities, deposits, fees, taxes etc. Meeting and decision criteria, death and bankruptcy policies, rights of first refusal and dispute resolution policies.

There are two most commonly used loans for TIC properties. First, is the group loan arrangement which is secured by the entire property. In this case the TIC agreement would specify how much was owed by each co-owner. A second option which is fairly new is a special programs set up by lenders specifically for TIC arrangements. This helps protect each individuals interest in case of default by another co-owner. A third, but less common option is individual mortgages carried by the seller or former owner.

In all, Tenancy-In-Common arrangements, as well as any co-ownership agreement involves a certain risk that has to be weighed against co-ownership benefits. Default, bankruptcy of partners versus lower acquisition costs and pro-longed maintenance fees. As well as management and usage flexibility. All these should be considered before making a final decision.

As with all investments, good research is important. A good place to start is with your local Department of Real Estate or check out some books by the author D. Andrew Sirkin, an expert in shared investments. He has written The Equity Sharing Manual and the Condominium Bluebook which is published annually by Piedmont Press. Also, try looking up “Tenancy-In-Common” with your preferred Internet search engine. This will provide a vast list of information and resources and get you moving in the right direction.