Harnessing The Power of Real Estate Through a Tenant In Common (TIC)
By Christopher Levarek
“Successful people do what unsuccessful people are not willing to do. Don’t wish it were easier; wish you were better.”
- Jim Rohn
Real estate is all about thinking creatively. As the great Robert Kiyosaki says, change the mindset from “I can’t afford it” to “how can I afford it”. Every acquisition or real estate property is different and no deal will ever be the same. This being the case it is important to have a good set of tools in the toolbox to pull out in varying situations. Some might not be used as much but having the knowledge of alternative options gives power for when that opportunity arises and the iron is hot to strike.
The TIC or Tenant in Common is one such tool for the toolbox and today we dive into some of the intricacies with What, Why and How to use this tool.
The TIC - What?
A Tenant in Common is a purchasing structure allowing multiple people to have ownership of a piece or property or share interest in real property. Rather than one person being on title or even a LLC with joint owners, the tenant in common allows a number of owners to own unequal or equal shares of the property giving much more freedom in the ownership of the property.
Due to this joint ownership arrangement, all owners have the ability to sell, gift or transfer their ownership share on to heirs or even exit the arrangement much easier then in a traditional property ownership without resale of the property.
Example of a Tenant in Common Purchase:
Bob, Sue and Daniel want to purchase 16 unit apartment.
The property costs $1,000,000
Each person has $100,000 in cash or assets for the purchase.
Bob, Sue and Daniel decide to purchase the property using a Tenant in Common and coordinate with their attorney to have a Tenant In Common Agreement completed.
The bank lender for the purchase processes the loan using all three owners names on the loan paperwork for a loan of $750,000
Bob, Sue and Daniel put $250,000 down and $50,000 in renovations.
Bob, Sue and Daniel close on the property using the Tenant in Common holding Title on the property. All are happy and all is well with the world.
The TIC - Why?
So what are some of the reasons or even advantages behind using a TIC? In the example above, why wouldn’t Bob, Sue and Daniel form a Partnership LLC and purchase the property taking title under the LLC?
As always, it depends. It depends what are the goals of the investors, what the deal looks like and what partners are comfortable with. However some of the advantages to a TIC with partnership real estate opportunities are the following:
Easier Exit from the ownership of the property or transfer of shares for an Owner if needed.
Single owner Ability to acquire or exit ownership using a 1031 Exchange which would otherwise be difficult with multiple owners on a traditional partnership.
This means a single owner in a Tenant in Common can transfer out ownership interest into another property at without being taxed. Always consult a CPA or attorney first as each Tenant In Common could have limits to what is possible for 1031, see IRS procedure 2002-22.
Joined “Common” parties to acquire a property previously unattainable alone.
The TIC - How?
In order to purchase property with a TIC, a TIC agreement should be made including all parties. Similar to a JV agreement, the TIC agreement will detail out the arrangement of the purchase and “co-tenancy” of the property. Generally it will include items such as :
Assignment of Usage - Portion of ownership for owners
Determination of Ownership share - How Ownership is determined. ie. percentage, number of units, etc.
Permitted Uses - How units or assigned space can be used, ie. tenant limits per unit, pets, etc.
Property Management - Who will manage the property, third party or co-owners.
Maintenance - Duties of owners for how property will be maintained.
Expenses - How will property expenses be split among owners.
Financing - How the property will be purchased or funded.
Sale or Transfer of Interest - How owners can transfer interests or ownership.
Decision-Making - Who will make overall decisions on the property day-to-day operations.
Default and Dispute Resolution Provisions - Who will resolve any differences or disputes if unable to be settled internally.
Although a TIC Agreement is not always needed, it is highly recommended to get all these details in writing first among partners and work with a qualified attorney to make sure no details are missed.
The TIC will be created when owners take title to the property or at closing through the closing attorney/title agency. The deed will detail the ownership percentage interest for the owners. If no TIC agreement is in place, the details of the TIC will be according to state statutes.
In Final
The Tenant-In-Common structure is a great way to gain some advantages to partnering on a property. We recommend consulting a qualified attorney on the TIC and researching the topic if the strategy looks like something of interest. As always, Invest Smart!